Philadelphia Nonprofits Nervous Over Tax Proposal

Feb. 18, 2009, The Philadelphia Inquirer — Nonprofit organizations fear a proposed amendment to Philadelphia's tax regulations will allow the city to tax an array of activities that they have always assumed were exempt.

The city revenue commissioner said today that proposed changes to the business-privilege tax regulations were being "misconstrued" and were not designed to generate new revenue.

Still, nonprofit experts said the proposed changes were broad enough to permit the city to tax universities for dorm fees, performing-arts theaters for concession-stand sales, and small community groups for fund-raising dinners.

The amendments, in practice, would require nonprofit groups to undertake bookkeeping and administrative changes that could be more costly than the taxes.

Revenue commissioner Keith Richardson acknowledged that the language in the amendments was "vague" in parts and would have to be rewritten, particularly to make it clear the city was not seeking to tax dorm fees.

"Our intent is being misconstrued," Richardson said, adding that the changes were unrelated to the city's fiscal crisis. "We are trying to close a loophole" and tax only business activities that are unrelated to the core mission of a nonprofit group.

"Dorms are clearly part of the core mission of a university," he said.

Richardson said his office would consider changes to the proposal after reviewing concerns raised by the nonprofit community, which sees a threat to the financial health of the smallest organizations and an unwieldy, shortsighted burden to others.

"Taxing nonprofit unrelated business activity would be a mistake," said David Ross, public policy officer for the Pennsylvania Association of Nonprofit Organizations. "By trying to extend the BPT to nonprofits, they are hurting the very institutions that are struggling to serve the needs of the community."

Lawyers representing nonprofit groups say they are hopeful the city will be open to reworking the final language to eliminate many, if not all, the problems they see.

"If the city will work cooperatively with nonprofits, I think rules can be developed that will be fair to both sides," said Wendi L. Kotzen, a partner at Ballard, Spahr, Andrews & Ingersoll L.L.P.

At issue is proposed language for the city's tax regulations that would say the city considered "unrelated business activities" by nonprofit groups as taxable.

The amendment defines "unrelated business activity," in part, as "trade or business . . . not substantially related to the nonprofit purpose of the organization . . . [and] similar to competing nonexempt organizations."

That language is seen by lawyers for nonprofit groups as including activities such as fund-raising dinners and concession sales at theaters.

The amendment also seems to define all rental income as taxable, regardless of whether it was related to the organization's mission or not.

Laura Weinbaum, director of public policy for Project HOME, said that was of particular concern to her organization, which provides affordable housing to people at risk of homelessness.

"Residential real estate is a core activity of what we do at Project HOME," she said. "Without this residential housing, you can't end homelessness."

Stewart M. Weintraub, a Philadelphia lawyer specializing in state and local taxation, saw a number of flaws in the amendments, among them the fact they defined "unrelated business income" in broader terms than the existing federal tax code.

Richardson said he was aware of the federal standards. He said they would be considered in the coming weeks as his office mulled changes to the proposed amendments.

"I know people are nervous about this," Richardson said. "But we are not trying to hit people between the eyes. We are not trying to turn over rocks looking for money. We are just trying to close a loophole."