Property Tax and Sales Tax Issue for Not-for-Profit Hospitals and Healthcare Organizations. The Illinois Experience. Keith Staats

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1 Property Tax and Sales Tax Issue for Not-for-Profit Hospitals and Healthcare Organizations The Illinois Experience By Keith Staats I. The Illinois Constitution Authorizes Exemption of Real Property Including Real Property Used Exclusively For Charitable Purposes. A. The General Assembly by law may exempt from taxation only the property of the State, units of local government and school districts and property used exclusively for agricultural and horticultural societies, and for school religious, cemetery and charitable purposes. (IL Const. Article IX, Section 6) B. Section 6 of the Illinois Constitution is not self-executing it authorizes the Illinois General Assembly to enact legislation exempting certain property from taxation. Chicago Patrolmen s Association v. Department of Revenue, 171 Ill.2d 263, (1996) C. The Illinois General Assembly cannot broaden the exemptions specified in Section 6. Chicago Bar Association v. Department of Revenue, 163 Ill.2d 290 (1994) II. Section of the Illinois Property Tax Code, implements the constitutional authorization to exempt property used for exclusively charitable purposes. 35 ILCS 200/

2 A. Section provides in pertinent point: [a]ll property of the following is exempt when actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit: (a) institutions of public charity. B. Section of the Property Tax Code added an additional statutory requirement to the constitutional requirement of exclusively charitable use of the property. As noted above, Section also requires charitable ownership of the property in addition to the exclusive use requirement of the Constitution. C. The term exclusively used has been defined by the courts to mean the primary purpose for which property used and not any secondary or incidental purpose. Highland Park Hospital v. Department of Revenue, 155 Ill. App.3d 272, 507 N.E.2d 1331 (1987), quoting Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149 (1968) III. The Illinois Property Tax Exemption Application Process A. Applications for exemption (PTAX-300) are obtained from the Board of Review in the county in which the property is located. (86 Ill. Adm. Code ) B. The completed application along with required documentation, is filed with the local Board of Review in the county in which the property is located (86 Ill. Adm. Code (b)). Notice of application for exemption must also be provided to the local school district and community college district, depending on the amount 2

3 of the reduction in property taxes effected by the granting of the exemption. (Form PTAX-300) C. The Board of Review evaluates exemption applications and forwards the application package to the Illinois Department of Revenue (the IDOR or Department ) with a recommendation for approval or denial of the exemption application. (86 Ill. Adm. Code (d)) D. The IDOR Property Tax Exemption Division reviews the exemption applications and Board of Review recommendations and approves or denies the application. (86 Ill. Adm. Code (h)) E. Exemption decisions made by the IDOR property tax exemption division may be challenged by any aggrieved party by requesting an administrative hearing before an IDOR administrative law judge (35 ILCS 200/8-35(a), 86 Ill. Adm. Code (i)). F. Hearings challenging exemption denials are governed by the Department s administrative hearings rules. (86 Ill. Adm. Code 200) G. At hearings, the Department is represented by a Department litigation attorney. The applicant must be represented by Counsel. Local taxing authorities may intervene as parties and be represented by Counsel. H. After a hearing is concluded, the administrative judge issues a recommended decision and the recommendation of the IDOR administrative law judge is 3

4 forwarded to the IDOR Director. The IDOR Director may accept the recommendation or reject the recommendation and substitute his own determination. (86 Ill. Adm. Code ) I. The final Department decision is subject to review by the circuit courts pursuant to Section 8-40 of the Property Tax Code and the Administrative Review Law. (35 ILCS 200/8-40 and 735 ILCS 5/Art. III.) IV. Not-For-Profit Hospitals and Other Healthcare Organizations Traditionally Qualified for the Charitable Exemption. A. For property to be exempt, it must belong to, and stand in the name of, an institution organized or public charity, and the property shall be used actually and exclusively for such charitable purposes. People ex rel. Thompson v. Ravenswood Hospital, 238 Ill. 137, 87 N.E. 305 (1909) B. To sustain a claim for exemption of property from taxation on the ground that it is used for charitable purposes, two conditions are essential: (1) ownership by a charitable organization, and (2) its exclusive use for charitable purposes. Turnverein Lincoln v. Board of Appeals, 358 Ill. 135, 192 N.E. 780 (1934) C. The concept of property use which is exclusively charitable does not lend itself to easy definition. Therefore each individual claim for tax exemption must be determined from the facts presented. (internal citations omitted) Methodist Old Peoples Home v. Korzen, 39 Ill.2d 149, 233 N.E.2d 537 (1968) D. The following criteria for qualification for the charitable exemption from taxation have been articulated by the Illinois Supreme Court: (1) it has no capital, capital 4

