Property, Sales, Use, and Other Taxes

Every state exempts some or all of the properties owned by charitable nonprofits from property taxes. However, despite a lack of legal authority to do so, some municipalities attempt to impose discriminatory taxes or fees on nonprofits, or demand so-called “voluntary” payments in lieu of taxes (PILOTs). Different jurisdictions call the assessment different terms – taxes, fees, or PILOTs – but the goal is the same, to divert nonprofit resources away from mission and into government coffers.

Challenges to Nonprofit Property Tax Exemptions

Property owned and operated by nonprofits for charitable purposes is exempt from property taxes in all 50 states. Threats to property tax exemptions come in many forms from all branches of government: state and local legislative bodies trying to rewrite the rules, executive branch tax assessors seeking to reclassify exempt property, and judges trying to legislate from the bench.

As reported in Nonprofit Advocacy Matters in March 2019, the challenges are widespread:

Policymakers across the country are targeting nonprofits with bills that would remove property tax exemptions. A measure under consideration in Montana would allow local governments to establish "Public Safety Districts" and levy so-called “fees” on properties that are tax exempt, thereby attempting to evade the state prohibition against imposing a “tax” on charitable properties used for charitable purposes. The Montana Nonprofit Association explains, “In essence this is a fee which would be assessed on nonprofit organizations should a local government decide to do so in order to fund public safety services - which is what property tax does.” Legislation in New York would shift the burden of proof from the state government to the nonprofit organization to show annually, by “clear and convincing evidence,” that it qualifies for property tax exemption. Similarly, the Oregon Legislature is looking to force nonprofits to file additional information returns that identify the basis for exemption. Rhode Island legislators have a history of introducing anti-nonprofit property tax bills; this year is no exception. Two bills, one targeting higher education and the other aimed at hospitals, would authorize cities and towns to tax the property of certain nonprofit institutions, including vacant lots, parking lots not used exclusively for nonprofit vehicles, and property not wholly and exclusively utilized for the purposes for which the nonprofit was incorporated.

Significant challenges have occurred in prior years. In June 2015, a New Jersey tax court judge revoked the long-standing property tax exemption of a major hospital, ruling that in his view nonprofit hospitals of today do not look like charity hospitals of the past and thus no longer deserved tax exempt status. He expressly challenged the New Jersey Legislature to change the property tax law if it disagreed with him. The Legislature disagreed with the judge and considered a bill that reaffirmed the property tax exemption for nonprofit hospitals, while also imposing new fees on the health care institutions that would generate additional revenue for communities in which the hospitals operate. The Governor pocket-vetoed the bill, setting off a new round of legislation and debate.

In early 2015, Maine's Governor made national news by proposing the repeal of tax exemptions for some nonprofit properties; a proposal the Legislature soundly rejected. But, Connecticut granted municipalities the power to tax certain new properties acquired by a nonprofit university or specific hospital systems. Pennsylvania continues to struggle with a 2012 Commonwealth Supreme Court decision on the standards for property tax exemption, leading to legislation proposing a constitutional amendment.

In January 2016, an Illinois court struck down a law that laid out clear rules on how nonprofit hospitals can demonstrate community benefit and earn the exemption from property taxes; the state Supreme Court is expected to rule on the issue in 2017. Massachusetts nonprofits and foundations successfully fought off three significant challenges: a four-year tax on new property bought and taken off the tax rolls (stripped from bill), assessments against nonprofits operating in “community benefits districts” (line-item vetoed), and a “right of first refusal” power for local governments when nonprofits seek to sell or change the use of property (removed in negotiations). Connecticut nonprofits overcame three challenges in 2016: a bill to levy an unrelated business income tax on increases to higher education endowments that exceed $10 billion (Yale University), one to deny tax exemption on individual properties of large colleges and universities that generate rent and ticket income, and another that sought to make nonprofit hospitals liable for property taxes if their executive compensation exceeds $500,000 per year. Rhode Island considered, but rejected a measure that would have empowered local governments to charge nonprofits up to 50 percent of what their property tax bill would be if the property were taxable.

