Executive Summary:
New tool may streamline sales and use tax exemption process
Pennsylvania recently announced the launch of an online application for non-profit organizations seeking or renewing tax-exempt status for sales and use tax purposes. The new application should streamline some aspects of the process. However, applicants must still demonstrate qualification under the qualitative constitutional test and quantitative statutory test – a task not always easy to accomplish.
Pennsylvania launches online application tool for tax exempt organizations
Pennsylvania tax-exempt status for sales and use taxes
The Pennsylvania Department of Revenue recently announced the launch of an online application for non-profit organizations seeking or renewing tax-exempt status for sales and use tax purposes. The online application replaces the six-page paper application previously required. Non-profits may access the online application through myPATH, the department’s centralized online hub for taxpayer services.
The online application arrives on the heels of an order from Gov. Josh Shapiro for the state’s agencies to conduct a review of their application processes. The department hopes the online application for non-profit organizations streamlines the pathway to sales and use tax exemption previously encumbered by a burdensome paper application, lengthy turnaround times, incomplete applications and verification issues. While the online tool may help the application process in some ways, it does not relieve the taxpayer of the obligation to demonstrate qualification for exemption with the documents and other support ordinarily required.
Purely public charity exemptions
In Pennsylvania, tax-exempt status only applies to an organization that qualifies as 'an institution of purely public charity’ under both the state’s constitutional test, first given full life in Hospital Utilization Project v. Commonwealth, 507 Pa. 1 (1985), and the statutory test under the Institutions of Public Charity Act, 10 Pa.C.S. section 375. Both tests are fact-sensitive, require more than federal section 501(c)(3) status, can be tedious to follow, and require separate analysis despite their apparent similarities. Although the constitutional test tends to be qualitative and the statutory test quantitative, the following general criteria apply to both tests.
- Charitable Purpose: The institution must advance a charitable purpose
- Private Profit Motive: The institution must operate entirely free from private profit motive
- Community Service: The institution must donate or render gratuitously a substantial portion of its services
- Charity to Persons: The institution must benefit a substantial and indefinite class of persons who are legitimate subjects of charity
- Government Service: The institution must relive the government of some of its burden
If the department denies the application, an organization seeking tax-exempt status must appeal the decision through the administrative appeal process and then through the courts as warranted. But, if granted, the organization may purchase products and services used in the qualifying business on a tax-exempt basis, as well as for any other purpose identified on Form REV-1220, Pennsylvania Exemption Certificate. The application must be renewed every five years. Finally, organizations that qualify for tax-exempt status on purchases, still may be required to collect sales tax on their sales as the exemption does not apply to both.
Takeaways
An online application should help to streamline the application process for Pennsylvania tax-exempt status for sales and use tax purposes. However, it does not relieve the organization from compiling the necessary documentation and ascertaining whether or not its activities support exempt status. In addition, the organization must sufficiently demonstrate an appropriate level of gratuity, benefit to legitimate subjects of charity on an indefinite basis, and relief of burden to the government under both tests. This is not always easy due to the fact-sensitive nature of each test and their similar yet distinct characteristics.
Also, taxpayers should be aware of a particular nuance if the application is denied. The organization must meet the constitutional and statutory tests to qualify for exemption. Yet, neither administrative appeal board may render a decision on a constitutional issue. Due to the constitutional nature of the tests, taxpayers may need to appeal a denial through the boards and to the courts before resolution of the issue, a potentially costly process. This emphasizes the importance of fling a properly completed and thoroughly reviewed original application.
Lastly, organizations seeking exemption should be mindful that a separate, duplicative application process applies for real estate tax purposes. That process requires an organization to clear not only the noted constitutional test and statutory test, but also the additional hurdle presented by the applicable county assessment law. The deadline to apply for exemption is the same as the deadline to file an annual assessment appeal. Qualifying for exempt status for sales and use tax purposes may help with exempt status for real estate tax purposes.