5 stock, or shareholders; (2) it earns no profits or dividends but rather derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter; (3) it dispenses charity to all who need it and apply for it; (4) it does not provide gain or profit in a private sense to any person connected with it; and (5) it does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses. Provena Covenant Medical Center v. Department of Revenue, 236 Ill. 2d 368, (2010) citing Methodist Old Peoples Home v. Korzen. V. In Provena Covenant Medical Center v. Department of Revenue, the Illinois Supreme Court set forth Standards Establishing a Hospital s Entitlement to the Charitable Exemption from Real Property Taxation. (236 Ill.2d 368, 2010) A. Provena Hospitals ( Provena ) applied to the Champaign County Board of Review for exemption of 43 parcels from real property taxes for 2002 under Section of the Property Tax Code. Id. at P.383 B. Provena claimed that the parcels were owned by an institution of public charity and that the property was actually and exclusively used for charitable purposes. Id. at P.383 C. The Champaign County Board of Review recommended denial of the exemption applications. Id. D. The Illinois Department of Revenue denied the applications for exemption. Id. 5

6 E. Provena paid the amount of tax in dispute, approximately $1.1 million, under protest and then filed a petition for hearing with the Illinois Department of Revenue under Section 8-35(b) of the Property Tax Code challenging the denial of the charitable exemption. (35 ILCS 200/8-35(b)). Provena also contended in the course of the hearing that it was entitled to exemption as a religious organization. Id. F. A hearing was held and the Department administrative law judge recommended that 94.4% of the parcels be granted a charitable exemption. The administrative law judge did not rule on the contention that Provena was entitled to exemption as a religious organization. Id. at P.384 G. The Director of Revenue rejected the administrative law judge s recommendation and issued a decision denying the charitable exemption and the Director also ruled that Provena did not qualify for a religious exemption. Id. H. The Director concluded that Provena failed to establish that the property qualified for the charitable exemption or the religious exemption. Id. I. The Department s decision denying the charitable exemption was appealed to the Circuit Court of Sangamon County. The circuit court held that Provena was entitled to exemption both on the charitable and religious grounds. Id. at 385 J. The Department appealed the Circuit Court s decision. The Illinois Appellate Court reversed the Circuit Court and reinstated the IDOR Director s determination that Provena was not entitled to a charitable or religious exemption. Id. K. Provena appealed the Appellate Court s decision to the Illinois Supreme Court. 6

7 L. In Illinois when the Supreme Court grants leave to appeal from the Judgment of an appellate court in an administrative review case, the final decision of the administrative agency, in this case the Illinois Department of Revenue, is before the Supreme Court. Id. at 386 M. The Illinois Supreme Court upheld the Appellate Court. A plurality of the court determined that the hospital failed to demonstrate that its property was actually and exclusively used for charitable purposes. N. The Illinois Supreme Court ruled that Provena did not qualify for a property tax exemption, but the court did not provide clear guidance as to the standards to be used in determining how to qualify. VI. The Illinois Department of Revenue Suspended Review of Property Tax Exemption Applications During the Provena Litigation and Continued the Suspension for a Time After the Issuance of the Supreme Court Decision in Provena. A. The Department suspended review of pending applications as it awaited guidance from the Illinois Supreme Court in Provena. B. As a result of the suspension, a backlog of property tax exemption applications developed. C. The Provena decision did not provide a clear roadmap for the charitable hospital exemption. D. The Department extended the suspension for a time after the issuance of the Provena decision to hold discussions on possible legislative solutions. 7

