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decided: February 13, 1985.


No. 50 W.D. Appeal Dkt. 1983, Appeal from the Order of the Commonwealth Court dated June 21, 1983, entered at No. 1596 C.D. 1981, affirming the Order of the Pennsylvania Board of Finance and Review dated May 27, 1981, entered at No. RST-4370, Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ.

Author: Nix

[ 507 Pa. Page 7]


This action arose when appellant, Hospital Utilization Project ("HUP"), filed a petition for refund of sales and use taxes with the Board of Appeals of the Department of Revenue on June 16, 1980, following a determination by the Department of Revenue that HUP was not entitled to a charitable exemption from imposition of the taxes. In early December, 1980, the Board of Appeals concluded that HUP was neither a charitable organization nor engaged in manufacturing, and issued a decision denying the petition for refund. On petition for review of that decision, the Board of Finance and Revenue entered an order on May 27, 1981 affirming the denial of the petition for refund. Upon consideration of HUP's petition for review of the order of the Board of Finance and Revenue, the Commonwealth Court, 75 Pa. Commw. 154, 461 A.2d 894 (1983), affirmed that order reaching the same conclusions as the Board of Appeals of the Department of Revenue. HUP then timely appealed to this Court which has jurisdiction pursuant to Section 723 of the Judicial Code, 42 Pa.C.S. § 723(b).


In the early 1960's the Medical Societies of Allegheny, Beaver, Lawrence and Westmoreland Counties perceived the need for a uniform system for the collection and collation of statistical data on area-wide hospital utilization. In 1963 an association of hospitals known as the Hospital Council of Western Pennsylvania ("Hospital Council") voluntarily embarked upon HUP under which participating hospitals prepare a statistical abstract of the medical record of each patient upon discharge. The statistical abstract includes such information as admission and discharge data, medical diagnosis, treatment, length of stay and the treating physician. This information is then collated and computerized, and complete reports are disseminated to area hospitals so that each institution can compare its utilization

[ 507 Pa. Page 8]

    statistics for particular diagnosis with those of other hospitals.*fn1

From 1963 through 1966 the Hospital Council funded HUP with charitable contributions from the Allegheny County Medical Society Foundation, thirty-three (33) private and corporate foundations and "in-kind" donations of computer services from Blue Cross of Western Pennsylvania. By 1967, however, HUP had become financially secure and the Hospital Council and the medical societies withdrew from the project. The hospitals themselves then undertook to fund HUP through direct payment to HUP for its services. Thus, from 1967 to the present, HUP has been solely financed through a fee-for-services arrangement.

This arrangement, which is critical to our determination of this case, can be briefly described as follows. Each participating hospital is charged a set fee for each patient abstract it submits to HUP.*fn2 Participating hospitals receive all of HUP's standard reports and may choose to receive additional special reports for no additional charge. Entities other than hospitals, which do not generate patient abstracts, purchase HUP reports at set fees. The set fees approximate HUP's cost in producing the reports. Other projects undertaken by HUP for research and special projects that do not involve input from hospital abstracts and resulting reports are charged on the basis of actual computer time and programming hours expended. HUP charges everyone for its services and does not provide regular and continual financial aid to its individual customers

[ 507 Pa. Page 9]

    that are unable to pay for its services. Recently, several for-profit corporations have entered the health record data processing field.

For the three fiscal years ending June 30, 1982, HUP operated at a net gain.*fn3 It has utilized this profit in part as a cash reserve to develop new medical information programs and to help finance the acquisition of computer terminals for use by hospitals in encoding patient abstracts. The gains also are budgeted to hedge against shortfalls in revenue expectation. In addition, HUP's executive officers receive compensation for their services.*fn4

While HUP was classified as a joint-venture of the Hospital Council and the Allegheny County Medical Society Foundation, the Pennsylvania Bureau of Sales and Use Tax determined in 1965 that HUP was entitled to an exemption as a charitable organization. HUP was instructed to use the sales tax exemption number of its two parent organizations.

In September, 1969, HUP was organized as a nonprofit corporation under Pennsylvania Law. Its corporate purpose can be summarized as that of promoting the maintenance of high quality patient care and effective use of hospital facilities.*fn5 Following its incorporation, HUP was

[ 507 Pa. Page 10]

    ruled a nonprofit corporation exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. § 501(c)(3) (Supp.1984). It continued to use the state tax exemption number of its parent organizations until the Pennsylvania Department of Revenue directed HUP to make application for a separate exemption number in February, 1980. That department subsequently denied HUP an exemption number and this litigation ensued.


Having set forth the relevant facts, we now address HUP's contention that it is a charitable organization entitled to exclusion from the Sales and Use Tax under Section 204 of the Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, No. 2, art. II, § 204, as amended, 72 P.S. § 7204 (Supp.1984-85). Section 204 provides in pertinent part:

The tax imposed by section 202 shall not be imposed upon

(10) The sale at retail to or use by (i) any charitable organization, volunteer firemen's organization or nonprofit educational institution, or (ii) a religious organization for religious purposes of tangible personal property or services: Provided, however, That the exclusion of this clause shall not apply with respect to any tangible personal property or services used in any unrelated trade or business carried on by such organization or institution or

[ 507 Pa. Page 11]

    with respect to any materials, supplies and equipment used in the construction, reconstruction, remodeling, repairs and maintenance of any real estate, except materials and supplies when purchased by such organizations or institutions for routine maintenance and repairs.

72 P.S. § 7204(10).

While the term "charitable organization" is not defined in the Tax Reform Code of 1971, some guidance is provided by Title 61 of the Pennsylvania Code, 61 Pa.Code § 32.1, which sets forth a definition of "charitable organization."*fn6

[ 507 Pa. Page 12]

Although we take judicial notice of this definition, 45 Pa.C.S. § 506, we are mindful that the origin of the charitable exemption under Section 204, 72 P.S. § 7204, is Article VIII, section 2(a)(v) of the Pennsylvania Constitution of 1968 which states:

(a) The General Assembly may by law exempt from taxation:

(v) Institutions of purely public charity . . . .

Pa. Const. art. VIII, § 2(a)(v).

Thus, under Section 204(10), the legislature is constitutionally limited to exempt only those charitable organizations which are institutions of "purely public charity," and we cannot constitutionally interpret that statutory language to exempt an organization which is not a "pure" public charity. Board of Christian Education of the Presbyterian Church v. Philadelphia School District, 171 Pa. Super. 610, 91 A.2d 372, 373 (1952); Commonwealth v. American Anti-Vivisection Society, 32 Pa. Commw. 70, 74, 377 A.2d 1378, 1379 (1977). We are guided in our statutory construction by the presumption that the legislature does not intend to violate the Constitution. 1 Pa.C.S. § 1922(3). Moreover, statutory provisions exempting persons or property from taxation must be strictly construed. 1 Pa.C.S. § 1928(b)(5); see, e.g., Four Freedoms House of Philadelphia v. Philadelphia, 443 Pa. 215, 219, 279 A.2d 155, 157 (1971); Y.M.C.A. v. Reading, 402 Pa. 592, 598, 167 A.2d 469, 472 (1961); McGuire v. Pittsburgh School District, 359 Pa. 602, 604, 60 A.2d 44, 45 (1948).

[ 507 Pa. Page ...

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