Many taxing bodies characterize the Pennsylvania Supreme Court’s decision in Mesivtah Eitz Chaim of Bobov v. Pike County Board of Property Assessment, 44 A.3d 3 (Pa. 2012), as having profoundly changed Pennsylvania charitable tax exemption law in a way that makes it substantially more difficult for charities to obtain or preserve property tax exemptions. Taxing bodies have pressed this perceived advantage through a raft of challenges to charitable tax exemptions. The sentiment that Mesivtah changed the exemption landscape has been popularized, for example, by Forbes Magazine: "The Bobov case was something of a major precedent in that it indicated that the legislature could not loosen the 'purely public charity' standard that the Supreme Court of Pennsylvania had previously defined." But in fact, the Mesivtah decision did not change exemption law at all but rather consciously and unambiguously followed 15-year-old precedent, changing nothing. As a result, charities should vigorously defend their tax exemptions and PILOT arrangements against spurious attacks by taxing bodies that are founded on an erroneous interpretation of this case.
In Mesivtah, the Court revoked the tax exemption of a Jewish summer camp on the grounds that it did not relieve the government of some of its burden under the constitutional exemption test. The camp argued that it satisfied the exemption requirements of the statutory test under the Institutions of Purely Public Charity Act, 10 P.S. 371 et seq. (Charity Act) and was therefore entitled to exemption. But the Court held that the camp did not satisfy the constitutional test, which must be met before even evaluating whether the Charity Act is also satisfied. The claim that Mesivtah altered the exemption landscape is rooted here, in the mistaken belief that this decision was the first time a Pennsylvania court had held that the constitutional exemption test is primary and the statutory test secondary. But, that is not the case. This has been the law since the Pennsylvania Supreme Court’s 2002 decision in Community Options v. Board of Property Assessment, 813 A.2d 680, 683 (Pa. 2002).
For context, Pennsylvania tax exemption law is grounded in the Pennsylvania Constitution, which empowers the General Assembly to exempt from real estate tax "institutions of purely public charity," Pa. Const. Art. VIII, §2(a)(v), but does not define the term. In its seminal 1985 decision in Hospital Utilization Project v. Commonwealth, 507 Pa. 1, 487 A.2d 1306 (1985) (HUP), the Pennsylvania Supreme Court sought to distill the common law into a clear tax exemption standard. The Court enunciated the constitutional test that to qualify as an institution of purely public charity entitled to a tax exemption, an organization must: 1) advance a charitable purpose; 2) donate or render gratuitously a substantial portion of its services; 3) benefit a substantial and indefinite class of persons who are legitimate subjects of charity; 4) relieve the government of some of its burden; and 5) operate entirely free from private profit motive.
But applying the standard proved challenging as inconsistent and subjective precedent developed from highly fact-specific cases. Taxing bodies and charities alike pressed the legislature to adopt objective standards. In 1997, the legislature heeded the call and passed the Charity Act. The legislation described its intent:
It is the intent of the General Assembly to eliminate inconsistent application of eligibility standards for charitable tax exemptions, reduce confusion and confrontation among traditionally tax-exempt institutions and political subdivisions and ensure that charitable and public funds are not unnecessarily diverted from the public good to litigate eligibility for tax-exempt status by providing standards to be applied uniformly in all proceedings throughout this Commonwealth for determining eligibility for exemption from State and local taxation which are consistent with traditional legislative and judicial applications of the constitutional term "institutions of purely public charity." 10 P.S. 372(b).
The Charity Act adopted the five-prong inquiry established by the Pennsylvania Supreme Court in HUP and set forth objective, often quantitative tests to determine eligibility for tax exemption. In some instances, the General Assembly’s quantitative tests appeared easier to satisfy than the common law constitutional tests developed by the courts.
The question then arose what if an organization satisfies the statutory test under the Charity Act but fails the constitutional test under HUP and its progeny. Pennsylvania courts held that an organization must first satisfy the HUP test. If it does not, it is taxable. If it does, the organization must then satisfy the Charity Act. If it does not, it is taxable. If it does, then it’s exempt. Pennsylvania courts have followed this approach for almost 15 years, since the Pennsylvania Supreme Court’s 2002 decision in Community Options. While the General Assembly passed the Charity Act in an attempt to reduce confusion in exemption law, ironically, the courts have instead interpreted the law as adding a second layer of criteria, as organizations seeking charitable exemption must satisfy not only the HUP test, but also the Charity Act test. This has remained the standard since the Pennsylvania Supreme Court’s 2002 decision in Community Options.
