Pennsylvania real estate taxes are usually very large line items on any corporate balance sheet. Accordingly, you should be reviewing your assessed value(s) on an annual basis if you are a Pennsylvania commercial or industrial property owner or a lessee of a commercial or industrial property that pays the property taxes as part of your lease. A reduction in your property’s assessed value will have substantial impacts on your balance sheet for many years because Pennsylvania counties don’t perform periodic county-wide reassessments. Thus, if you feel your assessed value(s) are too high, you must timely file an annual assessment appeal in the county that the property is located.

Unfortunately, there is no set annual assessment appeal deadline for all 67 counties in Pennsylvania. Every county has its own annual assessment appeal deadline.

The annual assessment appeal deadline of August 1, 2024 for assessed values effective for tax year January 1, 2025 is quickly approaching for the following Pennsylvania Counties:

Adams, Blair, Bucks, Butler, Cambria, Chester, Clarion, Crawford, Dauphin, Delaware, Erie, Fayette, Franklin, Indiana, Lackawanna, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna, Westmoreland and York.

The annual assessment appeal deadline of September 1, 2024 for assessed values effective for tax year January 1, 2025 is on the horizon for the following Pennsylvania Counties:

Armstrong, Beaver, Bedford, Bradford, Cameron, Carbon, Centre, Clearfield, Clinton, Columbia, Cumberland, Elk, Forest, Fulton, Greene, Huntington, Jefferson, Juniata, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Tioga, Union, Venango, Warren, Washington and Wayne.

There are a few oddball counties that have to be different and thus the annual assessment appeal deadline for Berks County is August 15, 2024 and Wyoming County is usually August 31, but because this year August 31 falls on a Saturday, you will have until September 2, 2024 to file an annual assessment appeal.  Philadelphia County is not a specific date, but instead the annual appeal deadline is the first Monday in October, which is the 7th this year.

Each county has its own separate set of local rules pertaining to annual assessment appeals that need to be navigated in order to successfully file an annual assessment appeal.  If you own or lease commercial or industrial properties in Pennsylvania, please make sure that you are aware of these appeal deadlines. Additionally, if you are not sure if you should file an appeal on your property, please contact Paul Morcom at 717-237-5364 or any member of the McNees Wallace & Nurick LLC SALT team to determine if an appeal is warranted for tax year 2025.

A little known statutory change now allows for certain fraternal societies to obtain tax exempt status in Pennsylvania.

In Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (“HUP”), the Pennsylvania Supreme Court set forth the following five-pronged test to determine whether an entity qualifies as “purely public charity” under the Pennsylvania Constitution and is therefore entitled to exemption from certain taxes:

  • Does the entity advance a charitable purpose?
  • Does the entity donate or render gratuitously a substantial portion of its services?
  • Does the entity benefit a substantial and indefinite class of persons who are legitimate subjects of charity?
  • Does the entity relieve the government of some of its burden?, and
  • Does the entity operate entirely free from private profit motive?

In 1997, the General Assembly enacted the Institutions of Purely Public Charity Act, also known as Act 55, in response to the court system’s perceived lack of consistency in applying the HUP test.  Act 55 codified five HUP prongs but defined how prongs were met and added other requirements.  The purpose of Act 55 was to bring objectivity and consistency.

Regarding the third prong above, Act 55 states that an institution does not benefit an indefinite class of persons who are legitimate subjects of charity if: (i) the institution does not qualify as a 501(c)(3) non-profit; and (ii) the institution is, among other things, qualified under 501(c)(7) as a “club organized for pleasure or recreation” or 501(c)(8) as a “fraternal beneficiary society, order or association.”  Based on this language alone, many fraternal associations, such as, for example, Masonic lodges, would not qualify as institutions of purely public charity and would not be entitled tax exempt status in Pennsylvania.

However, effective December 13, 2023, the General Assembly enacted an obscure provision into the Fiscal Code as part of their budget negotiations, stating that, notwithstanding the language in Act 55, an institution is considered to benefit a substantial and indefinite class of persons who are legitimate subjects of charity if:

  • the institution is a domestic fraternal society, order or association, that operates under a lodge system, the net earnings of which are devoted to religious, charitable, scientific, literary, educational and fraternal purposes and qualifies for an exemption from taxation under 26 U.S.C. § 501(c)(8) and (10) [] and:
  • the organization has been operating in this Commonwealth for at least 100 years upon the effective date of this subparagraph; and
  • the organization has not been issued a license under the act of April 12, 1951 (P.L.90, No.21), known as the Liquor Code.

