Noting that non-profits in the City of Pittsburgh own a lot of property and employ a lot of people but are tax exempt and not a lot of them participate in helping the City through payments in lieu of taxes, a state Senator has supported extending Pittsburgh’s Payroll Preparation Tax (PPT) to non-profits having 250 or more employees.
The PPT is a flat rate levy of 0.55 percent on the total payroll of businesses within the City. This tax was imposed by Act 222 of 2004, signed into law on December 1 of that year, and was part of a package of tax reforms that led to abolishing the mercantile tax and the business privilege tax-two very onerous taxes that were not based on company earnings and were quite punitive for some businesses.
Act 222 of 2004 does mention charitable organizations. It says they should calculate the PPT but would only be liable for activities that do not meet the requirements of the IRS Code or the state’s law on public charities. The law also notes that nothing in the Act would prevent a non-profit from making agreements with the City to provide services or make voluntary payments.
The Senator’s memorandum on the proposed legislation states that his proposal would reduce the PPT on for-profits to 0.5 percent and levy the PPT on large non-profits at a rate of 0.4 percent. The memorandum notes that non-profit employers with more than 250 employers account for over 70 percent of all non-profit employment in the City. Governmental entities including authorities were not subject to the tax when the Act was written and will not be in the future in light of the constitutional provision exempting government entities.
The issue of extending the tax to non-profits was debated prior to Act 222 becoming law. Indeed, the first Act 47 recovery plan for Pittsburgh noted “there are constitutional impediments to levying this tax on charitable organizations… [and would likely] lead to litigation between the City and the institutions.”
Pittsburgh is the only municipality in the Commonwealth to have a payroll preparation tax (it was created only for Cities of the Second Class and Pittsburgh is the only one in that class) but there are large non-profits in other corners of Pennsylvania. A 2009 study by the Legislative Budget and Finance Committee identified 183 municipalities that are home to either a non-profit general acute care hospital, a private four year college or university, a state related or a state owned college or university, or some combination of the four.
Could a selected group of non-profits in one city be subject to a tax that only exists in that Pennsylvania city? Can that city treat non-profits differently based on their size? Why should a charitable organization with 250 employees pay the tax but those with 249 employees not? Even more to the point, since the Pennsylvania Constitution allows tax exempt status for charitable organizations as defined in statutes adopted by the General Assembly, how would it be constitutional to allow a municipality to levy a tax on charitable organizations that have been granted exempt status under Pennsylvania law? These are just some of the long list of technical and legal questions raised by the proposal that will have to be addressed by legislative committees if the bill ever reaches the committee hearing stage.
Moreover, there can be little doubt that in the event the proposed legislation moves forward, the foundations, universities, churches and other non-profits in the cultural, educational and economic development community will be up in arms about the tax, especially the larger ones currently in the crosshairs of the proposed tax bill. These groups have many loyal and powerful friends who will point out all the good the non-profits do for Pittsburgh to help maintain its high rankings in many desirable amenities and in their attention to community needs. These friends will almost certainly importune Harrisburg so as to make sure this bill never gets out of committee.
It is unknown and perhaps unpredictable at this point whether the proposed PPT reduction on for-profit businesses will prompt that sector to mobilize and urge the Legislature to adopt the lower tax rate planned for them as part of the scheme to levy the PPT on non-profits.
None of this means there are no legitimate questions about what constitutes a qualified charitable organization. Take for instance the rise of the mega-hospital such as UPMC where revenues have, on occasion, exceeded expenditures by large amounts or when a university steps over the line into areas of for-profit activity.
Now would be the perfect time for the Legislature to review and update any laws pertaining to the criteria that must be met to qualify as a charitable organization and to delineate clearly what constitutes for-profit and non-profit activities. The Legislature can and should work on assisting taxing bodies in determining what if any for-profit activities exempt organizations are involved in. It might be as simple as requiring charitable organizations to file with state and local taxing bodies the equivalent of a Federal form (or copies of their Federal report) that contains information and explanations about for-profit activities to the state and local taxing authorities. Does the City know how much it collects from property taxes or payroll taxes attributable to non-profit activity that does not meet the charitable test? If not, that surely needs to be learned and quickly.
Bottom line for the proposed PPT bill: Non-profits that qualify as charitable organizations and have been granted tax exempt status under Pennsylvania laws and by the IRS will not be taxable under Pennsylvania’s Constitution. To levy any taxes on these organizations will require either an amendment regarding Article VIII, Section 2, paragraph v of the Pennsylvania Constitution or a General Assembly rewrite of laws spelling out the criteria required to be granted tax exempt status. Neither will happen any time soon, if ever, given what is at stake for the parties involved.
Something needs to be done to put a stop to the almost annual controversy over non-profits and whether they should somehow be taxed.