A little known statutory change now allows for certain fraternal societies to obtain tax exempt status in Pennsylvania.
In Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (“HUP”), the Pennsylvania Supreme Court set forth the following five-pronged test to determine whether an entity qualifies as “purely public charity” under the Pennsylvania Constitution and is therefore entitled to exemption from certain taxes:
- Does the entity advance a charitable purpose?
- Does the entity donate or render gratuitously a substantial portion of its services?
- Does the entity benefit a substantial and indefinite class of persons who are legitimate subjects of charity?
- Does the entity relieve the government of some of its burden?, and
- Does the entity operate entirely free from private profit motive?
In 1997, the General Assembly enacted the Institutions of Purely Public Charity Act, also known as Act 55, in response to the court system’s perceived lack of consistency in applying the HUP test. Act 55 codified five HUP prongs but defined how prongs were met and added other requirements. The purpose of Act 55 was to bring objectivity and consistency.
Regarding the third prong above, Act 55 states that an institution does not benefit an indefinite class of persons who are legitimate subjects of charity if: (i) the institution does not qualify as a 501(c)(3) non-profit; and (ii) the institution is, among other things, qualified under 501(c)(7) as a “club organized for pleasure or recreation” or 501(c)(8) as a “fraternal beneficiary society, order or association.” Based on this language alone, many fraternal associations, such as, for example, Masonic lodges, would not qualify as institutions of purely public charity and would not be entitled tax exempt status in Pennsylvania.
However, effective December 13, 2023, the General Assembly enacted an obscure provision into the Fiscal Code as part of their budget negotiations, stating that, notwithstanding the language in Act 55, an institution is considered to benefit a substantial and indefinite class of persons who are legitimate subjects of charity if:
- the institution is a domestic fraternal society, order or association, that operates under a lodge system, the net earnings of which are devoted to religious, charitable, scientific, literary, educational and fraternal purposes and qualifies for an exemption from taxation under 26 U.S.C. § 501(c)(8) and (10) [] and:
- the organization has been operating in this Commonwealth for at least 100 years upon the effective date of this subparagraph; and
- the organization has not been issued a license under the act of April 12, 1951 (P.L.90, No.21), known as the Liquor Code.
(2) the institution is a title-holding organization that qualifies for an exemption from taxation under 26 U.S.C. § 501(c)(2) that is wholly owned or controlled by one or more qualifying fraternal organization described under paragraph (1).
72 P.S. § 102-L.
This new language now opens the door for certain long-standing fraternal societies to qualify for sales and real estate tax exemptions in Pennsylvania.
If you have any questions regarding this statutory change, or if you have any SALT issues, please contact Adam Koelsch, Esquire (717-237-5305) or any member of the McNees SALT Group.