(2) the institution is a title-holding organization that qualifies for an exemption from taxation under 26 U.S.C. § 501(c)(2) that is wholly owned or controlled by one or more qualifying fraternal organization described under paragraph (1).

72 P.S. § 102-L.

This new language now opens the door for certain long-standing fraternal societies to qualify for sales and real estate tax exemptions in Pennsylvania.

If you have any questions regarding this statutory change, or if you have any SALT issues, please contact Adam Koelsch, Esquire (717-237-5305) or any member of the McNees SALT Group.

In Mixell v. Cumberland County Board of Assessment Appeals, 313 A.3d 330 (Pa. Commw. Ct. 2024), the Commonwealth Court held that the Board of Assessment Appeals (“Board”) had failed to show proof of mailing sufficient to establish that a property owner had received hearing notices in her property tax appeal.

The property owner had filed an appeal to restore the so-called “clean and green” preferential assessment on her property after it was subdivided and the county assessed roll-back taxes on it. The Board supposedly mailed hearing notices to the owner, but she did not appear at the hearing. The Board then issued a decision denying the appeal on the basis that the owner had abandoned it under 53 Pa.C.S. § 8844(e)(1).  That statute provides that any appellant who fails to appear for the hearing is presumed to have abandoned the appeal unless the board has agreed to reschedule the hearing date.

The property owner appealed to the trial court, claiming that she had been unable to attend the scheduled hearing. The Board filed preliminary objections, asserting abandonment as a basis to dismiss the appeal, and attaching the hearing notice and the decision. In response, the owner filed an answer and new matter, asserting that she never received the hearing notices.

Under the “mailbox rule,” proof of mailing raises a rebuttable presumption that a notice mailed was received by the intended recipient.  Once it is shown that a notice was mailed, the rule is difficult to rebut, because caselaw has established that mere testimony from the intended recipient that the notice was not received is insufficient.

Based only on the filings, the trial court concluded that the property owner had received the hearing notices based on the mailbox rule and dismissed the appeal.

On appeal, however, the Commonwealth Court concluded that there was insufficient evidence to sustain the preliminary objections based on the mailbox rule. The only evidence in support of the rule was the hearing notices themselves, which showed a date but bore no other indication that the notices were in fact mailed. There was no testimony or other evidence showing that the notices were taken to a regular place of mailing.  The Commonwealth Court concluded that, in any event, even if the dates on the notices constituted proof of mailing, the trial court had not allowed the property owner an opportunity to rebut the presumption of receipt.

As a result, the Commonwealth court vacated the trial court’s order and remanded it back to the trial court for a hearing on the mailbox rule.

The mailbox rule is often invoked by boards and taxing authorities to deny appeals on the basis of missed deadlines.  Consequently, understanding how best to rebut the rule’s powerful presumption often means the difference between winning and losing a case.

If you have any questions about this Decision or any state or local tax matter, please feel free t contact Adam Koelsch (717-237-5305) or any member of the McNees SALT Group.

In HUF Restaurant, Inc. v. Commonwealth, Docket No. 394 F.R. 2018 (04/19/2024), a three-judge panel of the Commonwealth Court of Pennsylvania ruled that HUF Restaurant, Inc. (“HUF”), which had purchased restaurant assets and a liquor license from Zola New World Bistro, Ltd. (“Zola”) in a bulk sale transaction, was liable for unpaid sales and use taxes owed by Zola.  HUF had obtained a lien certificate from the Pennsylvania Department of Revenue (“Department”) prior to closing which indicated that there were no outstanding state tax liens against Zola.  In addition, the Department had issued a tax clearance in conjunction with the transfer of a liquor license from Zola to HUF.

The Department had advised Zola that it would be subject to a sales and use tax audit after Zola and HUF had entered into an agreement of sale, but prior to the closing date.  The audit subsequently resulted in a sales and use tax assessment against Zola.  Zola filed a timely appeal with the Department’s Board of Appeals but did not file a further appeal after the Board denied relief.  HUF was not aware of the sales tax audit prior to closing on the transaction and only became aware of the tax assessment after the appeal period had lapsed and the Board of Appeals’ decision had become final.  Although Zola was contractually responsible for this tax liability under the agreement of sale, it failed to pay the assessment.  The Department therefore issued a bulk sale notice of assessment against HUF for Zola’s sales and use tax liabilities for the pre-closing period.

