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Senate finance committee passes bill on charitable nonprofits' property taxes

October 19, 2016

By Sherri Welch, Crain's Detroit Business, 10/18/16

A bill that would prevent municipalities from charging charitable nonprofits property taxes passed the Senate finance committee Tuesday and is headed to the full Senate.

The measure would take the guess work out of the equation for nonprofits and local assessors, proponents said, by codifying what constitutes a charitable nonprofit and granting those organizations uniform property tax exemption in Michigan.

Senate Bill 960 passed with a 5-1 vote. Sen. Steven Bieda, D-Warren, voted against the bill, and Sen. Marty Knollenberg, R-Troy, abstained.

Introduced in May by Sen. Jack Brandenburg, R-Harrison Township, the bill would amend the state's General Property Tax Act by adding the criteria for a charitable nonprofit and granting property tax exemption for nonprofits that meet it.

"Nonprofits deserve clarity when it comes to property tax exemptions," Brandenburg, chair of the Senate finance committee, said during a committee hearing Tuesday afternoon.

The criteria for what constitutes a charity that should be exempt from property taxes has been inconsistently applied from municipality to municipality, he said. That's led charitable nonprofits that have been assessed property taxes to appeal, leading to costly and lengthy court cases.

In the works for about two years, SB 960 will provide consistency and level the playing filed for all charitable nonprofits, requiring assessors to treat nonprofits operating in different parts of the state in the same manner, Brandenburg said.

In its current form, the bill would require a nonprofit qualifying for property tax exemption to have obtained 501(c)(3) charitable nonprofit status from the Internal Revenue Service.

Unlike other classes of nonprofits such as associations and membership groups, charitable nonprofits provide a community benefit.

Beyond that, it would require charitable nonprofits to meet two of four criteria based on standards laid out in the the 2006 Michigan Supreme Court case of Wexford Medical Group vs. the City of Cadillac — a case used by the Michigan Tax Tribunal judges listening to property tax assessment appeals from nonprofits to determine a charity's eligibility for property tax exemption.

The four criteria, based on the Wexford standards, are:

  • The charitable nonprofit offers services to the public without discriminating based on an individual's ability to pay, health or other factors and has a specific policy established to assure its services are available to all of those in need.
  • It is organized to advance education, advance religion, promote health and wellness, relieve poverty, erect public buildings or other public works, promote a governmental purpose or alleviate burdens or responsibilities that would otherwise be borne by the government.
  • It charges no more for its charitable services than is reasonably necessary to maintain the operation of the organization and has a specific policy established.
  • It has an overall nature that promotes charity, regardless of the amount it devotes to charitable activities on an annual basis.

Charitable nonprofits fill gaps and relieve local and state government by providing food, health care, job training and other critical services to close gaps in services in communities, said Donna Murray-Brown, president and CEO of the Michigan Nonprofit Association, which approached Brandenburg about the need for legislation after hearing an increasing number of charities across the state being assessed property taxes.

Most 501(c)3 charitable nonprofits operating in Michigan have annual operating budgets of less than $500,000, she said.

They "are a good investment," providing a three-to-one return for every dollar spent on them, Murray-Brown said Tuesday during testimony before the committee. The bill also stipulates that the state tax commission work with Michigan Nonprofit Association to educate municipal assessors so they can understand the changes to the act.

As written, the bill would grant property statewide tax exemption for all of the facilities owned by 501(c)(3) charities that meet two of the four criteria.

The Michigan Department of Treasury and others, including the Michigan Municipal League, Michigan Townships Association and Michigan Asociation of School Boards, opposed the bill.

Treasury supports the codification of the Wexford standards to provide clarity while ensuring only charities qualify for property tax exemption, said Gregory Gursky, deputy state treasurer for tax policy.

However, "the bill nonetheless provides a significant expansion of nonprofits that would qualify" for exemption, he said.

That could impact revenue by a median amount of about $50 million a year, posing a loss to the School Aid Fund and local entities, Gursky told the Senate finance committee.

"That will put pressure on property taxes paid by home owners and (businesses)," he said.

The current cost estimates from Treasury, however, include sportsman clubs, masons and other noncharitable nonprofits, said Joan Bowman, external affairs officer for the Michigan Nonprofit Association.

Dexter Mayor Shawn Keough was among others testifying in opposition to the bill.

"Nonprofit organizations have become increasingly sophisticated. This issue to me is an issue of fairness and integrity," he said. "Only properties where truly charitable activities take place should have the exemption."

Keough also raised objections to including health and wellness in charitable purposes, saying "any doctor, fitness studio or marijuana facility could claim that" and unfairly compete with for-profit companies.

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