UPMC questioned the legality of one of the City of Pittsburgh's most important taxes Tuesday following an exchange between lawyers at a court hearing.
The hospital giant's position on the city's payroll preparation tax, if it develops into a lawsuit, would widen the legal battlefield between the city and its largest employer. If successful, it could blow a $50 million hole in the city's budget, which is roughly 10 cents of every dollar the city spends.
"A $50 million hit to a city which is basically still trying to come out of bankruptcy would be a very devastating hit," said city Controller Michael Lamb. "I don't think there's much opportunity for success from that kind of challenge."
The exchange came in an argument before U.S. District Judge Joy Flowers Conti on whether the city's challenge to UPMC's tax exemption should be heard in federal court or state court.
Attorney William Pietragallo pointed to language on the city's payroll preparation tax forms that cites federal tax code sections on tax exemption. If the forms invoke federal law, the case should be heard in federal court, he argued.
Ron Barber, the attorney hired to defend the city, countered that regardless of what the form says, exemptions from the payroll preparation tax are governed by state court decisions. If the city based its exemption decisions on federal tax exemptions, that would violate the state constitution, he said.
UPMC spokesman Paul Wood, who attended the hearing, declared afterward in a written statement that it was "stunning that the city admitted that its payroll expense tax ordinance is unconstitutional and invalid. This means that either every employer (non-profit or not) must pay the payroll tax, or no employer has to pay any payroll tax."
He called it "an early Independence Day for all employers."
It may be too early for employers to set off fiscal fireworks.
"Are they right that there's something wrong with the city's tax form? The answer is obviously yes," said Bruce Ledewitz, a professor of law with Duquesne University.
"But it's not clear that this does UPMC any good," he continued. Since UPMC isn't paying the payroll tax, it has no legal standing to challenge its constitutionality, he said.
Judge Conti did not decide whether to keep the case in federal court or return it to state court, where the city originally filed it in March.
UPMC exercised its right to remove it to federal court, and then filed a separate lawsuit claiming that the city had violated its equal protection rights by singling it out among all tax-exempts within its borders.
"If they would have sent us a tax bill, we wouldn't need to be here," said Mr. Pietragallo, because the case would have played out in administrative proceedings. But by "aggressively attacking UPMC, singling out UPMC" in a lawsuit, the city raised constitutional questions, he said.
"This case asks only the question: Is UPMC an institution of purely public charity, or isn't it?" said Mr. Barber. That question can be answered with a five-part test in state court, he said.
Mr. Pietragallo said that because the city has referenced UPMC's overseas operations, it bumps "right up against" Congress's sole authority to regulate interstate and international commerce, and the case should remain in federal court.
Rich Lord: firstname.lastname@example.org, 412-263-1542 or Twitter @richelord.