Transcript Everything You Always Wanted to Knox About Workers

Thomas A. Tupitza, Esq.
Knox McLaughlin Gornall
& Sennett, P.C.
120 West Tenth Street
Erie, PA 16501
[email protected]
Vincent F. Halupczynski, CPA
Malin, Bergquist & Company, LLP
2402 West 8th Street
Erie, PA 16505
Background Facts*
Number of Nonprofit Organizations in Pennsylvania?
At least 41,000.
Number of PA residents employed by the PA nonprofit
sector?
1 out of every 9 full-time workers.
*Source: Pennsylvania Association of Nonprofit Organizations presentation to PA Joint Legislative
Budget and Finance Committee (May 2009).
Why is PA concerned about
nonprofit tax exemption?
Philadelphia has more tax-exempt land (by value) than
any other major city in the United States―an
estimated 10.8 percent in 2006.
Source: Daniel Denvir Philadelphia City Paper ,
“Pay up: Penn and other wealthy nonprofits pay
nothing to city.” (March 15, 2012).
Real Estate Tax 101
With a few exceptions (e.g. religious organizations),
taxable property includes any real estate not owned by
the government.
2. Property divided into assessment areas.
3. A tax assessor assesses his or her own assessment area
according to the local rules.
4. Instead of changing the rates, change the assessment.
5. Pennsylvania law allows purely public charities to receive
exemption from Pennsylvania Real Estate Tax.
1.
Pennsylvania Legislature
Under the Pennsylvania
Constitution, the
General Assembly is
empowered to confer
tax-exempt status on
“institutions of purely
public charity.” Pa.
Const. art. VIII, §2(a)(v).
PA Real Estate Tax Exemption
For Real Estate Tax, the General Assembly may exempt
“only that portion of real property of such institution
[purely public charity] which is actually and regularly
used for the purposes of the institution.” Pa. Const. art.
VIII, § 2(a)(v).
The General County Assessment Law, 72 P.S. § 5020-101
et seq. provides for the imposition of local tax on real
estate and exemptions from local real estate tax.
What is a “purely public charity”?
 PA Constitution does not define “purely public
charity”.
 PA Supreme Court creates HUP Test: Hospital
Utilization Project v. Commonwealth of Pennsylvania,
501 Pa. 1 (1985).
 PA Legislature enacts Institutions of Purely Public
Charity Act (“Act 55”) on November 26, 1997 which
adopts the same factors set forth by HUP Test, but
adds additional factors.
Hospital Utilization Project v.
Commonwealth of Pennsylvania
 1963: Allegheny, Beaver, Lawrence, and Westmoreland
counties form a Hospital Council and engage in the
Hospital Utilization Project to gather, analyze, and
compare hospital utilization statistics (e.g. length of stay,
diagnosis, treatment, etc.).
 1963 – 1966: HUP funded by charitable contributions.
 1967: Hospitals fund HUP through direct payment (i.e.
hospital is charged a set fee for each patient abstract it
submits to HUP and then receives access to all of HUP’s
reports). Non-submitting entities pay fees to receive
reports.
Hospital Utilization Project v.
Commonwealth of Pennsylvania
 1969: HUP organizes as a nonprofit corporation under PA
law and obtains “501(c)(3) status.”
 1980: HUP’s petition for refund of sales and use tax denied
by Board of Appeals of the Department of Revenue, the
Board of Finance and Revenue, and the Commonwealth
Court. HUP appeals to the Supreme Court of
Pennsylvania.
 1985: PA Supreme Court reviews case law, sets forth HUP
Test, and finds that HUP is not a “purely public charity”
entitled to exemption from taxation.
HUP Test
1.
2.
3.
4.
5.
advances a charitable purpose;
donates or renders gratuitously a substantial portion
of its services;
benefits a substantial and indefinite class of persons
who are legitimate subjects of charity;
relieves the government of some of its burden; and
operates entirely free from private profit motive.
Act 55
The institution must relieve the government of some of its burden. This
criterion is satisfied if the institution meets any one of the following:
(1) Provides a service to the public that the government would
otherwise be obliged to fund or to provide directly or indirectly or to
assure that a similar institution exists to provide the service.
(2) Provides services in furtherance of its charitable purpose which are
either the responsibility of the government by law or which historically
have been assumed or offered or funded by the government.