The view that the Mesivtah decision fundamentally altered Pennsylvania tax exemption law lies in the mistaken view that the Mesivtah decision initiated this approach to exemption analysis, i.e., first evaluate the exemption claim under the constitutional test, and if satisfied, then turn to the statutory test. But the Pennsylvania Supreme Court in its decision in Mesivtah was very clear that it was not changing existing law, but rather following longstanding precedent:
"We have repeatedly held "'[a]n entity seeking a statutory exemption for [sic] taxation must first establish that it is a 'purely public charity' under Article VIII, Section 2 of the Pennsylvania Constitution before the question of whether that entity meets the qualifications of a statutory exemption can be reached.'" Alliance Home, at 222 (quoting Community Options v. Board of Property Assessment, 813 A.2d 680, 683 (Pa. 2002) ); see also HUP, at 1312 ("Because we reach the conclusion ... that HUP is not a 'purely public charity' within the meaning of the Constitution, we do not reach whether HUP qualifies [for a tax exemption] under the Pennsylvania Code definition.”). We see no reason to alter this standard."
The introductory phrase "[w]e have repeatedly held" and the last line "[w]e see no reason to alter this standard" make clear that the Mesivtah Court explicitly viewed its decision as not altering existing law but in fact doing just the opposite: following longstanding precedent.
Based on the misinterpretation that Mesivtah changed Pennsylvania exemption law, taxing bodies have been emboldened in contesting tax exemptions, whether long-held or newly sought. In addition, some taxing bodies have attempted to terminate Payment In Lieu of Tax Agreements by invoking a clause permitting termination following a fundamental change in exemption law. The Pennsylvania Supreme Court’s decision in Mesivtah did not change exemption law at all, much less in a fundamental way. Taxing bodies should recognize this and proceed less aggressively in contesting tax exemptions on the basis of Mesivtah. Charities should bear this in mind as well when facing an exemption challenge and see Mesivtah for what it was: much ado about nothing.
The legislature responded to the perceived change wrought by the Mesivtah decision by proposing an amendment to the Pennsylvania Constitution through Senate Bill 4 to give the General Assembly exclusive authority to "[e]stablish uniform standards and qualifications which shall be the criteria to determine qualification as institutions of purely public charity…." To be adopted, a Pennsylvania constitutional amendment must be passed in two consecutive sessions of the General Assembly, and then approved by a majority of Pennsylvania voters in a statewide referendum. Senate Bill 4 passed both houses of the General Assembly in the 2013-14 session. In the 2015-16 session, it was passed by the Senate 30-19 on a largely party-line vote (Republicans supporting and Democrats opposed). In the face of mounting public scrutiny, the Bill then stalled in the House Finance Committee, where it has languished for over 15 months. There appears to be little appetite in Harrisburg for advancing the constitutional amendment this session. If the Bill dies in committee, the General Assembly’s effort to amend the Constitution would have to start over in a future session.
As an alternative legislation, Senate Resolution 28, called for a 12-month investigation of the Commonwealth’s tax exemption laws by a Joint Select Committee on Institutions of Purely Public Charity. But it has likewise stalled in committee.
On one hand, tax exemptions are inherently political, as the General Assembly and the courts strive to balance exempting property used for legitimate charitable purposes with preserving a tax base to support school district and local government services. On the other, as a policy matter, taxing bodies and charities alike would benefit from replacing the current system – with overlapping and largely similar but not identical inquiries under the constitutional HUP test and the statutory Charity Act test – with one clear test whether promulgated by the courts or the legislature. Setting politics aside, in the authors’ view the nature of the balancing required would be better addressed by the legislature.
In the meantime, taxing bodies and charities will continue to grapple with the uncertainty resulting from Mesivtah and its progeny, and the popularized misinterpretations of those decisions, to the detriment of all but the lawyers.