How to Become Tax Exempt in Pennsylvania

An organization’s journey to tax-exempt status is a multi-layered process involving distinct requirements from federal, state, and local government agencies. Each level has its own set of rules and application procedures that must be followed to secure the various tax exemptions available.

Federal Tax-Exempt Status Requirements

Before an organization can seek tax exemption, it must first exist as a formal legal entity. This typically means forming a nonprofit corporation under state law, though trusts or associations can also qualify. The formation process involves filing articles of incorporation with the state, which establishes the organization’s legal existence and structure.

An organization’s governing documents, like the articles of incorporation and bylaws, must contain specific language to qualify for exemption under Section 501(c)(3). The IRS requires a clear statement of purpose outlining charitable goals and a dissolution clause. This clause must stipulate that upon termination, any remaining assets will be distributed for an exempt purpose.

The next step is to obtain an Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit number that identifies the business entity for tax purposes, similar to a Social Security number for an individual. This number is required for organizations that will pay employees or file federal tax returns and must be acquired before applying for tax-exempt status.

The core of the federal process is the Application for Recognition of Exemption, either Form 1023 or the streamlined Form 1023-EZ for smaller organizations. This application requires a narrative detailing the organization’s activities and detailed financial data, including historical information and projections. It also requires information about the officers, directors, and their compensation.

The Federal Application Process

The application for exemption and all supporting documents must be submitted electronically. The IRS mandates that both Form 1023 and Form 1023-EZ be filed online through the federal government’s Pay.gov portal.

A user fee must be paid at the time of submission through the Pay.gov website. The fee for Form 1023 is $600, while the fee for the shorter Form 1023-EZ is $275.

After submission, the organization will receive an electronic acknowledgment of receipt from the IRS. The application is then assigned to an agent for review, a process that can take several months. It is not uncommon for the reviewing agent to request additional information. Once the review is complete, the IRS issues a determination letter that grants or denies tax-exempt status.

Obtaining Pennsylvania State Tax Exemptions

After securing a federal determination letter from the IRS, an organization can pursue state-level tax exemptions. For exemption from the state sales and use tax, an organization must file the Pennsylvania Application for Sales Tax Exemption (Form REV-72). This form requires detailed information about the organization’s activities and finances to demonstrate it qualifies as an “institution of purely public charity.”

The completed Form REV-72 and all required attachments, including the IRS determination letter and governing documents, must be submitted to the Pennsylvania Department of Revenue. The department’s online myPATH system allows for the direct upload of the application and documentation.

Organizations that have obtained 501(c)(3) status from the IRS are generally exempt from Pennsylvania’s Corporate Net Income Tax (CNIT). The organization must formally establish its exempt status by ensuring the Pennsylvania Department of Revenue has a record of the federal determination, which solidifies the exemption without a separate application process.

Any organization intending to solicit contributions from the public must file an Initial Registration Statement (Form BCO-10) with the Pennsylvania Department of State’s Bureau of Charitable Organizations (BCO). This registration requires providing copies of governing documents, financial information, and details about fundraising practices. A registration fee based on the organization’s gross annual contributions must be paid with the form.

• $15 for organizations with contributions of $25,000 or less
• $100 for contributions between $25,001 and $100,000
• $150 for contributions between $100,001 and $500,000
• $250 for contributions of $500,000 or more

Upon submission, the Department of Revenue will review the REV-72 application and, if approved, will issue a sales tax exemption certificate (Form REV-1715). The BCO will process the registration and list the organization on its public database. These processes can take several weeks to a few months.

Securing Local Property Tax Exemption

Exemption from local property taxes is a separate process from state-level exemptions and is handled at the county level. An organization must apply to the Board of Assessment Appeals in the county where the property is located. Specific application forms and procedures can vary from one county to another.

The legal standard for property tax exemption is rigorous. To qualify as an “institution of purely public charity,” an organization must satisfy both the five-part constitutional test from the Hospital Utilization Project (HUP) case and the statutory requirements in the Institutions of Purely Public Charity Act. This legislation was enacted to clarify the HUP test.

The HUP test requires the organization to prove it advances a charitable purpose, operates free from a private profit motive, and donates a substantial portion of its services. It must also prove it benefits a substantial and indefinite class of people who are legitimate subjects of charity and that it relieves the government of some of its burden.

To apply, an organization must obtain the specific application from its county assessment office. It will need to compile significant evidence, such as financial records and service logs, and may need to present its case at a formal hearing before the board.