79358 Prepared by the North Dakota Legislative Council staff for the Advisory Commission on Intergovernmental Relations August 2006

CHARITABLE ORGANIZATIONS' PROPERTY TAX EXEMPTION

The following memorandum is the result of a institutions of public charity requires that the property request from the Advisory Commission on must be owned by the institution of public charity to be Intergovernmental Relations for past bills that have eligible for the exemption and ownership by an amended or have attempted to amend North Dakota individual renders property ineligible for the charitable Century Code (NDCC) Section 57-02-08(8). Before property tax exemption. Vacant lots owned by reviewing those bills, this memorandum provides institutions of public charity are not exempt because information compiled by the interim Taxation they are not "actually occupied" by the charitable Committee during the 1997-98 interim. During that institution. interim, House Concurrent Resolution No. 3052 In Riverview Place, Inc. v. Cass County, directed a study of the tax exemption for charitable 448 N.W.2d 635 (N.D. 1989), the Supreme Court of organizations. The Taxation Committee was assigned North Dakota said: this study. [T]he determination of whether an institution falls within the exemption is, essentially, a two- CHARITABLE ORGANIZATIONS' step process in which it must be determined PROPERTY TAX EXEMPTION "whether the organization claiming the Background exemption is in fact a charitable one, and whether the property on which the exemption is Constitutional and Statutory Provisions claimed is being devoted to charitable The Constitution of North Dakota provides in purposes." . . . ownership of the property in Article X, Section 5, that ". . . property used question by an institution of public charity does exclusively for schools, religious, cemetery, charitable not, by that fact alone, exempt the property or other public purposes shall be exempt from from taxation . . . it is the use made of the taxation." property . . . which determines whether the North Dakota Century Code Section 57-02-08(8) property is exempt from taxation. [emphasis in provides an exemption for: text] The property's use must be devoted to All buildings belonging to institutions of charitable purposes and it must actually be public charity, including public hospitals and used in carrying out the charitable purposes of nursing homes licensed pursuant to section the organization claiming the exemption. 23-16-01 under the control of religious or

charitable institutions, used wholly or in part Use With a View to Profit for public charity, together with the land In Riverview Place, the Supreme Court of North actually occupied by such institutions not Dakota said: leased or otherwise used with a view to . . . When a charitable organization profit . . . . charges a fee for its services and operates at a Most property tax exemptions provided by the small net profit which is reinvested back into the Legislative Assembly do not apply to land. The organization's charitable operations, those facts Constitution of North Dakota, Article X, Section 5, do not automatically disqualify the entity's provides that "The legislative assembly may by law property from an exemption on the basis that it exempt any or all classes of personal property from was operated "with a view to profit," as the taxation and within the meaning of this section, concept of charity encompasses "something fixtures, buildings and improvements of every more than mere almsgiving" and therefore a character, whatsoever, upon land shall be deemed "benevolent association is not required to use personal property. . . ." (emphasis supplied). This only red ink in keeping its books and ledgers." constitutional authority of the Legislative Assembly The following conclusions have been reached in does not include providing an exemption for land upon application of the exemption by the Attorney General which buildings are located. However, the same and the Tax Commissioner: section of the constitution provides that the "property" 1. Only the amount of land that is reasonably used exclusively for charitable purposes shall be required for a site for the buildings and exempt from taxation. Because this provision is not improvements used for charitable purposes is limited to personal property, it appears both real and eligible for the exemption. Excess land used personal property of charities is intended to be to pasture cattle is "used with a view to profit." exempted by the constitutional provision. 2. The meaning commonly given to "not used

with a view to profit" is that no individual Unity of Ownership and Use stockholder or investor will receive any kind of The statutory requirement that buildings and land, profit or gain or dividend from the operation of to be exempt, must be property "belonging to" 79358 2 August 2006

