/ " title=""VARIOUS CITIES and towns across the nation have resorted to fees or assessments instead of confronting the real estate exemption head-on," said Joseph M. Giso, a certified public accountant with CBIZ Tofias. /"/>Joseph M. Giso is a certified public accountant with CBIZ Tofias, which has offices in Providence, Newport and New Bedford, and is the director of the firm’s not-for-profit and education practice. Although Giso is based in the firm’s Cambridge, Mass., office, he has been keeping an eye on the Rhode Island legislation that would allow cities and town to tax nonprofits that own properties assessed at more than $20 million.
PBN: Is this type of legislation allowing nonprofits to be taxed becoming more common elsewhere in the country?
GISO: Due to the recent downturn in the economy and cutbacks in federal and state local aid, cities and towns are pursuing alternative sources of revenue to close their funding gaps. In 2008, the Mass. House of Representatives introduced HB 3168, which would have repealed the real-estate tax exemption for institutions of a certain size. Even though this legislation was never enacted, the sentiment behind it, a desire for not-for-profits to contribute more, remains.
In recent years, there has been a push to collect more from the largest nonprofits, including educational, medical and cultural institutions where police, fire, sanitation and emergency medical response services are more regularly rendered. Various cities and towns across the nation have resorted to fees or assessments instead confronting the real estate exemption head-on. The exemption from real estate has been a long-standing privilege afforded to these institutions by state-level legislation. Cities and towns have justified these fees and/or assessments as the cost of doing business in their localities since the police, fire and sanitation services should be paid for whether or not the entity is tax exempt or not. This seems to be a more palatable premise for cities and towns to promote to their local citizenry.
Similar types of legislation have been introduced in other states.
For example, a Colorado bill would ask nonprofits to clarify their property use; a Connecticut bill would assess service fees against tax-exempt properties; an Illinois proposal would exempt property taxes for nonprofit hospitals only if used exclusively for charitable purposes; and New York legislation would levy property tax on some organizations and limit the exemption of property tax exemption to seven years.
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PBN: How successful have nonprofits been in fending off these attempts at adding taxes and fees?
GIZO: The results vary among the sectors and institutions. There are two parts to the question: On the tax side, it is not a matter of adding taxes but of reclassifying tax-exempt property to be taxable property based on a variety of factors applicable to that state. Many states are now addressing the very issue of what is a “charity” and the criteria needed for exemption from certain long standing privileges. Most state statutes are written similar to Rhode Island as follows:
44-3-3 Property exempt. – The following property is exempt from taxation.
“(8) Buildings and personal estate owned by any corporation used for a school, academy, or seminary of learning, and of any incorporated public charitable institution and the land upon which the buildings stand”
The key question is what is a “public charitable institution?” This is what the cities and towns are challenging with success. Cities and towns have taken this definition to court. The state of Illinois has been very successful in challenging not-for-profit hospitals regarding their cases of property-tax exemption. [In one case], the Department of Revenue denied a tax-exemption for the hospital on the grounds that it was not fulfilling its charitable mission. The judgment was based on whether the nonprofit hospital was providing enough free care to justify the tax break.
The court stated, “The primary reason for his decision was that in 2002, the tax year in question, [the hospital] devoted only 0.7 percent of its total revenue to charity care. Of 110,000 admissions in 2002, [the hospital] gave free care to only 196 patients and discounted care to only 106 patients; and [the hospital] hired collection agencies to recover the remaining balances from 64 of the patients to whom it had given discounts.”
Massachusetts also has been very successful in cases involving Continuing Care Retirement Communities (CCRCs). To date, I believe almost all cases involving CCRCs have been resolved in favor of the city or town. One of the first cases involved Western Massachusetts Lifecare Corp. v. Board of Assessors of Springfield.
The court stated the following in denying the real estate exemption: “The operator of a continuing care retirement community did not qualify for the charitable exemption from Massachusetts property tax, even though it was exempt from federal income tax under IRC Sec. 501(c)(3). The facility’s stringent health and financial requirements, requirements that made most of the elderly population ineligible for admission, precluded its classification as a public charity for purposes of the exemption because the public at large benefited only incidentally from the facility.”
PBN: What are some of the actions you recommend that nonprofits take in these situations?
GISO: • Review the organization’s mission and make sure all of its activities clearly fit within the organization’s mission. Planning, coordinating and implementing a strategy that begins with “Mission Statement” is key.
• Develop or expand a list of the organization’s programs that supplement or reduce the burdens of the cities and towns. How does the organization give back to the community? Volunteerism, cosponsorship of city and town events, use of the organization’s facilities by the cities and towns, etc. Gather statistics, quantify and publish the community benefits.
• Prepare your arguments as to why the organization should be exempt in entirety from any sort of property taxes, fees, or any other form of services charges.
• Negotiate [payment in lieu of taxes agreements] and fee payments. Remember these are voluntary payments in lieu of taxes. If the city wants 25 percent of assessed value and the organization can show that the community benefits equal 15 percent, why not settle on the difference?
• Reassess the use of all lands owned and determine whether all the property is used in furtherance of the organization’s mission; if some is not, pay tax on that property
• Meet with local officials to discuss property-tax issues, budget crises, services nonprofits provide, etc. Matters of mutual interest should be addressed. A resolution that benefits both parties should be the ultimate goal.
• In all communications, the benefits of having the organization as a significant contributing community neighbor should be promoted. What would the community be without the organization?
PBN: Another part of the Rhode Island legislation would charge private college and universities $150 per semester for every out-of-state student. Have you heard of this being tried anywhere else?
GISO: I have not heard of this type of legislation but again the theoretical concept is similar to “doing business fees.” The students are arriving and taking advantages of the services provided by of the cities and towns where the colleges and universities are located.
PBN: Other than nonprofits hospitals and private colleges, what other institutions should be mindful of attempts at taxation?
GISO: Because of the way most legislation is written, all “public charitable institutions” should be mindful of attempts at taxation. The $20 million assessed property threshold can be easily adjusted downward any time once it’s on the books similar to individual income tax rates. The bigger the local deficits, the more likely the threshold will be lowered or new fees enacted.
In the wake of recent reports, city task forces, and proposed legislative efforts, it is increasingly vital for nonprofits to deliver a compelling message that shows just how much they contributed to their communities in terms of programs and services, whether in direct dollars or indirect goodwill.
Not-for-profits should start to plan for this eventual conclusion: that they may have to contribute more in the cities and towns in which they operate. They will have to justify their exemption to elected state officials, local assessors, citizens and the media. It is a battle of perception.
