Allentown charges nonprofit Good Shepherd $700,000 in business taxes

Sept. 27--More than $700,000 in tax revenue is on the line in the lawsuit filed by Good Shepherd Rehabilitation Network against Allentown over the city's attempt to collect business privilege taxes from nonprofits.

The lawsuit, filed this month, argues that Good Shepherd, which operates a rehabilitation hospital in the city's South Side, was incorrectly taxed for several facets of its business.

Allentown officials vowed this year the city would be more "aggressive" with business privilege tax collection, particularly from nonprofits, which are typically tax-exempt. Finance Director Brent Hartzell said at the time that some city nonprofits were participating in "taxable activities."

Exactly what those taxable activities are is information typically protected by strict tax-privacy laws. Who Allentown is taxing and how much also are confidential. But an appeal entered into evidence two weeks after Good Shepherd filed its lawsuit sheds some light.

According to the appeal, Allentown initially assessed Good Shepherd for $1.5 million for the years 2007 to 2016. By law, Allentown can collect for up to 10 years of back taxes from organizations that have never filed a business privilege tax return.

That assessment was later revised to $788,082 for the years 2012 to 2016. Good Shepherd appealed in May. An opinion was issued in August upholding the majority of the tax, but reducing it slightly to $704,348.

That figure is about 10 percent of Allentown's anticipated business privilege tax revenue for 2018.

According to an appeal board's findings, Good Shepherd provides administrative services that include accounting, financial management, fundraising, human resources, information systems and maintenance to subsidiaries in its care network, a collection of taxable and tax-exempt corporations.

Taxes were assessed on the following revenue streams: -- Contributions, gifts and grants; -- Management fees collected for administrative services offered by Good Shepherd to its care network; -- Investment income derived from investments managed on behalf of the care network; -- Gross rent generated by leases on property Good Shepherd owns for possible future hospital expansion; -- Expense reimbursement which includes income from reimbursements made by the care network to Good Shepherd in exchange for managing debt service; -- Health Network Labs revenue derived from Good Shepherd's 2 percent share of the lab company; -- Management services, which includes income generated by a contract with Lehigh County to manage Cedarbrook Senior Care and Rehabilitation facility; -- Insurance reimbursement also received for the Cedarbrook service.

The appeal board ruled that all of the above revenue was taxable except for contributions, gifts and grants. A total of $704,348 was due in taxes post appeal -- charged at a rate of $3 for every $1,000 of gross volume business.

Reached for comment Wednesday, Good Shepherd provided a statement:

"As a non-profit entity, Good Shepherd provides vital health-care services to our community. At this time, our preference is to have the legal process run its course and determine the merits of the city's assessment and our appeal."

The appeal board noted that Good Shepherd provides bonuses to its executive staff, a move courts have found to show "profit motive," according to the opinion. The decision also argued that Good Shepherd is not a purely public charity, the standard for tax exemption.

In its lawsuit against the city, Good Shepherd argued the tax was "unlawfully excessive, improperly determined and non-uniform." The suit also contends that the tax violates Pennsylvania's constitution.

The scope of nonprofits assessed by the city is unknown due to tax privacy laws, but the Good Shepherd case demonstrates how much revenue is at stake. Allentown budgeted for $7.37 million in revenue from the business privilege tax for 2018, according to city budget documents. More than $7 million has already been collected.

Good Shepherd is the first nonprofit to sue the city over the tax. Hartzell warned members of City Council earlier this year to expect appeals and legal challenges.

A status conference in the Good Shepherd case has been scheduled for December before Lehigh County Judge Melissa Pavlack.

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Good Shepherd tax bill

Good Shepherd Rehabilitation Network, a nonprofit and typically tax-exempt, was assessed a business privilege tax by Allentown for 2012 through 2016. The network has sued the city, saying the organization was unfairly assessed. Here's what it was charged:

2012: $143,896

2013: $143,372

2014: $117,734

2015: $160,084

2016: $139,260

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