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

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1 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: Keith Staats Director Grant Thornton LLP Grant Thornton LLP. All rights reserved. Program Objectives Gain an understanding of the "perfect storm" that culminated in the Illinois Supreme Court's decision in Provena Covenant v. Department of Revenue The Illinois legislative reaction to Provena, The new property and sales tax exemptions for charitable hospitals, The future Will the Illinois legislation be challenged, and, if so, upheld? Is the Illinois experience unique, or might other states follow the same path with respect to charitable exemptions? Grant Thornton LLP. All rights reserved. 1 1

2 Illinois Property Taxation Exemption of Charitable Organizations The Illinois Constitution establishes the basis for real property tax exemption The constitutional grounds for exemption are not self-executing Illinois law Implements and narrows the Constitutional Exemption The Property Tax Exemption Process o The role of local taxing authorities o The role of the Illinois Department of Revenue o Case law construing the constitutional and statutory bases of the exemption prior to Provena Covenant v. Department of Revenue Grant Thornton LLP. All rights reserved. 2 Illinois Sales Tax Exemption of Charitable Organizations Sales tax exemptions are not addressed in the Constitution Sales tax exemptions are strictly statutory The statutory basis of the sales tax exemption The sales tax exemption process o The role of the Illinois Department of Revenue o Case law construing the statutory exemption prior to Provena Grant Thornton LLP. All rights reserved. 3 2

3 Provena Covenant Medical Center v. Department of Revenue, 925 N.E.2d 1131 (Ill. 2010) The Champaign County Board of Review recommended denial of charitable property tax exemptions to Provena The Illinois Department of Revenue agreed with the recommendation and denied the exemption requests contending that Provena's property was not in charitable ownership and use Provena challenged the denial in an administrative hearing before the Department Provena asserted that the property was exempt because the property was in charitable ownership and use and also that the property was exempt because Provena was a religious organization The Department's administrative law judge and recommended granting the exemptions based on charitable ownership and use The Department Director overturned the administrative law judge's recommendation and denied the exemptions ruling that Provena had not established that it was "exclusively charitable" and entitled to the exemption. The Director also found that Provena was not entitled an exemption as a religious organization. Grant Thornton LLP. All rights reserved. 4 Provena Covenant Medical Center v. Department of Revenue, 925 N.E.2d 1131 (Ill. 2010) Provena sought administrative review of the Department's administrative decision in the Circuit Court The Circuit Court reversed the Department and granted the exemptions ruling that Provena was entitled to the charitable exemption and the religious exemption The Department appealed to the appellate court and the appellate court reversed the circuit court and reinstated the denial ruling that Provena did not qualify for the charitable exemption or the religious exemption Provena appealed the Appellate Court decision to the Illinois Supreme Court Grant Thornton LLP. All rights reserved. 5 3

4 Provena Covenant Medical Center v. Department of Revenue, 925 N.E.2d 1131 (Ill. 2010) The Illinois Supreme Court upheld the determination that Provena, a not-forprofit hospital, was not entitled to a property tax exemption because it failed to establish that it was a charitable institution. The court also concluded that Provena did not qualify for the religious exemption A plurality of the court determined that the hospital failed to demonstrate that its property was actually and exclusively used for charitable purposes The "exclusive use" requirement is grounded in the Illinois Constitution Article IX, Section 6 of the Illinois Constitution limits the Illinois General Assembly's authority to exempt real property from taxation by law. Included in the authorized exemptions is property used "exclusively" for charitable purposes Case law has defined "exclusively" to mean "primarily" Grant Thornton LLP. All rights reserved. 6 Provena Covenant Medical Center v. Department of Revenue, 925 N.E.2d 1131 (Ill. 2010) The original denial of the Provena property tax exemptions was triggered by a strict construction of the "exclusively charitable" requirement by local county Board of Review When the exemption applications reached the Illinois Department of Revenue, the declined to overturn the recommendation to deny the property tax exemptions The Department's litigation attorney took a much more active role in the hearing than had traditionally occurred Grant Thornton LLP. All rights reserved. 7 4

