Bill would grant new charities two‑year conditional sales‑tax exemption, department says
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Summary
House Bill 2305 would allow newly formed charities to obtain a conditional two‑year sales‑and‑use tax exemption while they work to meet Pennsylvania's five‑pronged HUP test; the Department of Revenue highlighted safeguards including a possible clawback and audit tools.
The committee heard testimony on House Bill 2305, which would create a conditional sales‑and‑use tax exemption for newly formed charities for their first two years of operation to help address barriers created by Pennsylvania’s five‑pronged HUP test for institutions of purely public charity.
Ryan Froman, chair of the Board of Appeals, told the committee that federal 501(c)(3) status does not automatically satisfy Pennsylvania’s constitutional and statutory standards for a sales‑tax exemption and that the current rules can create a "chicken and egg" problem for startups that must demonstrate they have already rendered substantial gratuitous services to qualify. "House bill 2305 provides an option for new charities to obtain a conditional exemption for the first 2 years of their operation," Froman said.
Froman said the measure aims to make Pennsylvania more welcoming to start‑up charities while preserving safeguards. He described the underlying legal test (the HUP test, derived from case law and act 55 of 1997 and the Pennsylvania Constitution, article 8, section 2) and noted the bill includes a provision allowing the Department to seek a clawback of sales tax in cases of abuse; he characterized that provision as permissive (a "may," not a "shall").
Members asked whether the exemption would be automatic for every new charity. Froman said the temporary exemption would be available to new entities going through the application process and noted the Department already maintains records — he cited roughly 26,000 entities currently holding purely public charity status and that the Department received over 3,100 applications — and described desk reviews, field audits and other enforcement tools to address bad actors.
The committee did not vote on HB 2305 during the meeting. Members asked for additional detail and for the Department to provide further information about eligibility assessments and enforcement mechanics before the committee takes further action.
