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Property Tax Exemptions Challenged

Throughout the state and nation, revenue-deprived municipalities and other units of local governments are challenging the property tax exemptions of nonprofit organizations. In some instances, property tax issues have surfaced where nonprofits own a disproportionate amount of property within a city. Large tax-exempt nonprofits like universities, hospitals and cultural centers require city service including water and waste treatment, street maintenance, and fire and police protection. The infrastructure and delivery of services is primarily funded through taxes, which the heavy-users may not be obligated to pay. Some large nonprofits ease the tax burden on local businesses and residents by providing payment-in-lieu-of-taxes (PILOT) to the unit of government that provides their service. The large nonprofits; however, have not been the only organizations whose exemptions have been challenged.

Property Tax exemption has become a controversial political issue. Some view nonprofits as having an unfair advantage in the competitive marketplace. Organizations like the YMCA, have come under attack because they offer more affordable rates than for-profit health clubs that provide similar services. Health clubs contend that they can not compete because they are required to pay taxes which increase operational costs.

In certain areas, elected officials are examining the number of properties within their governance area that are tax exempt; and in some instances, tax statements have been mailed to some or all nonprofit organizations.

The law specifically identifies certain tax exempt organizations including:

• Housing owned and occupied by nonprofits that is occupied or used solely by the elderly or disabled;
• Nonprofit theatre, library, educational, or scientific institution and property owned and occupied by nonprofits devoted exclusively to promoting the development of literature, music, painting, or sculpture;
• Boy or Girl Scout Camps (not exceeding 400 acres), Camp Fire Girls, 4-H Clubs, YMCA and YWCA, providing 50% of the members of each of residents of Michigan;
• Houses of public worship (buildings and other facilities) used predominately for religious services or for teaching the religious truths and beliefs of the society;
• Property which is leased, loaned or otherwise available to a nonprofit educational institution while it is used by the nonprofit educational institution primarily for educational purposes;
• Real estate with other buildings and located on the property occupied by a nonprofit trust and used for hospital or public health purposes (not including excess acreage not actively utilized for hospital or public health purposes or real estate that is used to house physicians and their families); and
• Certain real or personal property that is owned by a nonprofit and leased, loaned, or otherwise made available to another nonprofit charitable institution.

If a plea at the local level is denied, the organization should seek legal counsel to file an appeal with the Michigan Tax Tribunal. Case law that interprets the property tax exemption statutes has been established, including a recent Michigan Court of Appeals case. In the case of Redford Opportunity House v. Township of Redford, the nonprofit was denied a refund for real estate taxes paid over a three year period. The law allows a taxpayer to recover monies paid if there was a clerical error or a mutual mistake of fact. The Court said that the organization’s failure to realize that it was eligible for the exemption is not a mistake of fact “but a failure to comprehend and appreciate the legal significance of the facts.”

Michigan Nonprofit Association will address the property tax exemption issue with a white paper that is scheduled for release before the end of 2004. Additional information on property tax exemption can be found at www.urban.org.