HARRISBURG, Penn. -
The case could have severe ramifications for Pennsylvania's credit unions, as the state Department of Revenue, one of the defendants in the suit, estimates that the tax exemption saves credit unions as much as $20 million a year in corporate, sales and other state levies.
The argument, part of a major offensive brought by the bankers over the expanding fields of membership by state charters, was dismissed by the lower court, the state's Commonwealth Court, where other aspects of the case are still pending. If the state's High Court rules for the bankers, it will send the tax issue back to the lower court for a hearing.
Bankers Lay Out Their Case
The state high court will hear the bankers' argument that the tax exemption violates a section of the state's constitution that delineates exactly which entities the legislature may exempt from taxation. The bankers claim that credit unions are not among those entities delineated as tax-exempt, and therefore, the tax exemption granted credit unions by the legislature is unconstitutional, according to Raymond Pepe, an attorney with Kirkpatrick & Lockhart, who is representing the bankers. "The only issue being argued is whether the Commonwealth Court may consider (the constitutionality of the tax exemption)," said Pepe.
The continuing case in the lower court, asserted Pepe, represents a victory for the bankers because the court rejected the argument by the credit union interests that the bankers do not have standing. "Their motion to dismiss was denied," he said.
The Commonwealth Court has yet to rule on the bankers' other tax arguments: that the tax exemption for credit unions violates state and federal statutes on uniform treatment of similar entities; that large, diversified credit unions have outgrown the original intent of the tax exemption; and that the tax exemption is discriminatory because it benefits only certain residents, members of credit unions.
As state chartered credit unions are being granted ever larger FOMs, the Keystone state has become the main battleground between the credit unions and banks, which have filed suit in both the state and federal courts challenging large FOM grants.
The main argument of the Pennsylvania bankers, as for bankers throughout the country, is that large, diversified credit unions, like TruMark Financial CU and Freedom CU, with $850 million and $300 million in assets, respectively, have grown into full-service financial institutions and are now little more than tax-exempt banks, according to Pepe.
A Broader Challenge
The tax case is part of a broader challenge of FOM grants for those two state charters that sprawl across five counties and almost three million residents surrounding Philadelphia.
"The issue has morphed into a challenge to credit unions' tax status, after the credit unions won the bankers community chartering challenge before the state regulator," said Richard Wargo, legal counsel for the Pennsylvania CU Association, which is defending the credit unions. As such, he said, "there is a significant risk that bankers in other states will adopt similar strategies (if the bankers win their case)."
"We think and we believe and we have presented a lot of case law and precedent to the Supreme Court that the tax scheme for credit unions is consistent with the Pennsylvania constitution," said Wargo.
