On January 15, 2013, Pennsylvania State Senator Jim Ferlo, D-Highland Park, announced that he will introduce an amendment to the Local Tax Enabling Act that would allow the City of Pittsburgh to extend its current payroll tax to “charitable organizations that have 250 or more employees.” Interestingly, the provision of Act 222 of 2004 that amended the Local Tax Enabling Act to give the City of Pittsburgh authority to tax the payroll of for-profit businesses within the City applies only to cities of the second class. Pittsburgh is the only second class city within the Commonwealth.
Act 222 of 2004 permits the City of Pittsburgh to impose a .55 % (0.0055) tax on the payroll expense of an employer conducting a business activity in the City. The statute specifically excludes, however, an “Institution of Purely Public Charity” from paying the tax on the payroll expense attributable to its exempt activities even though it is required to file the payroll tax return. Payroll expense incurred by a purely public charity in connection with an unrelated business activity, however, is subject to the tax.
In a memorandum outlining his intentions, the Senator indicated that proposed legislation would reduce the current .55 % tax to .50 % on the for-profit community and establish a .40 % tax levy on nonprofit employers with more than 250 employees. He predicted that the lower rate for the City’s for-profit businesses would result in a reduction of tax revenues by $5 million but that the imposition of the payroll tax on the City’s nonprofit community would raise between $10 million and $15 million in new tax revenue from larger nonprofit organizations.
The memorandum reported that nonprofit employers with more than 250 employees account for more than 70% of the total employment in the nonprofit sector in the City of Pittsburgh, and that nonprofits employ nearly 25% of the workforce within the City, well above Pennsylvania’s 11% average for all cities. In the memorandum, the Senator states that “it is unsustainable and unreasonable to continue treating the expansion of these large nonprofits as if they are unable to pay their fair share for the upkeep of basic city services and infrastructure.”
It is important to note that within the Senator’s memo the terms “nonprofit” and “charitable organization” are used interchangeably, but the exemption to the payroll tax under Act 222 only applies to organizations that qualify as Institutions of Purely Public Charities under the Pennsylvania statute. The proposal to expand the payroll tax to purely public charities presents many issues that will need to be resolved before such a tax could be enacted. For example, the Institutions of Purely Public Charity Act specifically provides for tax exemption for charities satisfying criteria set forth in that statute. Furthermore, Pennsylvania’s Constitution requires uniformity in taxation; hence, the disparity in taxing only organizations with more than 250 employees may present constitutional issues.
The Schneider Downs Nonprofit Tax team will continue to monitor developments with respect to this issue and alert our nonprofit clients if any proposed legislation is introduced. If you have any questions or require assistance on this issue, please do not hesitate to contact Susan M. Kirsch at email@example.com or Debra A. Ries at firstname.lastname@example.org
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