(3) Receives on a regular basis payments for services rendered under a
government program if the payments are less than the full costs
incurred by the institution, as determined by generally accepted
accounting principles.
Act 55 (Con’t.)
(4) Provides a service to the public which directly or indirectly reduces
dependence on government programs or relieves or lessens the burden
borne by government for the advancement of social, moral, educational
or physical objectives.
(5) Advances or promotes religion and is owned and operated by a
corporation or other entity as a religious ministry and otherwise
satisfies the criteria set forth in section 5.
Mesivtah Eitz Chaim of Bobov, Inc. v. Pike
County Board of Assessment Appeals
 Mesivtah Eitz is a
nonprofit religious entity
related to the Bobov
Orthodox Jewish
community in Brooklyn,
NY that operates a summer
camp in Pike County
which provides classes on
the Jewish faith and
recreational activities for
campers.
Mesivtah Eitz Chaim of Bobov, Inc. v. Pike
County Board of Assessment Appeals
 Mesivtah Eitz seeks property tax exemption as a
purely public charity which is denied by Pike
County Board of Assessment.
 By applying the HUP Test, the Board of
Assessment Appeals and the Commonwealth
Court affirm the denial of tax exemption.
 Mesivtah Eitz appeals to the Supreme Court of PA
arguing that the lower courts erred in using the
HUP Test. It argues that Act 55 is more recent and
broader than the HUP Test.
Mesivtah Eitz Chaim of Bobov, Inc. v. Pike
County Board of Assessment Appeals
Does the Pennsylvania Legislature’s enactment of Act 55
for determining if an organization qualifies as a
“purely public charity” under Pennsylvania’s
Constitution deserve deference in deciding whether an
organization qualifies as a “purely public charity” or
has the HUP Test occupied the constitutional field,
leaving no room for legislative input?
Mesivtah Eitz Chaim of Bobov, Inc. v. Pike
County Board of Assessment Appeals
“To receive a real estate tax exemption without violating
the Pennsylvania Constitution, the party must meet
the definition of purely public charity as measured by
the test in HUP. If it does so, it may qualify for
exemption if it meets the statute’s requirements. Act
55, however, cannot excuse the constitutional
minimum: if you do not qualify under the HUP
test, you never get to the statute.” Mesivtah Eitz, 44
A.3d at 14 (April 25, 2012).
Real Estate Tax Exemption Process
1.
Complete Application for Exemption of Real Estate.
One application per parcel.
b) “Legal” basis for request.
c) General information about property.
a)
2. Comply with specific requirements of applicable
county.
Real Estate Tax Exemption Process
3. Comply with General County Assessment Law (72
P.S. § 5020-204)
a)
b)
c)
d)
e)
Properly completed assessment appeal form.
Proof of nonprofit status.
IRS ruling letter granting exempt status.
Three (3) years of income tax returns.
Copies of organization documents, bylaws and
amendments .
Real Estate Tax Exemption Process
3. Cont’d.
f) Current list of Board Members.
g) Verified statement of no private inurement or Articles
of Incorporation stating the same.
h) If not in tax returns, statements of salaries for officers,
directors, and five highest paid salaried employees.
i) Copies of deeds of property in question.
j) Verified statement of authorization if the appeal is
filed by an officer or employee of the corporation.
Real Estate Tax Exemption Process
4. Burden of Proof
5. Hearing Process
6. Board Decision
a. May be from solicitor and set forth reasons for denial.
b. May be from Board or Board Secretary and MAY NOT
set forth reasons for denial.
7. Appeal
a) Must be filed within 30 days from date of filing of
decision of denial.
b) Notice of Appeal must be served on Assessment Board
within ten days of filing an appeal.
Vincent F.
PA Sales & Use Tax
 501(c)(3) is for exemption from federal and state
income taxes (not sales/use, real estate, and other
taxes).
 PA requires a separate application (PA Form REV-72)
for sales/use tax exemption.
 Basically, the same criteria that applies to real estate
tax exemption applies to sales/use tax.
PA Sales & Use Tax
Transactions exempt from sales/use tax:
 Purchase and use of tangible property or services that
are used in an activity which bears a reasonable
relationship to the purpose for which the exempt
organization exists.