Recent Challenges Reported in Nonprofit Advocacy Matters:

• Louisiana: City officials in New Orleans are once again targeting nonprofit property owners to generate revenues. Property assessments have increased for thousands of properties in the city, and lawmakers are looking at removing property tax exemption for nonprofits to avoid more tax increases for homeowners. The New Orleans Baptist Association responded that there is “a need for increased administration and enforcement of existing exemptions rather than the removal of said exemptions.” The statement continues, “We ask that the city not add any burden to the good work done by many to address the needs of our city.” The Louisiana Constitution (Article VIII, Section 21) guarantees nonprofit property tax exemption, so it is unclear how, short of a constitutional amendment, city leaders intend to tax nonprofits. (9/9/2019)
• A Maryland court held that a local health care campus failed to show that all of its property served a charitable purpose and determined some property tax exemptions did not qualify. The local supervisor of assessments had determined that a property with a for-profit dialysis center, memory care unit, and assisted living facilities were not eligible for the tax exemption, but long-term nursing care, rehabilitative services unit, and adult day care units qualified for exemptions because of the amount of Medicaid patients treated. An appeals court upheld the ruling. (7/15/2019)
• Connecticut: In Hartford, Connecticut, a councilmember is promoting a resolution that urges state lawmakers to craft a bill that would require private universities, hospitals, and other major nonprofit organizations in the capital city to pay property tax on 20 percent of their assessed value. (6/3/2019)
• Oregon: Some charitable organizations in Oregon may be required to file information returns with the state explaining the basis for property tax exemption under a bill (SB 210) pending in the Legislature. Nonprofits, while exempt from property tax in the state, would have to submit paperwork to prove their eligibility for tax exemption by explaining the basis, uses, and number of days the property is utilized for charitable purposes. The burdensome mandate is like government “looking for coins in the couch,” according to Jim White, executive director of the Nonprofit Association of Oregon. (4/22/2019)

Sales, Use, and Other Taxes

The U.S. Supreme Court’s recent decision in South Dakota v. Wayfair  overturns precedent and makes clear that states have the power to impose sales and use taxes on entities beyond their borders. The decision allows states to collect sales and use taxes for online purchases of goods and services from sellers without a physical presence in the state. The Wayfair decision could have significant implications for charitable nonprofits, as purchasers and sellers online. States currently are not consistent in whether some or all nonprofits are exempt from sales and use taxes as purchasers and as sellers. As a result, the immediate impact of the decision is confusion about when, where, and how nonprofits should be paying and/or charging sales taxes.

Recent Challenges Reported in Nonprofit Advocacy Matters:

• Alaska: The Nome City Council in Alaska approved an ordinance to impose its 5 percent sales and use tax on remote sellers and marketplace facilitators that have gross revenue of more than $100,000 or 100 separate transactions in the locality. Alaska is one of five states without a state sales and use tax, but more than 100 local jurisdictions do impose such taxes. The threshold set by the City is less than the 200 separate transaction threshold approved by the U.S. Supreme Court’s decision in South Dakota v. Wayfair, which allows jurisdictions to require out-of-state sellers to collect and remit sales tax on their behalf. (9/9/2019)
• Kentucky: Nonprofits in Kentucky are celebrating a major victory as Governor Bevin signed the bill to undo sales taxes on nonprofits, after a year of headaches in the Commonwealth caused by inadvertent taxing of tax exempt organizations under previous legislation. This new law immediately exempts from sales tax admissions and items sold for fundraising purposes by charitable nonprofits. The Kentucky Nonprofit Network fought hard for the legislation and remains vigilant, stating that “it is clear that there is much education and advocacy work that remains – addressing dangerous myths and misunderstanding about the essential work and vital role of nonprofits. Advocacy is absolutely no longer optional.” (4/8/2019)
• North Carolina: Legislation filed in North Carolina would clarify that nonprofits do not need to charge sales tax for tuition or registration fees for educational events, even if there is some entertainment provided at these events. Separate legislation would exempt most North Carolina nonprofits from paying sales and use tax when they purchase goods and services. Currently, nonprofits pay sales tax on their purchases and can apply to the NC Department of Revenue for semi-annual refunds of the taxes they pay. “A system of sales tax exemption would save nonprofits time and reduce administrative burdens,” according to the North Carolina Center for Nonprofits. (4/8/2019)

Additional Resources

• Panel Moves to Reverse Ruling Imposing Taxes on Meals Prepped by Nonprofits, Maine Public Radio, March 4, 2016.
• To Tax or Not to Tax? Maine Mulls Property Tax on Nonprofits, Los Angeles KPCC Radio Program, March 17, 2015.
• Amici Curiae brief in Fields v. Trustees of Princeton University filed by the Center for Non-Profits in New Jersey, March 16, 2015.
• Should Nonprofits Have to Pay Taxes?, Elaine Povich, Stateline, March 5, 2015.