the charity. It does not mean that the charity across jurisdictions. Another growing problem is how cannot make some type of charge for certain to approach assessment for hospitals, YMCAs, and services. other organizations providing an expanded range of 3. Occasional rental of property owned by a services in recent years. These expanded activities public charity and rented for nonexempt generate complaints from private businesses about purposes does not destroy the tax-exempt unfair competition being fostered by a property tax status of the property. exemption. Assessment issues can become 4. If a charitable organization leases a building extremely complicated when a property is used for to another charitable organization at rent charitable purposes and nonexempt activities. This substantially below market rental rates so as requires a partial assessment against the property, to constitute financial assistance to the lessee which becomes difficult when there is mixed usage of charitable organization, then a charitable use certain areas. by the lessor can be established. A representative of the North Dakota Healthcare 5. A used clothing store operated by a public Association said nonprofit entities are required by charity is not exempt because it is used for Internal Revenue Code standards to not use earnings profit rather than the charitable uses of the or donations to benefit private shareholders or others charitable institution. similarly situated; to not pay compensation to directors, officers, and employees based solely upon State Limits on Charitable Property Tax financial performance of the organization; and to use Exemptions any excess revenues to further the organization's Property tax exemptions originated at a time when nonprofit purposes or fund other nonprofit churches conducted most educational and charitable organizations. The association representative activities. Because these activities were operated by suggested that adding criteria to define charitable churches and relieved government of the cost of activities can become extremely complex and lead to performing some services or obligations, there was an unworkable, narrow test that becomes an little controversy when property tax exemptions were accounting exercise and does not adequately address written into states' constitutions and laws. As other the range of activities engaged in by nonprofit organizations began to offer these services, organizations. exemptions were extended to these new activities. The committee considered a bill draft patterned However, modern operation of charitable after 1997 Pennsylvania law which established organizations has changed so that they sometimes specific criteria to determine what constitutes compete with businesses run on a for-profit basis. A charitable use of property for property tax exemption 1990 United States Government Accounting Office purposes. The Pennsylvania law established five report prepared for the House Select Committee on detailed criteria to determine what qualifies as a Aging noted these changes and observed that purely public charity: nonprofit hospital goals most often relate to increasing 1. The institution must advance a charitable the share of patients within market areas, mirroring purpose. This criterion is satisfied if the the goals of investor-owned institutions. Several institution is organized and operated primarily observers have suggested that granting and retaining to fulfill any of six listed purposes. charitable exemptions in the modern political 2. The institution must operate entirely free from environment have more to do with political clout than private profit motive. Without regard to benefits to the public and government. The changing whether the institution's revenues exceed nature of charitable organization operation is one of expenses, this criterion is satisfied if four listed the factors that led assessment officials to more criteria are met. closely scrutinize application of exemptions. Another 3. The institution must provide a community factor leading to increased scrutiny of claims for service by donating or rendering gratuitously a exemptions is the proliferation in tax-exempt real substantial portion of its services. This property and resulting tax burden shifted to other criterion is satisfied if the institution benefits taxpayers, who voice growing displeasure with the community by meeting one of seven property tax levels. detailed standards. 4. The institution must benefit a substantial and Taxation Committee Considerations indefinite class of persons who are legitimate Assessment officials expressed concerns about subjects of charity. "Legitimate subjects of the charitable organizations exemption. One difficulty charity" is defined as individuals unable to is determining whether property qualifies and another provide themselves with what the institution difficulty is dealing with public concerns about provides for them. The bill specifically possible unfair advantages exempt property provides disqualifies any organization not recognized as in competing with taxable property. Assessment exempt under Section 501(c)(3) of the Internal officials described the statutory exemption as Revenue Code and certain institutions requiring a great deal of legal interpretation, which can otherwise qualified under Section 501(c)(3) of result in differences in administration within and the Internal Revenue Code. 79358 3 August 2006

5. The institution must relieve the government of costs of police and fire protection and infrastructure some of its burden. This criterion is satisfied if expenditures paid from the budget of the city. The bill the institution meets any one of six criteria. limited the amounts that may be levied against subject Committee members said it would be useful to properties based on comparison of the value of those establish a workable standard for assessors to fairly properties to the value of taxable property in the city. distinguish charitable activities from those that should Committee members said the bill would provide local not be eligible for property tax exemptions. flexibility in determining whether and at what level Committee members were critical of the approach in special assessments would be imposed. The bill gave the Pennsylvania law as being too complicated and cities an option to require charitable organizations to placing too much emphasis on tracking revenues and pay for the value of certain city services in the same expenses. Committee members said the manner they pay special assessments for property Pennsylvania law was obviously directed toward improvements under existing law because the hospitals and does not adequately address other services contribute to the value of the property. charitable organizations. House Bill No. 1051 failed to pass in the House. The committee considered a bill draft that limited the property tax exemption for property of hospitals to OTHER LEGISLATIVE ACTION those areas of a building essential to providing In the last 20 years, two other bills have been inpatient services. Committee members said hospital introduced that have attempted to change NDCC activities have changed substantially in recent years, Section 57-02-08(8). Both of these bills were hospitals now have enormous budgets, and health introduced in 1997--House Bill No. 1460 and House care customers are now paying for services that did Bill No. 1289. Both failed to pass in the House. not exist several years ago like sports medicine, House Bill No. 1460 would have changed the test women's health centers, screening services, and other to determine if a building is exempt from property efforts. These activities were described as intended taxation on charitable grounds to if the building to expand operations and the client base for the belongs to "an organization organized and operated hospitals and as encroaching in areas that should be exclusively for charitable purposes, but any portion of left to private enterprise. Committee members did not that building is not exempt if it is not used exclusively support the bill draft approach because of concern for charitable purposes." In addition, the bill provided about its effect on small town medical facilities and the that "[a]n organization is not organized and operated difficulty assessment officials would have to determine exclusively for charitable purposes if it . . . pays wages which portions of a facility would be exempt as being . . . exceeding seventy-five thousand dollars to any essential for inpatient services. person employed in this state during the taxable year." House Bill No. 1289 would have required a Recommended Legislation charitable exemption to be specifically approved by The interim Taxation Committee recommended the governing body of the city, if the property is House Bill No. 1051 to allow imposition of special located within city limits, or by the governing body of assessments by cities against exempt property of the county in which the property is located, if not charitable organizations. The bill allowed a city to within city limits. The bill would have grandfathered establish a special assessment district composed only existing exemptions so that city or county approval of property of charitable organizations. The bill was not required to continue the exemption. allowed imposition of special assessments by the governing body of a city for the proportionate share of