Localities look to Scale Back Property Non-Profit Tax Exemptions / Impose PILOTs (Payments in Lieu of Taxes)

Updated 3/2/2019

See also:
Princeton University Settles Property Tax Exemption Lawsuit
Center Files Amicus Brief in Princeton University Property Tax Exemption Case
Tax Court Rules Against Hospital in Morristown Property Tax Exemption Case
Legislation to Protect Non-Profits from Arbitrary Tax Exemption Challenges by Third Parties Reintroduced
Blog: Non-Profits and Tax Policy: Not a One-Sided Equation
"Is Non-Profit Property Tax Exemption Sound Public Policy?"  Presentation slides of Center executive director Linda Czipo to 4/15/2016 Seton Hall University School of Law conference

As local government budget crises continue, the pressure for them to find new sources of revenue has continued to intensify. In response, in recent years a growing number of municipalities have attempted to challenge non-profit property tax exemptions or otherwise extract payments from non-profits. The June 2015 ruling by a Tax Court judge invalidating much the property tax exemption of Morristown Medical Center has spawned additional suits by other municipalities against at least 40 other hospitals in New Jersey. Meanwhile, because of the procedural ruling by the Tax Court judge in the since-settled Princeton University property tax case, holding that the University has the burden of re-proving its property tax exemption, thousands of non-profits statewide are still vulnerable to third-party challenges. Although court cases focusing on hospitals and universities have attracted widespread attention, municipalities have been challenging the property tax exemptions of individual organizations of all sizes with increasing frequency. 

New Jersey’s Property Tax Exemption Framework
The New Jersey State Constitution provides that property tax exemption may only be granted through general laws.  It further protects property tax exemptions for property “used exclusively for religious, educational, charitable or cemetery purposes, as defined by law, and owned by any corporation or association organized and conducted exclusively for one or more of such purposes and not operating for profit.” 

Generally speaking, New Jersey law states that real property “owned by” a charitable organization and used “exclusively for” charitable purposes is entitled to tax exemption.  The statute also allows for property tax exemption to be prorated if a portion is used for a nonexempt purpose.

New Jersey courts have established a three-part test that, in essence, provides that for an organization to be entitled to property tax exemption, it must show that:

  1. it is organized exclusively for a charitable purpose (or other qualifying purpose enumerated in the statute);
  2. its property is actually used for such a charitable purpose (or the specific qualifying purpose applicable to that organization); and
  3. its use and operation of the property is not for profit.

There have been numerous court cases over the years in which exemption has been denied or upheld, either in whole or in part, based on the determination of whether an organization meets these tests.

In New Jersey and across the country, cash-strapped local governments have become increasingly aggressive in mounting challenges to non-profit property tax exemptions – some for no other reason than an organization charging fees for services – in an attempt to generate revenue from non-profit property owners of all sizes.  For many organizations, already straining under the weight of rising demand for services without a commensurate growth in resources, these challenges can significantly erode their ability to provide the programs that communities need.

In the wake of the Morristown decision, municipalities have initiated property tax challenges against at least 35 non-profits hospitals across New Jersey, and New Jersey legislators have been working on legislative solutions that they say will provide clarity for hospitals and revenue for the municipalities.

Legislative Proposals

In early 2016, then-Governor Christie pocket vetoed legislation that would have required hospitals that have profit-making operations to provide some level of payment to their host communities. S-3299 (Sweeney/Singer/Vitale) / A-4903 (Burzichelli/Pintor Marin)  would have allowed non-profit hospitals that have certain for-profit activities to retain their property tax exemptions but would have established a formula-based mechanism for those hospitals to make mandatory payments to their host municipalities.  The fee-based formula under the bill would have been $2.50 per day per bed, or $250/day for satellite facilities (amended from $750/day). The bill also provided for certain circumstances, such as a negative operating margin, in which a hospital could apply for an exemption from the assessment. The bill also would have established a “Nonprofit Hospital Community Service Contribution Study Commission,” to study and make recommendations regarding the community service contribution system created by the bill. A-4903 has been reintroduced in the 2018-19 legislative session as A-1503.

