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 demanding 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.

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. Montana is now requiring nonprofit property owners to reapply for their exemption(s) early this year.

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.

Nonprofits have done more than just defend against similar challenges. A bill in Michigan sought to clarify the law on nonprofit property tax exemption to improve consistency of application by county tax assessors; there are more than 130 cases of nonprofits defending their exemptions from assessor interpretations. Legislation in New Jersey goes to the root cause of the challenge in the Princeton case by prohibiting individual taxpayers from filing property tax appeals challenging the assessment or exempt status with respect to the property of others.

Sales, Use, and Other Taxes

2016 saw states considering various other forms of taxes threatening nonprofit budgets and finances. Across the country state legislatures introduced and contemplated bills to levy unrelated business income tax, impose sales and use taxes, and remove other exemptions that afford nonprofits the ability to continue to serve their communities and the public.

Louisiana enacted several acts affecting nonprofit tax exemptions. Act 25 and Act 26 jointly suspend sales tax exemptions for hundreds of items, including membership dues and fees paid to nonprofits that entitle members to use the nonprofits’ clubs, or amusement, entertainment, athletic, or recreational facilities. Act 12 restores numerous tax exemptions and exclusions temporarily suspended earlier in the year, including exemptions for tickets to school athletic and entertainment events, sales and donations to food banks, food sales by youth serving organizations, and membership fees or dues of nonprofit civic organizations. Act 6 requires nonprofits with restored exemption/exceptions to file an annual report listing those items that were exempted/excepted. Meanwhile, Hawaii enacted Act 261 requiring the State Auditor to periodically review and report on the cost of certain exemptions, exclusions, and credits, including the nonprofit exemption from the general excise and use taxes, and pays for the reviews through a new filing surcharge.

Other states either considered or are still considering tax issues affecting nonprofits. A Pennsylvania bill (HB 2409) sought to disqualify a nonprofit from the sales tax exemption if it spends less than 60 percent (averaged over three years) of annual functional expenses on program services, as opposed to administrative and fundraising (overhead), as identified on the organization’s IRS Form 990 or separate reporting to the PA Secretary of State. Kansas considered HB 2408 to repeal the tax exemption on gross receipts from fees and charges by nonprofits for participation in recreational activities, and Kentucky considered HB 233 to extend fundraising exemption from sales taxes to gross receipts from charity auctions. North Carolina’s Senate Tax Proposal for Fiscal Year 2015-2017 would have made three changes that would harm nonprofits by: eliminating state tax incentives for charitable giving, creating new taxes on large nonprofits, and cutting into reserves of almost every nonprofit.

Additional Resources

• “Senate finance committee passes bill on charitable nonprofits’ property taxes,” Crain’s Detroit, October 18, 2016.
• “Mississippi Tax Policy: Options for Reform,” Mississippi Tax Policy Panel, September 1, 2016.
• “Taxing Yale: An attack or fair game?”, The CT Mirror, March 22, 2016.
• “Panel Moves to Reverse Ruling Imposing Taxes on Meals Prepped by Nonprofits,” Main 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.
• "From the Fault Line on Nonprofit Property-Tax Exemptions," David L. Thompson, National Council of Nonprofits Blog, February 9, 2015.
• "Bryant's Mandatory Payment Another Black Eye for State," David L. Thompson, The Valley Breeze, July 31, 2013.
• The Charitable Property-Tax Exemption and PILOTs, Urban Institute, 2012.
• Taxing Non-Profits: A Bad Idea, Linda Czipo, NJBIZ, 2012,
• State Budget Crises: Ripping the Safety Net Held by Nonprofits, National Council of Nonprofits, 2010.