On June 25, after a long period of disagreement, a New Jersey tax court ruled that a major medical center generally failed to qualify for property tax exemption based on the judge’s determination that the center operated more like a for-profit business than a charitable institution. The decision arose from a lawsuit filed by the parent company of Morristown Medical Center (formerly Morristown Memorial Hospital) after the town of Morristown, New Jersey denied the medical center property tax exemption for the years 2006 to 2008. It is unclear how the ruling applies to later years.
The town claimed that the medical center was ineligible for property tax exemption because it didn’t operate like a nonprofit. Hospital officials argued that they followed established practice in offering services by both doctors employed by the hospital and self-employed physicians who operate for-profit businesses. The hospital also provided loans, capital, and subsidies to for-profit entities, including physician groups. Hospital executives were involved in both nonprofit and for-profit affiliated companies.
The judge noted that nonprofit hospitals have changed since their origins as “charitable alms houses” providing free basic medical treatment to the infirm poor. To secure property tax exemption under current New Jersey law, he indicated that the following statutory criteria must be met (N.J.S.A. § 54:4-3.6):
- The owner of the property must be organized exclusively for the exempt purpose
- The property must be actually and exclusively used for the tax exempt purpose
- Operation and use of the property must not be conducted for profit
Under this standard, the judge determined that only the auditorium, fitness center, and the visitor’s garage qualified for exemption from property tax.
The judge concluded, “If the property-tax exemption for modern nonprofit hospitals is to exist at all in New Jersey going forward, then it is a function of the Legislature and not the courts to promulgate what the terms and conditions will be” (AHS Hospital Corp., d/b/a/ Morristown Memorial Hospital v. Town of Morristown, DKT 010900-2007, NJ Tax Court, revised June 29, 2015).
The Chairman of the New Jersey Senate Health Committee has already asked that a bill be drafted to clarify the requirements for property tax exemption.
The ruling that Morristown Medical Center failed to operate as a nonprofit organization could have implications for other New Jersey hospitals if the municipalities that host them seek to collect property taxes. It will almost certainly be appealed. This decision will not affect hospitals’ federal hospital community benefit requirements or New Jersey corporate income tax exemptions.
This ruling by the trial-level state tax court is reminiscent of the issues addressed by the Illinois Supreme Court in Provena Covenant Medical Center v. Department of Revenue (236 Ill. 2d 368; 925 N.E.2d 1131 (2010). Provena sparked a national discussion of whether property owned by a charitable organization is being “used exclusively for charitable purposes,” the standard for Illinois tax exemption in effect when the case was decided. Illinois overhauled its statutory criteria for hospital property tax exemption in 2012. For more information on Illinois’ current tax exemption standards, see Hilltop’s Community Benefit State Law Profiles.
A similar issue arose about three years after Provena, when the city of Pittsburgh filed suit against the University of Pittsburgh Medical Center (UPMC) to compel it to pay payroll taxes: UMPC counter-sued in federal court. In 2014, the parties agreed to forgo litigation and commenced negotiating a long-term agreement.
These are examples of instances in which localities have challenged the validity of nonprofit hospitals’ state tax exemptions. With the increase in awareness about the requirements for nonprofit hospital tax exemptions, it is possible that the number of these types of challenges will increase.
For more information, contact Gayle Nelson, Hospital Community Benefit Program Director.