Taxing Non-Profits

A state Senator has proposed levying Pittsburgh’s Payroll Preparation Tax (PPT) on non-profits with 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 back in 2004 and was part of package of tax reforms that lead to abolishing the mercantile tax and the business privilege tax-two very onerous revenue taxes that were not based on company earnings and were quite punitive for some businesses.

The proposed PPT for non-profits would apply to the charitable part of a non-profit’s activities since presumably they are paying the tax on any activities that have been deemed for-profit. Note there are no taxes on the non-profits that could be eliminated as part of a deal sweetener for them.

This issue was debated at the time the PPT was being drafted into law. The arguments then and the arguments are still about the legality and constitutionality of taxing purely charitable organizations. There is also the issue of whether the taxing power can be given to the City if it is not part of a law that would allow other taxing bodies in Pennsylvania to levy the tax on non-profits.

Beyond those technical considerations, there is the political angle. Without question, the foundations, universities, churches and other non-profits in the cultural, educational and economic development community will be up in arms about the tax. These groups have many loyal and powerful friends who will point out all the good they do for Pittsburgh to help maintain its high rankings in many desirable amenities and attention to community needs. These friends will also be calling Harrisburg to make sure this bill never gets out of committee.

There are legitimate questions about what constitutes a qualified charitable organization. It is high time the Legislature update any laws pertaining to the criteria that must be met to qualify as a charitable organization and to delineate clearly when the activities they engage in are for-profit and must pay taxes.

All this is complicated by the rise of the mega-hospital such as UPMC where revenues have on occasion exceeded expenditures by large amounts. The laws need to recognize and deal with those situations by forcing the non-profit to lower its prices, allocate their excess to free care or donate to other hospitals that need financial help. Universities will also need a lot of examination to determine whether they are stepping over the lines in some areas into for-profit activity. This is not easy but it will have to be dealt with if we are to put an end to the annual cries for non-profits to do more.

Will the Senator also ask that governmental entities including authorities to also pay the tax as the law currently exempts them?