HUF appealed the Department’s assessment against it, and the administrative boards denied relief on the basis that no bulk sale certificate was obtained before HUF’s purchase of Zola’s assets.  HUF argued that it should not be responsible for the disputed tax liability because the Department had cleared HUF and Zola of any taxes owed as part of the liquor license transfer process.  HUF further claimed that the Commonwealth should be estopped from pursuing the assessment because HUF had justifiably relied on this tax clearance during its purchase of Zola’s assets, and the Department failed to inform HUF of the pending audit when it certified to the PLCB that Zola did not owe any state taxes at that time.  The Court concluded that HUF’s failure to obtain a bulk sale certificate pursuant to 72 P.S. § 1403(a) was fatal to its appeal.  The Court explained that there are no exceptions to the statutory bulk sale certificate requirement and HUF could not “rely upon the clearance provided during the liquor license transfer process because that involved a separate statutory scheme and the clearance provided was of limited scope.”   

If you have any questions about this Decision or any state or local tax issue, please feel free to contact Sharon Paxton (717-237-5393) or any member of the McNees SALT team.

The deadline for filing a real estate tax assessment appeal for the 2024 tax year is fast approaching in Allegheny County.  The deadline is April 1, 2024.  The Common Level Ratio for 2024 is 54.5%.

Allegheny County is the only county out of the 67 counties in Pennsylvania whereby you appeal the assessed value when the assessed value is already effective.

If you have any questions about appealing your real commercial property in Allegheny County, please contact Paul Morcom (717-237-5364).

On January 10, 2024, the Commonwealth Court held in NHL Players Ass’n v. City of Pittsburgh, (No. 1150 C.D. 2022) that the City of Pittsburgh’s Facility Tax — a unique tax on nonresidents who use a sports stadium or arena (“Facility”) to engage in an athletic event or other performance — violated the Pennsylvania Constitution.

The Local Tax Enabling Act (“LTEA”), a state statutory act, permitted the City of Pittsburgh (“City”) to impose the Facility Tax in a flat dollar amount or up to 3% of the income attributed to a nonresidents’ usage of the facility.  The City imposed a 3% Facility Tax by ordinance.

By contrast, residents, including those earning income at a City Facility, did not pay the Facility Tax, but instead paid a 1% local Earned Income Tax (“EIT”) to the City and a 2% tax to the School District. Nonresidents performing work in the City, but not earning income at a Facility, also paid a 1% EIT, but were prohibited from paying a tax to the School District by law.

The NHL Players Association, the MLB Players Association, the NFL Players Association, and various individuals, filed a civil complaint against the City, alleging in part that the Facility Tax ordinance (importantly, not the provision of the LTEA authorizing the ordinance) violated the Pennsylvania Constitution.  Specifically, the complaint alleged that the ordinance violated the Uniformity Clause, which states that “all taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax.”  The trial court agreed that the tax violated the Uniformity Clause, because nonresident athletes paid a 3% Facility Tax while resident athletes only paid a 1% EIT.

On appeal, the City argued that the tax burden on both residents and nonresidents working at a Facility is 3% — residents pay a 1% EIT and a 2% School District tax, and nonresidents pay the 3% Facility Tax.  The City further argued that the trial court should have severed the unconstitutional language in the ordinance by removing the word “nonresident” and replacing it with “individual.”

But the Commonwealth Court disagreed.

The Court held that the Facility Tax ordinance violated the Uniformity Clause.  The Court concluded that the tax burdens were not equal because the City has effectively imposed a 3% EIT on nonresidents, but imposed a 1% EIT on residents, who derive income from a Facility.  According to the Court, the 2% School District tax paid by residents was not relevant, because such a tax could not be imposed on nonresidents.  Nothing argued by the City justified different treatment between the two classes of taxpayer.

