Public Charity Bill Would Add Certainty, Clarity
By Peter Calcara, Vice President - Government Relations
Among the many services CPAs provide, they help individuals, businesses, and charitable entities with tax planning. Tax planning is essential in preparing for a business’s fiscal year. Providing as much certainty on the debit side of the ledger places the taxpayer in a position to thrive in today’s economy. Shouldn’t public charities, which provide essential services to our communities, be afforded the same amount of certainty as others in their tax planning?
The Pennsylvania Senate is debating a measure that will help ensure that institutions of purely public charity in the state are provided with a property and sales tax regime that is more certain and predictable. Senate Bill 4, which would amend our state constitution, returns the power to determine property and sales tax exemption criteria for purely public charities back to the legislature. This bill is necessary because the state Supreme Court upended what was, for the past 15 years or so, a relatively stable and unambiguous area of the law.
In spring 2012, the court denied public charity status to Camp Mesivtah in Pike County. The decision, Mesivtah v. Pike County Board of Assessment Appeals, held that the religious camp was not a purely public charity, even though it qualified as such under the Pennsylvania Institutions of Purely Public Charities Act (Act 55 of 1997). In addition to the five prongs required to be a purely public charity under Act 55, which include quantitative safe harbors, the court imposed its own series of more vague and subjective tests established in its 1985 Hospital Utilization Project (HUP) case.
For more than 200 years, the legislative branch passes a bill, the governor signs it into law, and, when necessary, the courts interpret what the other two branches have agreed to. But not in the Mesivtah matter. Here, the Pennsylvania Supreme Court has essentially said to charitable organizations, “You need to jump through our series of tests first—the HUP tests—before you can meet the requirements of Act 55.” So, for all intents and purposes, Pennsylvania now has 10 tests to determine the status of a purely public charity.
This is why Senate Bill 4, sponsored by Sen. Ryan Aument and Sen. Joe Scarnati, is so important to these taxpayers and why the PICPA is engaged with a board-based coalition that is urging state lawmakers to approve the measure so it can go on the ballot sometime in 2015.
Unfortunately, this common sense proposal is under attack by some who are trying to cloud the debate with unrelated issues. They argue that Senate Bill 4 casts a net so wide that for-profits can be masked as purely public charities and not pay their fair share. They claim that, should Senate Bill 4 be approved by the voters, municipalities will not receive the revenue necessary to fund fire, police, and other municipal services. While it might be true that Act 55 (which is amendable) may not be perfect in establishing who is privy to the property and sales tax exemptions, leaving that decision to the courts on a case-by-case basis, removes all tax certainty. Certainty (and expected revenue) can only be obtained by charities if the legislature is allowed to do its job and legislate the proper parameters.
Tax rules should specify who is to pay the tax, when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined. A person’s tax liability should be certain, not ambiguous. A tax system’s rules must enable taxpayers to determine what is subject to tax (the tax base) and at what tax rate.
Taxpayers should be able to determine their tax liabilities with reasonable certainty based on the nature of their transactions. They should not have to litigate such matters that had previously been defined by the General Assembly. If the transactions subject to tax are easy to identify and value, the principle of certainty is more likely to be attained. On the other hand, if the tax base is dependent on subjective valuations or transactions that are difficult to categorize, the principle of certainty cannot be attained. Furthermore, the cost to litigate these cases is borne by both taxpayers and charities, putting further pressure on local government budgets and diverting funds that otherwise would be used for charitable purposes.
Certainty is important to a tax system because it helps to improve compliance and increases respect for the system. Certainty comes from clear statutes as well as timely and understandable administrative guidance that is readily available to taxpayers. The principle of certainty is closely related to the principle of simplicity. The more complex the tax rules and system, the greater likelihood that the certainty principle will be compromised.
Senate Bill 4 provides certainty for Pennsylvania’s charitable institutions and should be passed by the General Assembly in its present form.