5 Provena Covenant Medical Center v. Department of Revenue, 925 N.E.2d 1131 (Ill. 2010) Provena put on 5 or 6 days worth of evidence at hearing based upon the way in which cases had been handled traditionally The IDOR Administrative Law Judge issued an approximately 60 page opinion upholding Provena's exemption requests consistent with prior decisions The Director of Revenue took a close review of the ALJ's recommendation. This review took more than a year and resulted in the Director's rejection of the ALJ's opinion The Director concluded that an application of the facts to the standards articulated by the courts in prior case law led to the conclusion that Provena had not established that it was "exclusively charitable" and, therefore, was not entitled to the exemption The Director's opinion pointed out that the value of the property tax exemptions sought by Provena were greater than the value of the charitable services reported by Provena Grant Thornton LLP. All rights reserved. 8 Provena Covenant Medical Center v. Department of Revenue, 925 N.E.2d 1131 (Ill. 2010) The Director's decision, while adopting an arguably restrictive view of the charitable exemption, was well-crafted The Appellate Court and Supreme Court reviewed the Director's decision under a standard of review that affords great deference to the factual determinations made at the administrative hearing level and at each level did not find a basis for overturning the Director's decision The result of the Supreme Court's decision in Provena was that going forward, very few, if any, hospitals could qualify for the charitable exemption Grant Thornton LLP. All rights reserved. 9 5

6 Post-Provena Post-Provena, the Department of Revenue had a backlog of property tax exemption applications that it had held in abeyance until the Provena decision was issued Post-Provena, the Department of Revenue entered into discussions with the Illinois Hospital Association and others about how to address the charitable exemption going forward. When no agreement was reached by late last year, the Department issued additional denials of exemptions to three hospitals and continued to hold other pending applications in abeyance Subsequent to the denials, the Illinois General Assembly passed legislation in the spring session to articulate the demonstration that hospitals must make to qualify for property tax and sales tax and use exemption Grant Thornton LLP. All rights reserved. 10 Illinois Legislation (P.A ) Creates new categories of charitable property tax and sales and use tax exemption exclusively for hospitals Implements the intent of the General Assembly to establish quantifiable standards for the issuance of the exemptions Legislation has an immediate effective date and contains an applicability clause to clarify the effect of the immediate effective date: o 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 o 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 Grant Thornton LLP. All rights reserved. 11 6

7 Illinois Legislation (P.A ) o 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. Defined terms: "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. "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. Grant Thornton LLP. All rights reserved. 12 Illinois Legislation (P.A ) "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. "Hospital applicant" is an owner or affiliate that files an application for a property tax exemption "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 Grant Thornton LLP. All rights reserved. 13 7

8 Illinois Legislation (P.A ) To qualify for 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. Qualified Services and Activities Estimated Property Tax Liability = Exemption Grant Thornton LLP. All rights reserved. 14 Illinois Legislation (P.A ) Qualified services and activities: o Charity Care: Free or discounted care provided pursuant to the hospital entity's financial assistance policy, o 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, Grant Thornton LLP. All rights reserved. 15 8

9 Illinois Legislation (P.A ) o o o o 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, 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, Dual-eligible subsidy: Amount of subsidy provided to government by treating Medicare/Medicaid patients, Relief of the burden of government related to healthcare of low-income 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, Grant Thornton LLP. All rights reserved. 16 Illinois Legislation (P.A ) o 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. In calculating the value of qualified services and activities, the hospital applicant may each year elect to, o use the value of the services and activities for the hospital year, or o the average value of those services for the three fiscal years ending with the hospital year Grant Thornton LLP. All rights reserved. 17 9

10 Illinois Legislation (P.A ) Estimation of Exempt Property Tax Liability (Estimated dollar value of property tax that would be owed if the property were not exempt) lesser of, o (i) actual assessed value of the portion of the property for which an exemption is sought, or o (ii) an estimated assessed value of the exempt portion of such property, times the applicable state equalization rate, times the applicable tax rate o (assessed value, or estimated assessed value) (state equalization rate) (applicable tax rate) = estimation of exempt property tax liability Estimated assessed value is the sum of: o estimated fair market value of buildings times the applicable assessment factor, plus o estimated assessed value of the land portion of the property Grant Thornton LLP. All rights reserved. 18 Illinois Legislation (P.A ) Credit to owners of for-profit 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 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 The credit is transferrable to other taxpayers (IDOR has opined that the credit may not be "transferred" to offset other Illinois taxes that may be owed by the hospital (i.e. sales and use tax, or income tax withholding) Grant Thornton LLP. All rights reserved

