August 2, 2012; Source: Scranton Times Tribune
Pennsylvania is the epicenter for local and state government exploration of payments in lieu of taxes (PILOTs) applied to tax-exempt entities, and the City of Scranton’s back-and-forth with the University of Scranton is a good case study of the issues involved. This Scranton Times-Tribune article suggests that rather than (or in addition to) PILOTs, there may be ways of simply taxing college and university properties as taxable entities.
As you may know, there is nothing automatic about nonprofit property ownership that leads to a property tax exemption. Property taxes are based on the use of the properties in question. If a nonprofit uses a property for a purpose that isn’t charitable, then the property is taxable. For example, if a university leases facilities to a for-profit, the property is taxable. Doug Hill, director of the Harrisburg-based Assessors Association of Pennsylvania, breaks out some of the non-charitable uses that he thinks could trigger taxes: “If a campus has a bank on it, a food court with a bunch of fast food places or another commercial establishment,” it would be taxable, he says.
Ron Koldjeski, head of the Lackawanna County Tax Claims Bureau, offers a broader interpretation of the principle that doesn’t ring true to us: “I believe if you can put the use of a property to the test and show a particular use is not advancing the mission of a nonprofit, then it would be taxable.” What constitutes the variation from the mission, when nonprofits often carry out multiple and diverse programs of a charitable nature that are difficult to exactly fit into some mission statements?
Taking Hill’s and Koldjeski’s comments together, one can imagine the problem of a university bookstore or the leasing of a space to an eatery catering to students (the University of Scranton, for example, leases to Chick-fil-A and Starbucks, among others). Evelyn Brody from the Kent School of Law broadens the leasing issues further, suggesting that, “It has always been the case that leasing property ends the tax exemption…Often, even when a charity leases to another charity, the exemption ends for the leased property.”
Pennsylvania state law adds other criteria to the standards for property tax exemption, including, according to the Times Tribune, that a “nonprofit entity must also give away a portion of its services, benefit people who are legitimate subjects of charity [and] relieve the government of some burden.”
There’s no question that this article constitutes a signal that Pennsylvania governmental jurisdictions are not only going to continue their strategy of negotiating bigger PILOTs with more nonprofit property owners, but they will be fine-combing nonprofit property uses to see if they can spot openings for applying straight-up taxes. Expect leases and nonprofit-owned vacant land to be considered as possible taxation triggers.—Rick Cohen