Since 2016, a number of bills have been introduced or recycled in an effort to address hospital property tax exemptions. 
Those pending in the current 2018-19 Legislature include:

  • A-1503 (Burzichelli/Pintor Marin), which is a reintroduction of the legislation described above (read our summary of A-1503)
  • S-582 (Sacco), which is similar to A-1503, but would also apply to nursing homes owned by hospitals (read our summary of S-582)
  • S-487 (Vitale), which would tie the property taxation of a non-profit acute care hospital to the percentages of community benefit expenses and community building activities out of total hospital expenses that the hospital reports to the Internal Revenue Service on Schedule H of its Form 990 (read our summary of S-487)
  • A-4013 (Coughlin/Karibinchak)/S-2642 (Cryan/Vitale), which is similar to A-1503 (analysis forthcoming)

A-1503 and A-4013 are awaiting consideration by the Assembly State and Local Government Committee, and S-487 and S-582 are in the Senate Community and Urban Affairs Committee. S-2642 is in the Senate Health, Human Services and Senior Citizens Committee

Third Party Standing Legislation Reintroduced
Legislation that would help curtail arbitrarily challenges to non-profits' property tax exemptions by limiting the ability of third parties to appeal the property tax exempt status of other entities has been reintroduced in the New Jersey Legislature. A-3113 (Gusciora) would address a significant concern that has arisen in light of the property tax challenges to Morristown Medical Center and Princeton University. The Center for Non-Profits supports this bill.

In the Princeton case, wihich was settled in October 2016 by the University and the plaintiffs without any admission of liability, a challenge to the property tax exemption of Princeton University was brought by a small group of residents who disagreed with the exemption already granted by the municipality. The municipality was also named a defendant in that suit.

In the case against Princeton University and the municipality, Tax Court of New Jersey Judge Vito Bianco in a procedural action held not only that the residents have legal standing to challenge the municipality’s determination that the University is tax exempt, but has also ruled that the non-profit (in this instance, Princeton University) has the burden of re-proving its eligibility for tax-exemption, even when the challenge is brought by third parties. This ruling leaves thousands of non-profit property owners of all sizes – particularly those that might be unpopular or controversial – vulnerable to arbitrary legal challenges by residents that would be extremely costly and time-consuming to defend, diverting scarce resources away from essential programs and services.

Amending the existing statute to limit the ability of third parties to challenge non-profit property tax exemptions would help to protect organizations from being arbitrarily forced to re-prove their exemptions repeatedly and from needlessly siphoning resources away from charitable purposes.

Non-profit organizations are straining under the weight of skyrocketing demand for services and resources that have not kept pace with the steadily escalating costs of providing programs and services that our communities need. Clarifying that third parties do not have standing to challenge the property tax exemption of non-profits, while preserving the authority of local governments, would provide needed assurance and protection for thousands of non-profit property owners throughout the state.

In the prior legislative session, this bill passed the Senate and one Assembly committee but failed to gain final passage in the Assembly. The new bill is awaiting consideration in the Assembly State and Local Government Committee.    See the latest updates on A-3113.

 

The Center for Non-Profits is committed to promoting policies that preserve the ability of the non-profit community to provide the programs and services that people need.  We believe that efforts to remove or curtail non-profit property tax exemptions are misguided and counterproductive, and that such proposals too often disregard the significant contributions non-profits make to the social and economic well-being of communities. (See our submission to NJBIZ and blog post explaining why.) Recognizing that hard choices must be made to resolve government fiscal crises, we will also support and encourage efforts for all stakeholders to work collaboratively toward comprehensive solutions.

If you have questions or would like more information about the Center's involvement in this or any other non-profit issue, contact Linda Czipo at the Center.

For more information:

http://www.nj.com/mercer/index.ssf/2012/08/lawrence_council_seeks_new_sou.html ;
http://www.nj.com/times-opinion/index.ssf/2012/08/editorial_lawrence_faces_tough.html ; and http://www.courierpostonline.com/article/20120708/NEWS01/307080028/Camden-striking-out-court-fights-nonprofit-day-cares

National Council of Nonprofits: Government Taxes, Fees and PILOTs

PILOT Proposals Spreading to More Affluent Suburbs
August 3, 2012
The Nonprofit Quarterly

Center for Non-Profits: Center Files Amicus Brief in Princeton University Property Tax Exemption Case
Center for Non-Profits: Tax Court Rules Against Hospital in Morristown Property Tax Exemption Case
Center for Non-Profits: Non-Profits and Tax Policy: Not a One-Sided Equation (blog)
Center for Non-Profits: "Is Non-Profit Property Tax Exemption Sound Public Policy?"  Presentation slides of Center executive director Linda Czipo to 4/15/2016 Seton Hall University School of Law conference

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