The Court further held that the unconstitutional language could not be severed from the ordinance.  Replacing the word “nonresident” with “individual” would impose the Facility Tax on residents.  The LTEA, however, authorizes a Facility Tax on nonresidents only.  According to the Court, the LTEA did not allow expansion of the ordinance to impose tax on residents because the LTEA specifically stated that, if the LTEA authorizing provision were found unconstitutional, nonresidents would simply be required to pay EIT.  Therefore, the Court invalidated the ordinance.

Local taxes are often complicated and frequently overlooked.  Such taxes are not necessarily permissible simply because they are authorized by the state legislature.  Taxpayers should not automatically assume that they are subject to every tax and should carefully consider their local tax liabilities.

If you have any questions about this Decision or any local tax matter, please feel free to contact Adam Koelsch (717-237-5305) or any member of the McNees State and Local tax team.

On October 16, 2023, the Pennsylvania Supreme Court granted Tower Health’s Petition for Allowance of Appeal related to the Montgomery County hospital property. The Supreme Court is going to address the following two issues on appeal:

  1. Whether the Commonwealth Court erred by holding that Pottstown Hospital, LLC, offered substantial executive compensation based upon the financial performance of the institution, thereby precluding it from establishing that it was operating entirely free from private profit motive to qualify as a purely public charity entitled to real estate tax exemption under the standard set forth in Hospital Utilization Project v. Commonwealth (“HUP”), 487 A.2d 1306, 1317 (Pa. 1985).
  2. Whether the operation of entities related to Pottstown Hospital, LLC, is relevant to a determination of whether it qualifies as a purely public charity under the HUP test.

Tower Health’s Supreme Court brief and reproduced record are due on December 27, 2023. We will keep you updated as this very important case for nonprofit organizations seeking real estate tax exemption in Pennsylvania makes its way through the Pennsylvania Supreme Court.

On December 5, 2023, the Pennsylvania Supreme Court issued an Order denying Tower Health’s Petition for Allowance of Appeal related to the three Chester County hospital properties. Accordingly, the Chester County hospitals are all taxable for real estate tax purposes pursuant to the Commonwealth Court’s affirmance of the trial court’s determination that Tower Health was not an institution of purely public charity. Unlike the Montgomery County hospital appeal, the Commonwealth Court actually dismissed all three Chester County appeals because all of the issues on appeal were waived for failure to comply with Rule 1925(b) of the Pennsylvania Rules of Appellate Procedure. Thus, the Chester County appeals contained procedural issues that I am sure the Supreme Court did not want to address.

Please contact Paul Morcom, Esq. at 717-237-5364 or Adam Koelsch, Esq. at 717-237-5305 if you have any questions regarding the “purely public charity” exemption in Pennsylvania.

Now that the 2024 tax year August 1 annual assessment appeal filing deadline has passed for 26 counties in Pennsylvania, the appeal deadlines for the remaining 41 counties are as follows:

August 15

Berks

August 31

Wyoming

September 1

ARMSTRONG, BEDFORD, BRADFORD, CAMERON, CARBON, CENTRE, CLEARFIELD, CLINTON, COLUMBIA, CUMBERLAND, ELK, FOREST, FULTON, GREENE, HUNTINGDON, JEFFERSON, JUNIATA, LEBANON, LYCOMING, MCKEAN, MERCER, MIFFLIN, MONTOUR, NORTHUMBERLAND, PERRY, PIKE, POTTER, SCHUYLKILL, SNYDER, SOMERSET, SULLIVAN, TIOGA*, UNION, VENANGO, WARREN, WASHINGTON and WAYNE.

October 2 (First Monday in October)

Philadelphia

April 1, 2024 (usually March 31, but falls on Sunday)

Allegheny

If you have any questions or concerns about filing an annual assessment appeal for any of the above-listed counties, please contact Paul R. Morcom, Esquire at 717-237-5364 to discuss.

* Tioga County is going through a countywide reassessment for tax year 2024, so the filing deadline is 40 days from the Notice of Reassessment mailing date.

In a long-awaited decision, the Pennsylvania Supreme Court recently held in Synthes USA HQ, Inc. v. Commonwealth, 11 MAP 2021, that service providers were required to apportion receipts based on the location where the customer received the benefit of the service (“Benefit-Received Method”) under Pennsylvania’s “costs of performance” (“COP”) statute in effect prior to 2014.  The Court also ruled that the Office of Attorney General (“OAG”), which represents the Commonwealth in tax appeals, is permitted to take independent positions, and is not bound to act merely as a “mouthpiece” for the Department of Revenue (“DOR”).  In addition to the majority opinion in the case, there was a concurring opinion (dealing only with the legal representation issue) and a concurring and dissenting opinion (dissenting from the majority’s interpretation of the COP statute). 

