Pennsylvania Supreme Court Hears Arguments On CU Tax Exemption

HARRISBURG, Pa. – In a case that could reverberate around the nation, the Pennsylvania Supreme Court will hear arguments this morning challenging the exemption from state taxes for state chartered credit unions. 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, according to Raymond Pepe, a Harrisburg attorney representing the Pennsylvania Bankers Association and the Pennsylvania Association of Community Bankers. 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. “The only issue is whether the Commonwealth Court may consider Article 8, section 2, of the Constitution,” Pepe told The Credit Union Journal. Richard Wargo, legal counsel for the Pennsylvania CU Association, said he is confident of 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. 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.