Information You Can Use

Pennsylvania Supreme Court Reaffirms Primacy of 5-Part HUP Test – Non-Profit Organizations Beware!

May, 2012

Some years ago, the Pennsylvania Supreme Court adopted a 5-part test, known as the HUP test, [1] to determine whether a non-profit organization in Pennsylvania is to be treated as a "purely public charity" under the Pennsylvania constitution and other applicable Pennsylvania law. A "purely public charity" is tax-exempt for purposes of Pennsylvania sales tax and local real estate tax. Subsequent court cases showed that the 5-part test was going to be applied by the Pennsylvania courts in a fact-specific, and in the minds of many observers, widely inconsistent basis.

Reacting to the uncertainty caused by these court decisions, the non-profit community persuaded the Pennsylvania legislature to approve legislation known as Act 55 which sought to clarify the court cases in this area and to provide greater certainty going forward as to what organizations would or would not qualify as a purely public charity under Pennsylvania laws. In fact, Act 55 seemed to work pretty well. The tax-exempt standards stated in Act 55 were clearer than the numerous court cases and court decisions following Act 55 began to develop some consistency.

In several recent cases, the Pennsylvania Supreme Court hinted that its interpretation of the PA constitution as set forth in the HUP test takes primacy over Act 55. In a recent case, the Pennsylvania Supreme Court finally addressed this issue head-on and concluded that Act 55 can only limit and cannot broaden the definition of what is a purely public charity beyond the HUP test. In sum, the key factor is determining whether a non-profit organization is tax exempt under Pennsylvania law (for real estate and sales tax purposes) will again be the HUP test and not Act 55.

So, what does this mean? It means that the greater certainty provided by Act 55 has effectively been gutted and that the courts of Pennsylvania will most likely return to the inconsistent fact-specific determination process used previously under the HUP test. This is not good news for non-profits whose tax-exempt status is more easily established under certain specific standards in Act 55. The Supreme Court’s holding will make it harder for non-profits to obtain and maintain tax exempt status.

It is also worth noting that in order to create sufficient political support to pass Act 55, the non-profit community agreed to a provision in Act 55 which allows a private business to challenge the tax-exempt status of an organization alleged to be engaged in competition with the private business (an example would be a private health club challenging the tax exempt status of a YMCA/YWCA). It appears that this provision will continue notwithstanding the reduction in the effectiveness of the other provisions of Act 55. As a result, the non-profit community will not get the benefit of the bargain that it thought it was getting by agreeing to this unusual provision.

If you have any questions regarding this new Pennsylvania Supreme Court decision, Act 55, the HUP test or obtaining exemption from Pennsylvania sales tax or local real estate tax, Davison & McCarthy can help.

Contact Mark D. Aurand for more information.


1. The name of the five-part test is derived from a case entitled Hospital Utilization Project v. Commonwealth, decided by the Pennsylvania Supreme Court in 1985.