Prior to 2014, Pennsylvania’s COP statute required receipts from the sale of services to be sourced to the location of the “income-producing activity.”  Where the “income-producing activity” was performed in multiple states, the receipts were required to be sourced to the state in which the greatest proportion of the “income-producing activity” was performed, based on “costs of performance.”  Neither the tax statute nor the Department’s regulations defined “income-producing activity” or “costs of performance.”  The OAG took the position that the COP statute required that service receipts be sourced based on the location where the taxpayer produced the service, while the DOR asserted that the “income-producing activity” occurred where the customer received the benefit of the service. 

The OAG contended that the terms “income-producing activity” and “costs of performance” plainly referenced the service provider rather than the customer.  The OAG also noted that the statutory language applicable to the sourcing of receipts from sales of services was “remarkably different” from the language sourcing receipts from sales of tangible personal property to where the “property is delivered or shipped to a purchaser.”  The OAG further argued that the statutory adoption of market-based sourcing for services in 2014 demonstrated a change in legislative intent, rather than a “clarification” of the prior language in the COP statute addressing the sourcing of receipts from sales of services. 

The DOR argued that “income-producing activity” is “fulfilled, accomplished, or completed when and where the customer receives the benefit of the service.”  In addition, the DOR emphasized that its position should be entitled to deference because it is the agency tasked with implementing the COP statute.

After noting that colorable arguments can be made that the “income-producing activity” occurs either where the service is produced or where the customer receives the service, the Court upheld the Benefit-Received Method advocated by the DOR.  The Court’s decision was based primarily on an analysis of the purpose of the sales factor, which is “to give weight to the states that provide the market for the taxpayer’s products.”    

While the Court technically did not base its interpretation of the COP statute on deference to the DOR’s position, it did refer to the parties’ agreement that the DOR had “utilized the Benefit-Received Method as a ‘consistent and deliberate policy and practice’” in its discussion of the background of the case.  The Court also concluded that its support of the DOR’s application of the Benefit-Received Method “has the added benefit of providing continuity for taxpayers as the Department’s consistent application of destination sourcing for similarly situated taxpayers prior to 2014 will continue for taxpayers in 2014 and after.”  That potential deference to the DOR’s interpretation of the COP statute is significant because the DOR had never published any formal guidance regarding its interpretation of the COP statute prior to 2014 and, as noted in the amicus brief filed by Allianz of America, there was some question as to whether the DOR had, in fact, “consistently” applied the Benefit-Received Method when interpreting the COP statute. 

With respect to the OAG’s role in tax appeals, the Court concluded that the OAG represents the “Commonwealth,” separately from the DOR, and therefore can advocate  an interpretation of a tax statute that differs from the DOR’s interpretation.  The Court stated:  “While the Attorney General regularly represents the Department, it is not merely the Department’s law firm.  Instead, the Pennsylvania Constitution designates the Attorney General as the ‘chief law officer’ for the Commonwealth as a whole, accountable directly to the Pennsylvania voters, and independent of the Governor and the Commonwealth agencies.” 

Even though the OAG is permitted to take an independent position that may differ from the DOR’s position, the Court did not find that the OAG has exclusive control of tax appeals.  Rather, the OAG concurrently represents both the “Commonwealth” and the DOR in a tax appeal unless a conflict develops between the positions advocated by the OAG, on behalf of the Commonwealth, and by the DOR.  If a conflict develops and the OAG does not authorize the General Counsel’s Office to supersede it in the litigation, there may be separate representation of the Commonwealth and the DOR, with the Commonwealth represented by the OAG and the DOR represented by its own counsel.  Procedurally, this would occur by the DOR intervening in the appeal.  In practice, it is relatively rare for the OAG to take a position contrary to the DOR’s position in a tax appeal. 

If you have questions regarding this case, please contact Sharon Paxton, Esquire (717-237-5393), or any member of the McNees State and Local Tax team.

