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On August 3, 2022, the Pennsylvania Commonwealth Court upheld a panel decision finding that a senior living facility failed to qualify as a “purely public charity” and therefore was not entitled to exemption from sales tax. See Friends Boarding Home of W. Quarterly Meeting v. Commonwealth, No. 332 F.R. 2018 (Pa. Commw. Ct. Aug. 3, 2022) (op. not reported). In order to satisfy the requirements for a “purely public charity,” an institution must satisfy the five-part HUP test, which requires that an institution:
- Advance a charitable purpose;
- Donate or renders gratuitously a substantial portion of its services;
- Benefit a substantial and indefinite class of persons who are legitimate subjects of charity;
- Relieve the government of some of its burden; and
- Operate entirely free from private profit motive.
In Friends, the Pennsylvania Commonwealth Court found that the senior living facility failed to satisfy the second and third prongs of the HUP test.
Regarding the second prong, the court found that: (1) Friends charged rates comparable to its for-profit competitors; and (2) Friends provided direct financial assistance to approximately 15% of its population, but only after those residents financially qualified for admission and paid for two years without support. The amount of financial assistance also contained a cap. The court found that the level of assistance, which was limited in both scope and amount, did not meet the HUP test requirement that Friends donate or render gratuitously a substantial portion of its services.
Turning to the third prong, the court found that the senior living facility did not benefit an indefinite class of persons who were legitimate subjects of charity because: (1) Friends only admitted individuals who could initially afford its services with the use of personally available financial resources; (2) once admitted, Friends continued to care for the residents only if they could afford services with limited financial assistance for a limited duration; and (3) Friends excluded Medicaid recipients. Thus, the court found that Friends was assisting a finite – not indefinite – class of subjects of charity.
Institutions hoping to fall within the charitable exemption should conduct a careful review to ensure their actions are sufficient to satisfy the HUP test. As Friends demonstrates, it can be a difficult test to meet and certain actions can cause the institution to lose the benefits of the charitable exemption. If you have questions about whether your institution qualifies for the charitable exemption, reach out to us.
Jennifer Karpchuk is co-chair of the State and Local Tax (SALT) Controversy and Planning practice at Chamberlain Hrdlicka. She can be reached at firstname.lastname@example.org.