Back Billed for Taxes: The Definition of Nonprofit Matters in Allentown

indecision dice / Anne-Lise Heinrichs

March 5, 2019: The Morning Call

The Parkettes is a gymnastics club in Allentown, Pennsylvania with a mission to “provid(e) all boys and girls, regardless of age, financial, mental, or physical ability” with experiences in gymnastics. Their goal is to build self-esteem, increased physical fitness, and more. Seems pretty straightforward as a nonprofit organization. However, according to a report in the local paper, The Morning Call, the organization is in the middle of a legal battle over a “business privilege tax” bill of more than $60,000 assessed by the city of Allentown.

The city’s bill is for the years 2007-2016 on what a spokesperson for the city said is activity that is taxable according to city ordinances and state court rulings. The Parkettes appealed in October of last year, but according to the report, the Tax Appeal Board issued a finding that the organization cannot demonstrate that it donates a substantial portion of its services and “does not advance a charitable purpose” because its clients are capable of paying for services. The Parkettes are now suing the city.

The Parkettes are not the only ones in this limbo; also suing the city over a much larger tax bill of $704,348 is the Good Shephard Rehabilitation Network, which is being back-billed for the years between 2012 and 2017. The network better fits the usual target of these kinds of tax collection efforts in that it is a large health services organization. Its original bill was $1.5 million. It is not clear how many other nonprofits in that area are struggling with the same sudden assessments, but Allentown’s tax revenues in that area came in well over budget in 2017 and seem to be inching steadily upward. The city has said that it will levy up to 10 years of taxes from a nonprofit when the measure appears appropriate.

According to the Pennsylvania Department of State, nonprofits are organizations in which members or shareholders may not receive any of the monetary profits that are generated each year except as salaries and reimbursement of expenses. Nonprofit organizations in Pennsylvania may be exempt from certain state taxes. Interestingly, the commonwealth’s language specifically calls out that many, but not all, nonprofits have a charitable purpose.

At the local, municipal level, the tax in question is known as the Business Privilege Tax Ordinance, and is levied for “general revenue purposes on the privilege of doing business as herein defined in the City.” In the description of the ordinance passed in 1996, “business” is defined as “any activity carried on or exercised for gain or profit in the City.” In some ways, the Parkettes might fit that definition.

The IRS Form 990 for 2017 shows a profit of more than $219,000 (8.6 percent) that year and more than $93,000 the prior year. Almost 92 percent of the total income comes from program revenue and most is listed as derived from “membership fees.”

There are 11 board directors listed and two officers, the President and the Co-Director; each receive around $100,000 in reportable compensation. They are the founders and lead staff of the organization. They are not independent directors, so there is room for a perception that there are not appropriate levels of objective oversight. However, there is no indication that anyone received any funds beyond a salary, and the profits are merely rolled back into the organization’s operations for the following year.

Of course, even though it is recognized as nonprofit by the IRS and the commonwealth of Pennsylvania, the organization is not exempt from all taxes. In this case, when is an organization a “business” and therefore taxable under the business privilege tax ordinance? When does being profitable make profit the specific purpose for the activities that were carried on? It is not readily apparent in the IRS Form 990 nor on the website what percentage of the expenses incurred that year was to offer scholarships or in other ways make the services available beyond a clientele that could afford membership and program fees. Would that be the only way to prove that the organization’s activities were not carried out for profit?

These are issues that presumably will be clarified as the lawsuit progresses and will provide some guidance for future efforts to gain taxes from nonprofits in Pennsylvania and, probably, other parts of the country.—Rob Meiksins