On February 10, 2023, in a much-anticipated group of Opinions, the Pennsylvania Commonwealth Court (“Court”) held that four separate Tower Health hospitals (one in Montgomery County and three in Chester County) did not qualify as institutions of purely public charity and thus, the hospitals were not entitled to real property tax exemptions for the 2018 through 2021 tax years.

Relevant Background

In 2017, Reading Health System, n/k/a Tower Health, LLC (“Tower Health”), purchased several for-profit hospital facilities from Community Health Systems (“CHS”), a for-profit entity, in Montgomery and Chester Counties.  Tower Health, a nonprofit 501(c)(3), created separate LLCs (Chester Hospitals and Montgomery Hospital) to run each of the purchased hospital facilities as nonprofit entities.  Those LLCs were:  Pottstown Hospital, LLC (“Montgomery Hospital”); and Brandywine Hospital, LLC, Jennersville Hospital, LLC and Phoenixville Hospital, LLC (“Chester Hospitals”).

Chester Hospitals and Montgomery Hospital filed real property tax exemption appeals for the 2018 tax year in their respective county.  The Montgomery County Board of Assessment Appeals (“Montgomery Board”) granted Montgomery Hospital real property tax exemption as a nonprofit entity for tax years 2018 through 2021.  However, the County of Chester Board of Assessment Appeals (“Chester Board”) denied Chester Hospitals real property tax exemptions for tax years 2018 through 2021.

The Pottstown School District appealed the Montgomery Board decision to the Court of Common Pleas of Montgomery County (“Montgomery trial court”).  After a de novo trial, the Montgomery trial court granted the real property tax exemption for Montgomery Hospital. 

Likewise, Chester Hospitals appealed the Chester Board decisions to the Court of Common Pleas of Chester County (“Chester trial court”).  After a de novo trial, the Chester trial court denied the real estate tax exemptions for Chester Hospitals. 

The Court reviewed the Montgomery trial court decision and record, and reversed the trial court’s order granting the real property tax exemption for Montgomery Hospital[1].  Additionally, in a surprise plot twist, the Court reviewed the Chester trial court decision and record, and instead of affirming the Chester trial court’s order denying real property tax exemption for Chester Hospitals, the Court dismissed Chester Hospitals’ appeals because all the issues on appeal were waived[2].  The Court could have ended its Chester Hospitals opinions on the waiver issue, but for some unknown reason, the Court proceeded to provide a complete analysis of the exemption criteria to show Chester Hospitals that they would not have satisfied all of the criteria necessary to be deemed an institution of purely public charity anyway.

Relevant Issues

Although there were numerous issues raised on appeal to the Court, I think the following are the two relevant issues addressed by the Court:

  1. Entitlement to Real Property Tax Exemption; and
  2. Standing for tax year 2018.

Entitlement to Real Estate Tax Exemption

In order to qualify for an exemption as an institution of purely public charity, an entity must first meet the five constitutional requirements set forth in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985), know as the HUP test.  After satisfying the five parts of the HUP test, an entity must then also satisfy the five statutory requirements of the Institutions of Purely Public Charity Act, commonly known as Act 55[3].  Once all ten prongs of the HUP test and Act 55 are satisfied, the entity must also comply with any additional and not inconsistent requirements of the relevant county assessment law.  Moreover, the party seeking a tax exemption has the burden of proving its entitlement to the exemption. 

In these appeals, the Court held that Montgomery Hospital and Chester Hospitals did not “operate free from private profit motive,” which is one of the five HUP test criteria.  Specifically, the Court concluded that tying 40% of executive compensation bonus to financial performance of each hospital was sufficiently substantial to indicate a private profit motive.  The Court looked to In re Dunwoody Village, 52 A.3d 408 (Pa. Cmwlth. 2012) for guidance, where it found that a nursing home did not operate free from private profit motive because the CEO’s maximum incentive bonus was 24% of salary and the chief financial officers was 18-19%.

Additionally, the Court found that Tower Health charged Montgomery Hospital and Chester Hospitals “exorbitant” management and administrative fees that grew exponentially from year to year and none of the hospitals “studied the charges to determine whether the administrative and management fees were fair or reasonable for the services provided” by Tower Health.   Thus, the Court concluded that Montgomery Hospital and Chester Hospitals failed the requirements of the HUP test.