8 E. In early 2011, the Department lifted the suspension by denying 3 pending hospital exemption applications. VII. The Illinois Supreme Court Decision in Provena Also Had Sales Tax Exemption Implications Because the Illinois Department of Revenue Uses the Same Standards for Both the Sales Tax and Property Tax Charitable Exemptions. A. Section 2-5(11) of the Retailers Occupation Tax Act exempts sales of tangible personal property to a governmental body, to a corporation, society, association, foundation, or institution organized and operated exclusively for charitable... purposes. 35 ILCS 120/2-5(11) B. Section 1g of the Retailers Occupation Tax Act requires each entity otherwise eligible under Section 2-5(11) to make application to the IDOR for an exemption application number. Exemptions application numbers fare valid for 5 years. 35 ILCS 120/1g C. The same standards for determining whether an organization is exclusively charitable are used for both property tax and sales tax exemption determinations. D. The Department held off on making decisions on new hospital sales tax exemption requests during the pendency of Provena. E. The Department issued interim renewals of sales tax exemptions during pendency of Provena and has continued to issue interim renewals of sales tax exemptions since the issuance of the Provena decision. VIII. Illinois Adopted Legislation to Establish New Categories of Property Tax and Sales Tax Exemptions for Not-For-Profit Hospitals and an income tax credit for investor-owned hospitals. (P.A , effective June 14, 2012) 8

9 A. Property Tax and Sales Tax Exemptions For Not-For-Profit Hospitals 1. The legislation creates new categories of charitable property tax and sales and use tax exemption exclusively for hospitals. 2. The legislation is designed to implement the intent of the Illinois General Assembly to establish quantifiable standards for the issuance of the exemptions. 3. The legislation has an immediate effective date and contains an applicability clause to clarify the effect of the immediate effective date: a. The amendments to the Property Tax Code and the sales and use tax Acts apply to all decisions by the Illinois Department of Revenue on or after the effective date of the Act regarding entitlement or continued entitlement by hospitals to charitable property tax and sales and use tax exemptions, and b. to all applications for property tax and sales and use tax exemptions filed by hospitals on or after the effective date of the Act, and c. to all applications for property tax exemption and sales and use tax exemption or renewal, filed by hospitals, that have either not been decided by the Department before the effective date of the Act, or for which any such Department decisions are not final and non-appealable as of that date. d. Defined terms contained in the legislation include: i. "Hospital" means "institution, place, building, buildings on a campus, or other health care facility located in Illinois licensed under the Hospital Licensing Act and has a hospital owner. 9

10 ii. "Hospital Owner" is a not-for-profit corporation that is the titleholder of a hospital, or the owner of a beneficial interest in an Illinois land trust that is the title holder of a hospital. iii. "Hospital affiliate" is any corporation, partnership, limited partnership, joint venture, limited liability company, association or other organization other than a hospital owner that directly or indirectly controls, is controlled by, or is under common control with, one or more hospital owners and that supports, is supported by, or acts in furtherance of the exempt health care purposes of at least one of those hospital owners' hospitals. iv. "Hospital applicant" is an owner or affiliate that files an application for a property tax exemption. v. "Hospital year" means the fiscal year of the relevant hospital entity, or the fiscal year of one of the hospital owners in the hospital system if the relevant hospital entity is a hospital system with members with different fiscal years that ends in the year for which the exemption is sought. e. To qualify for either the property tax or sales and use tax exemption, the value of the services and activities provided by the hospital during the hospital year to low income or underserved individuals and services that relieve the burden on government must equal or exceed the value of the hospital's estimated property tax liability for the year for which the exemption is sought. 10

