Philadelphia and taxes

Today’s post comes once again from iOn guest contributor, John McGee. John can be found in the current issue of the Chronicle of Philanthropy, in an article about social networking and LinkedIn within the “economy and philanthropy” supplement.

In a recent nonprofit update, Grant Thornton LLP reported that Philadelphia has moved to expand the tax on unrelated income earned by nonprofits by amending its definition of the business privilege tax (BPT).  The BPT is a tax on gross receipts and net income. There is much debate in Philadelphia about how this tax should be used, if at all.

The change includes a provision that revenue “generated by a nonprofit organization from rental of any residential or commercial real estate is deemed income derived from unrelated business activity.” This provision based on a variety of analysis is different from that which is required by federal reporting standards for unrelated income. This expanded BPT presents a whole new set of budget issues to nonprofits and potentially provides the cash strapped city with a new revenue stream.

Some would argue that Philadelphia has a history of aggressively (Executive Order 1-94 as an example) viewing nonprofits as a potential source of tax revenue. Over the years they have implemented a number of efforts to impose a PILOT (payment in lieu of taxes) program to cover the cost of city services consumed by the nonprofit community.

Recent reductions in tax collections at the state and local levels have resurrected the debate over taxing nonprofits in some capacity. The most common idea is the PILOT concept because the real estate tax is a key component for local governments funding of critical services. These services are consumed by all in the community including nonprofit organizations. The recent closure of libraries in major cities has intensified this debate as reported in a December 2008 issue of the Library Journal.

While the issue of nonprofit property tax has been being debated for some time (NY Times article 11/12/07) the likelihood of a significant change has always appeared low. The situation is radically different now.

One thing to consider is: if organizations must divert funds from programs to pay the taxes or charges levied by communities, who will pick up the slack in services caused by the reassignment of those assets? Will the cities lose more in services than they gain in revenue?

Add this effort to that of the proposal in Massachusetts to levy a 2.5% tax on the assessed value of an endowment over $1 billion, and it becomes obvious the nature of this discussion and debate has changed. The question for the nonprofit sector is how to respond to these growing pressures and, more importantly, how to respond to the debate over what a charitable nonprofit is – a debate currently raging in other sections of the world.

Hospitals Beware – Nonprofits Be Vigilant

Today’s post comes to us again from guest contributor John McGee:

In its January newsletter, Fund Raising and Non-Profit Report (produced by Copilevitz and Canter, LLC) reports on comments made by Senator Charles Grassley in a December 13, 2008 Wall Street Journal article. It is suggested that new minimum requirements for aid to the poor (community benefit) may be legislated by Congress for non-profit hospitals. These minimums if legislated would change the debate on requirements to allocate a certain percentage of one’s operating revenue or expenses to approved charitable purposes.

TE/GE Commissioner Steven T.  Miller in January 12, 2009 speech addressed specifically issues related to community impact as it applies non-profit hospitals. In his address he acknowledged that the 40 year old standard may be outdated; that Schedule H on the new 990 will enhance transparency and accountability of hospitals to the existing standard; that any changes to the standard will cut both ways and that we are entering a new era in medical care and will need to monitor those changes as they apply to the exemption standard.

In comparing the comments of Mr. Miller with those credited to Senator Grassley, I must wonder if they are sharing them most recent data and current impressions. These are issues the hospital organizations will need to address if proposed changes to the community benefit standard are suggested based on outdated or incomplete data. Using Mr. Miller’s comments as a guide, it would seem that primary data is available but comprehensive date will not be until the new 990 has been used and validated.

The bigger issue for the general non-profit sector is if Congress legislates minimum allocation requirements to meet the community benefit standard for non-profit hospitals to retain their tax-exempt status; can that concept be applied to the general population of non-profits by extension or other legislation? Historically, the courts have ruled that such standards are not acceptable but in today’s fiscal and regulatory environment changes may be afoot.  Any proposed legislation dealing with minimum requirements will need to be scrutinized and evaluated as to how it not only impacts a segment of the tax code but how it might impact the full contingent covered by the code.