PA Sales & Use Tax
Transactions exempt from sales/use tax:
 Purchase and use of tangible property qualifying as a
material or supply which is used for the routine
maintenance or repair of real estate which is used
in an activity which bears a reasonable relationship to
the purpose for which the organization exists.
PA Sales & Use Tax
Transactions subject to sales/use tax for NPO’s:
 Property used in an activity which is not the exempt
purpose of the organization.
 Materials, supplies and equipment used and installed
in the construction, remodeling, repair and
maintenance of any real estate so as to become a
permanent part of the real estate.
PA Sales & Use Tax
Transactions subject to sales/use tax for NPO’s
(continued):
 Equipment used but not installed in the
construction, remodeling, repair and maintenance
of real estate.
 Charges subject to hotel occupancy tax
 Purchases of alcohol
What You Should Do. . .
 Educate your people on the regulations, typically this
would be your accounts payable accountant, controller,
and/or CFO.
 Review your vendor invoices to be sure they charge you
sales tax for the appropriate taxable purchases. If not
charged by the vendor you should remit the use tax.
 Anytime you have a construction project be sure to
review the rules very carefully, and be sure you and the
contractor are “getting it right”.
Nonprofits and Political Activity
PA Lobbyist Disclosure Act
 Lobbyist: “Any individual, association, corporation,
partnership, business trust or other entity that engages
in lobbying on behalf of a principal for economic
consideration.”
 Lobbying: “An effort to influence state legislative or
administrative action.” The term includes (1) direct or
indirect communication, (2) office expenses, and (3)
providing any gift, hospitality, transportation or
lodging to State official or employee for the purposes
of advancing the interest of the lobbyist or principal.
PA Lobbying Reporting
Requirements
When total expenses for
lobbying activity exceed
$2,500 for a registered
principal in any calendar
quarter.
NOTE: There are also
federal and IRS lobbying
rules for nonprofit
organizations.
Political Activity
Under Federal law, a 501(c)(3) organization may “not
participate in, or intervene in (including the
publishing or distributing of statements), any political
campaign on behalf of, or in opposition to, any
candidate for public office.”
Political Activity
 No campaign contributions.
 No endorsement.
 No polls or surveys.
 No candidate position papers.
 No advertising or publicity.
 No money paid to candidates for speeches or other
services.
Political Activities
PENALTIES
 Loss of exemption;
 Injunction requiring
immediate cessation of
political activities;
 Excise tax; and/or
 Penalty for failure to
correct illegal activities.
Lobbying
An attempt to influence
legislation through
communication with
members or employees of a
legislative body or with
governmental officials or
employees who may
participate in formulating
legislation.
Political Activity
An attempt to influence the
selection, nomination,
election or appointment of
an individual to a federal,
state or local public office or
office in a political
organization, or the election
of a presidential or vicepresidential elector.
Worker Classification
Employee vs. Independent Contractor
 20 common law factors (IRS Rev. Rule 87-41)
 1099-MISC
 Penalties for failure to file
 990 questions regarding 1099’s
 IRS audit focus
Ramifications
 Taxes, penalties, interest if worker is misclassified:
 Federal income taxes
 Social security (employee and employer)
 Medicare (employee and employer)
 Federal U/C
 PA income taxes
 PA U/C
 Local income taxes
 Penalties for failure to withhold
 Penalties for failure to remit
 Interest
What You Should Do. . .
 Review the individuals you are sending 1099’s to be
certain that is the appropriate treatment.
 Use IRS Form SS-8, Determination of Worker
Status for Purposes of Federal Employment Taxes
and Income Tax Withholding to help guide your fact
gathering.
 Review workers who received Form W-2 and a 1099 in
the same year.
 Review your vendor list and check register to be sure
you are sending 1099’s to all appropriate individuals
(penalties apply for failure to file)
Other
 403(b)/401(k)
 DOL Audits
 Timely remittance of employee withholding
 Small plan safe harbor
 Get to know “best practices” for sponsoring and
operating the plan
 Deductibility of Charitable Contributions
 EITC Organizations
 New certification requirements
Thank You!
Thomas A. Tupitza, Esq.
Knox McLaughlin Gornall
& Sennett, P.C.
120 West Tenth Street
Erie, PA 16501
[email protected]
Vincent F. Halupczynski, CPA
Malin, Bergquist & Company, LLP
2402 West 8th Street
Erie, PA 16506