11 Il Illinois Legislation (P.A ) Cigarette Tax increase $1.00 a pack Tobacco Products Tax 18% rate increases to 36% - (i.e. cigars, pipe tobacco) Hospital Provider Tax extended to December 31, 2014 For state fiscal years through 2014 and for the portion of the following fiscal year from July 1, 2014 through December 31, 2014, an annual assessment on inpatient services is imposed on each hospital provider in an amount equal to $ times the difference of the hospital's occupied bed days less the hospital's Medicare bed days. The state will impose an additional assessment on outpatient hospital services. For the same period as the inpatient assessment, an annual assessment on outpatient services is imposed on each hospital provider in an amount equal to multiplied by the hospital's outpatient gross revenue. The term "outpatient gross revenue" is defined by reference to total gross charges attributed to outpatient services as reported on the Medicare cost report at Worksheet C less certain specified items. This item is to be determined using the most recent data available from each hospital's 2009 Medicare cost report as contained in the Healthcare Cost Report Information System file for the quarter ending on June 30, 2011, without regard to any subsequent adjustments or changes to such data. Grant Thornton LLP. All rights reserved. 20 Illinois Legislation (P.A ) Remaining Questions: How many hospitals will qualify for exemption? Will the property tax portion of the legislation be challenged by a local taxing authority that contends that the legislation intrudes into decisions only the Supreme Court can make? For example, does the legislation attempt to impermissibly expand what counts as charity care by taking into account Medicaid shortfalls? How will DOR implement the new tests? What is the impact of Provena on non-hospital healthcare organizations? Grant Thornton LLP. All rights reserved

12 Related Legislation (P.A ) Amends the Fair Patient Billing Act Requires the Attorney General to adopt, by rule, standard provisions to be included in all applications for financial assistance no later than June 30, 2013 On or before January 1, 2013, a "statewide organization representing a majority of hospitals" may submit recommendations to the Attorney General concerning standard provisions The rules are also required to contain "appropriate methodologies" for the determination of presumptive eligibility Grant Thornton LLP. All rights reserved. 22 Related Legislation (P.A ) Amends the Hospital Uninsured Patient Discount Act o Requires hospitals other than rural hospitals or critical access hospitals to provide a charitable discount of 100% of its charges for medically necessary healthcare services exceeding $300 to any uninsured patient who applies for a discount and has family income of not more than 200% of the federal poverty income guidelines o Requires rural hospitals and critical access hospitals to provide a charitable discount of 100% of its charges for all medically necessary healthcare services exceeding $300 to any uninsured patient who applies for a discount and has family income of not more than 125% of the federal poverty income guidelines Grant Thornton LLP. All rights reserved

13 Lessons From Illinois Provena was a "perfect storm" o Local officials decided to take a strict approach to the charitable exemption o The Department of Revenue's Property Tax Exemption Division took the same strict approach o A Department litigator with and apparently strong view that the exemption should be narrowly construed took an active role in the case. o The Director of Review closely reviewed the Administrative Law Judge's recommendations and overturned the Administrative Law Judge's recommendation o The reviewing courts were constrained to provide great deference to the factual determinations made at the administrative level o The manner in which the Supreme Court articulated the tests for establishing the charitable exemption set a virtually impossible standard to achieve going forward Grant Thornton LLP. All rights reserved. 24 Lessons From Illinois Build and maintain good relationships with local taxing authorities Try to head off and handle local decisions locally Know the facts and anticipate the worst outcome at the administrative level Even if you are right legally, do you have the best facts to take forward? Is it better to go forward or concede the matter at issue and come back to fight another day with better facts? Grant Thornton LLP. All rights reserved

14 Hospital State Tax Exemptions Impact of Illinois experience on other states? National Model or Unique to Illinois? Grant Thornton LLP. All rights reserved. 26 Disclaimer This document supports Grant Thornton LLP s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code Grant Thornton LLP. All rights reserved