The Court could have ended its analysis right there because it concluded that one of the prongs was not met – operates entirely free from private profit motive.  However, the Court found that Chester Hospitals failed the “gratuitous services” prong of the HUP test and also failed the requirements of Act 55 because Chester Hospitals’ financial evidence failed to use GAAP accounting for calculations as required by 10.P.S. § 375(f)(3).  The Court agreed with the Chester trial court that Chester Hospitals failed to show the amount of gratuitous services it provided because Chester Hospitals did not provide information concerning whether patients receiving free, discounted, or reimbursed services actually had the ability to pay the full costs.  The Court noted “[a]lthough inability to pay is not expressly part of the HUP test, it was recognized as relevant to gratuitous services in St. Margaret Seneca Place[4].”

Standing for tax year 2018

The Montgomery trial court concluded that Montgomery Hospital had standing to seek tax exemption for tax year 2018 because it was the equitable owner pursuant to the pending asset purchase agreement and was therefore an aggrieved person.  Conversely, the Chester trial court concluded that Chester Hospitals did not have standing to apply for 2018 tax exemptions because neither Chester Hospitals nor Tower Health was the record owner of the properties at issue at the time the exemption applications were filed.

Although the exemption appeals for tax year 2018 for Montgomery Hospital and Chester Hospitals manifested because of the same purchase agreement between Tower Health and CHS, the trial courts came to two different conclusions regarding standing for tax year 2018.

Fortunately, the Court expounded on the statutory “any person aggrieved” language found in 53 Pa.C.S. § 8844(c)(1) and held that Montgomery Hospital and Chester Hospitals had standing for tax year 2018 because “the owner of a property who may feel aggrieved [for tax assessment purposes] includes not only the registered owner of the real estate, but also an equitable owner or owner of a taxable interest in the property.”  The Court noted “if [Montgomery Hospital] was forced to wait until it has record ownership of the properties, the window for seeking a tax exemption for tax year 2018 would have passed, even though [Montgomery Hospital] would have had legal title during that entire tax year.”

Key Takeaways

The trial courts from two adjoining counties reached two completely different outcomes using essentially the same facts and law, thus showing how convoluted and problematic this area of the law really is when trying to advise nonprofits in general.  If there was ever an area of law that should be black and white – this should be it – but clearly isn’t.  Keep in mind, nonprofits have charitable missions that benefit the public as a whole.  Every dollar that a nonprofit brings in the door should be used to accomplish its charitable mission, not fight over exempt status.  However, the nonprofits in Pennsylvania have to spend their limited resources deciphering a set of rules that are very fact specific, open to interpretation and grey at best, on top of having the “heavy” burden of proving entitlement to exempt status.

The taxing districts will undoubtedly smell the “blood in the water” caused by these Court Opinions and a new wave of taxing district appeals fighting current exempt nonprofit hospital property and other exempt nonprofit properties will ensue, much like after the HUP decision in 1985. 

Accordingly, nonprofits at the very least need to:

  • Review all executive compensation, with a specific eye on all bonus structures as they relate to financial performance of the nonprofit entity.
  • Analyze the reasonableness of all management and administrative fees charged by any parent or operating entity, similar to a transfer price study done for Federal and State income tax purposes.
  • Understand the HUP test, Act 55 and relevant county assessment law.
  • Be willing to entertain or enter into “payment in lieu of taxes agreements” commonly referred to as PILOT Agreements with taxing districts.

Please contact Paul Morcom, Esq. at 717-237-5364 or Adam Koelsch, Esq. at 717-237-5305 if you have any questions regarding the “purely public charity” exemption in Pennsylvania.


[1] Pottstown School District v. Montgomery County Board of Assessment Appeals et. al., 1217 C.D. 2021 (2/10/23).

[2] Brandywine Hospital, LLC v. County of Chester Board of Assessment Appeals et. al., 1279, 1280, 1283 and 1284 C.D. 2021 (2/10/23), Jennersville Hospital, LLC v. Chester County Board of Assessment Appeals, et. al., 1282 and 1286 C.D. 2021 (2/10/23) and Phoenixville Hospital, LLC, v. Chester County Board of Assessment Appeals, et. al., 1281 C.D. 2021 and 1285 C.D. 2021 (2/10/23).

[3] Codified at 10 P.S. § 371 et seq.

[4] St. Margaret Seneca Place v. Bd. of Prop. Assessment, Appeals & Rev., 640 A.2d 380 (Pa. 1994).