Judge rules for UPMC on payroll tax dispute with city

UPMC hospital payrolls won’t be taxed, and the health care titan’s exemptions from taxes remain undiminished after a county judge’s ruling Wednesday dismissed a lawsuit the city of Pittsburgh brought.

Common Pleas Judge R. Stanton Wettick Jr. of Allegheny County issued what he called “a narrow ruling that does not consider whether UPMC or any of its subsidiaries are charitable organizations.”

He found that the city erred when it sued UPMC, the parent company with no employees, rather than the hospitals and other facilities, which have payrolls.

“Under the clear language of the [state tax legislation], the payroll tax is levied upon the entity that conducts the business and pays the salary,” Judge Wettick wrote. “Employees of a subsidiary, such as Mercy Hospital, are not employees of UPMC. Thus, Pittsburgh cannot look to UPMC to pay a payroll tax based on payments Mercy Hospital made to its employees.”

UPMC characterized the ruling as total vindication.

“By throwing out the city’s tax-exempt challenge to UPMC, the court clearly agrees that the city’s case had absolutely no merit,” UPMC spokesman Paul Wood said. “We are very pleased with the decision and prepared to defend UPMC’s charitable status if there should be any further legal action.”

Mayor Bill Peduto said the bigger issue of UPMC’s tax status still is undecided.

“Judge Wettick’s ruling today is on a procedural issue and is not a decision on the merits of the lawsuit,” the mayor said. “Our lawyers are reviewing the decision and will advise me on our legal options.”

The ruling left open the possibility that the city could sue UPMC subsidiaries individually.

“We'd rather not have to do that, but if we have to we will,” said E.J. Strassburger, head of Pittsburgh law firm Strassburger Mckenna Gutnick & Gefsky, which the city hired to handle the case against UPMC. He said he had not yet touched based with the city or Mr. Peduto to determine the next course of action.

Then-Mayor Luke Ravenstahl filed the suit against UPMC early last year. The health care giant responded with its own lawsuit in federal court alleging that it was being unfairly singled out, in violation of its due process rights.

The federal lawsuit was stayed pending Judge Wettick’s decision. Mr. Wood did not say Wednesday whether UPMC would seek to lift the stay and pursue damages against the city.

“Certainly, the decision of the judge is consistent with our concerns that brought about the federal lawsuit,” said William Pietragallo, an attorney who represented UPMC in both matters. “The misuse of the state court lawsuit when there was a procedure in place [to challenge tax exemptions that] they could or should have followed is a factual predicate to the action we brought in the federal court.”

Judge Wettick’s decision spurred immediate pressure on Mr. Peduto to sue UPMC’s hospitals and perhaps other nonprofit entities.

“As we read it, [the decision] just deals with the question of naming the proper defendant in a lawsuit,” said attorney Leon Dayan, who has represented the advocacy group Fair Share Pittsburgh, which is a co-defendant with the city in the federal court case. He said that union-backed group “is committed to continuing to try to hold UPMC accountable for its activities that are not genuinely charitable in nature.”

“The judge’s ruling is very clear that this has nothing to do with UPMC’s charity status, and our community feels strongly that based on the organization’s actions it is not a charity,” wrote Barney Oursler, executive director of Pittsburgh UNITED. He said that UPMC “isn’t paying its fair share for public services like schools and transit, and taxpayers are forced to pick up the tab.”

Mr. Strassburger was adamant that the UPMC parent company’s lack of a payroll was beside the point.

“I think the judge ignored overwhelming evidence that UPMC itself has some employees,” he said. UPMC CEO Jeffrey Romoff “and all the top echelon are, based on their own [tax returns], UPMC employees.

“The ballgame isn’t over, and the judge acknowledges that,” Mr. Strassburger said. In the next few weeks, city officials and the legal team “will knock our heads together and take the next step.”

If the city can get beyond Judge Wettick’s “narrow ruling” on the payroll issue, it still has a chance to contest UPMC’s “purely public charity” designation, said Gary M. Grobman, of the Harrisburg-based nonprofit consulting company White Hat Communications.

“In order to be a charity, you have to meet five criteria,” known as the HUP test, named after the 1985 decision in Hospital Utilization Project v. Commonwealth, Mr. Grobman said.

In order to be stripped of that charitable status, “you only have to miss on one of the five,” he said.

The city taxes for-profit employers 0.55 percent of their payroll expenses. Its effort to wring that tax from UPMC, whose subsidiaries, when combined, are its largest employer, is part of a decadeslong response to the growth of tax-exempt entities, which comprise ever-increasing portions of its workforce and take up much of its land area.

“We are eager to continue to meet with UPMC and other nonprofit partners to formalize a collaborative long-term agreement that addresses our structural financial needs, invests in our neighborhoods and workforce, and delivers upon their charitable commitment to our community,” Mr. Peduto said.

UPMC is Allegheny County’s largest property owner, with 656 acres and $1.6 billion in land and buildings, and 86 percent of that is tax-exempt, according to a Pittsburgh Post-Gazette analysis.

If it were not a nonprofit, and thus exempt from paying certain taxes, UPMC would owe the city $20 million more in taxes every year.

Because of its charitable designation, the hospital system pays no payroll preparation tax, and it pays property tax on certain profit-generating pieces of real estate, which represent 14 percent of UPMC’s total county holdings.

Robert Zullo contributed. Rich Lord: rlord@post-gazette.com. Bill Toland: btoland@post-gazette.com.

First Published June 25, 2014 12:00 AM

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