Edinburgh Printmakers obtained planning permission to redevelop a derelict building in the capital's Fountainbridge area and turn it into a luxury arts studio , gallery and cafe.
The charity raised £10m to transform the building and as part of the plans entered into an agreement with the council requiring a contribution be made to the city's trams.
Last year they asked the council to discharge their planning obligation to pay £70,314.29 to the tram project and stated they had no funds available and would have to borrow money to cover the costs.
The charity, which was set up in 1967 and employs 20 people, has an income of £350,000 but also encounters running costs of £350,000 and works on a 'break-even' model.
Bosses also said that additional costs of refurbishing the building only came to light after the tram contribution had been put in place by the council and that they had turned a derelict building into an 'asset'.
But their request was refused by city planners who insisted Edinburgh Printmakers would still have to hand over the cash.
Staff facing cuts
They have now appealed that ruling to the Scottish Government and claim that if forced to pay they will be 'curtailed' in their charity work and could have to lay off staff.
In a letter supporting their appeal, they said: "The cost of the additional works required to remediate the appeal site were well in excess of the level of the tram contribution.
"The works were required due to the continued deterioration of the building's condition, which occurred during the time responsibility for maintenance of the building was with the council.
"The council, as landowner, benefits from the refurbishment works, including the additional repair works carried out by the appellant.
"Whereas Castle Mills was once a liability for the council, it is now an asset.
"The unexpected repair works required to the council's property have exhausted the grant funding and public donations, such that the appellant has been forced to seek loan financing to enable them to complete the development.
"Enforcement of the planning obligation threatens the ongoing viability of the development. The appellant is a charitable organisation, which operates on a not-for-profit basis.
"This appeal seeks discharge of the planning obligation as a result of abnormal, unforeseen, additional repair costs."
Throwing out the bid, City of Edinburgh Council told them: "The applicants' request to discharge the planning obligation, in the absence of compliance with the tram financial contribution provisions is not acceptable.
"The developer had full knowledge of the policy requirement of this planning obligation and, therefore, there is no argument that the payment of the contribution impacted unduly on the viability of the development of the site.
"The applicant seeks to justify their application based on a number of other factors.
"Whilst these matters are not disputed, they are not material land use planning factors.
"As such they do not justify the removal of the legitimate planning obligation agreed for the development of the site and cannot be given any weight in the statutory assessment of this application."
A government reporter will issue a decision in due course.