11 f. Qualified services and activities: i. Charity Care: Free or discounted care provided pursuant to the hospital entity's financial assistance policy, ii. Health Services to low-income and underserved individuals: Other unreimbursed costs of the relevant hospital entity for providing without charge, paying for or subsidizing goods, activities, or services for purposes of addressing the health of low-income or underserved individuals. May include financial or in-kind support to affiliated or unaffiliated hospitals, hospital affiliates, community clinics, or programs that treat low-income or underserved individuals, iii. Subsidy of State and Local Governments: Direct or indirect financial or in-kind subsidies or state or local government that pay for or subsidize health care for low-income or underserved individuals, iv. Support for state health care programs for low-income individuals: At the election of the hospital 10% of the payments received under Medicaid or other means-tested programs or the amount of subsidy provided by the hospital entity to state and local government in treating patients under Medicaid and other means-tested programs, v. Dual-eligible subsidy: Amount of subsidy provided to government by treating Medicare/Medicaid patients, 11

12 vi. Relief of the burden of government related to healthcare of lowincome individuals: The portion of unreimbursed costs of the relevant hospital entity attributable to providing, paying for, or subsidizing goods, activities or services that relieve the burden of government related to health care for low-income individuals, vii. Any other activity that the Department determines relieves the burden on government or addresses the health of low-income or underserved individuals that the Department determines relieves the burden of government or addresses the health of low-income or underserved individuals. g. In calculating the value of qualified services and activities, the hospital applicant may each year elect to, i. use the value of the services and activities for the hospital year, or ii. the average value of those services for the three fiscal years ending with the hospital year h. Estimation of Exempt Property Tax Liability (Estimated dollar value of property tax that would be owed if the property were not exempt) lesser of, i. actual assessed value of the portion of the property for which an exemption is sought, or ii. an estimated assessed value of the exempt portion of such property, times 12

13 i. the applicable state equalization rate, times the applicable tax rate, (assessed value, or estimated assessed value) (state equalization rate) (applicable tax rate) = estimation of exempt property tax liability j. Estimated assessed value is the sum of: i. estimated fair market value of buildings times the applicable assessment factor, plus ii. estimated assessed value of the land portion of the property B. Credit to owners of investor-owned hospitals in an amount equal to the lesser of the amount of property taxes paid on real property used for hospital purposes during the prior tax year or the cost of free or discounted services provided during the tax year pursuant to the hospital's charitable assistance policy 1. If the credit exceeds the amount of tax liability in the year in which the credit is claimed, the excess can be carried forward for up to 5 years 2. The credit is transferrable (At this point, it is unclear whether transferrable mean the credit may be transferred to another taxpayer or whether the credit may also be "transferred" to offset other Illinois taxes that may be owed by the hospital that earned the credit. (i.e. income tax withholding obligations or sales and use taxes.) IX. Open Issues A. Constitutionality of the new hospital property tax exemption 1. Does the new charitable exemption for hospitals impermissibly broaden the exclusively charitable exemption authorized under the Illinois Constitution? 13

14 (see Chicago Bar Association v. Department of Revenue 163 Ill. 2d.290 (1994)) 2. What happens to the sales tax exemption if anything if the property tax exemption is successfully challenged on constitutional grounds? B. Practical impact of the new exemption process 1. How many hospitals will qualify? 2. What will be the impact of Affordable Care Act on the eligibility calculation? C. Impact of Provena on charitable exemption applications from property taxes and sales and use taxes claimed by non-hospital healthcare organizations. X. Lessons For Other States A. Illinois is likely an outlier not a harbinger, B. Provena was a perfect storm not likely to be replicated in other states, and C. Pick your battles wisely. Be careful what cases you appeal. 14

Property Tax and Sales Tax Issues for Not-For-Profit Hospitals and Healthcare Organizations The Illinois Experience Outlier or Harbinger

Property Tax and Sales Tax Issues for Not-For-Profit Hospitals and Healthcare Organizations The Illinois Experience Outlier or Harbinger Issues For Healthcare Organizations October 15-16, 2012 Presenter: