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Property tax debate: What is a charity?

October 25, 2016

By Sherri Welch, Crain's Detroit Business, 10/23/16

Communities question status of some, send property tax bills

A battle is brewing in Lansing on several fronts over how to define a charitable nonprofit that should be exempt from property taxes.

A growing number of nonprofits around the state are getting unexpected property tax bills, including local nonprofits like Cass Community Social Services, Downtown Boxing Gym Youth Program, Oakland Community College, Southwest Housing Solutions Corp. and Spectrum Health in Grand Rapids Township.

Cities and townships are scrutinizing property exemptions more closely than ever as they continue to face pressure on municipal revenue.

While charitable nonprofits have long been exempt from property taxes, communities taxing them argue those taxed are either not charitable or affiliated with for-profit operations that are only marginally tied, if at all, to their charitable mission.

Nonprofits are appealing assessments before the Michigan Tax Tribunal and taking denials there to the Michigan Court of Appeals and even the Michigan Supreme Court.

At the same time, three bills introduced on the issue have moved recently in the Senate.

While one would codify the criteria for any nonprofit to be considered charitable and exempt from property taxes, others would carve out singular exemptions for Masonic lodges and sportsmen clubs.

At the core of the issue is what criteria should constitute a charitable nonprofit and whether all of the properties they own and operate should be exempt. A 2006 Michigan Supreme Court case, Wexford Medical Group vs. the city of Cadillac, laid out six criteria for assessing a charitable nonprofit. But the Michigan Nonprofit Association and Council of Michigan Foundations and others disagree with groups including the Michigan Department of Treasury and Michigan Municipal League on whether some or all of the factors must be met.

Over the past two years, the Michigan Nonprofit Association has heard from many of its members that their tax-exempt status has been challenged, said President and CEO Donna Murray-Brown.

As municipalities face increasing need to identify new sources of revenue, "it's calling into question the value nonprofits bring," she said.

Nonprofits granted 501(c)(3) status under the Internal Revenue code are considered charitable because they are providing broad community benefit. They receive a tax benefit, but they give up profit, privacy and any involvement in partisan politics in exchange. They include homeless shelters, child development centers and assisted living facilities, Murray-Brown said.

"They are doing charitable work that decreases the burden on government and deserve to be exempt from property taxes."

The Michigan Municipal League and its members appreciate and support charitable organizations in their communities, said Chris Hackbarth, director of state and federal affairs.

"We think there are absolutely important charitable institutions that deserve to be treated with tax-exempt status."

But there are others who take advantage of the exemption, and the loss of that revenue equates to losses in local services such as those for public safety, he said.

Other communities checking

Michigan's townships and cities aren't unique in looking to nonprofits to pay up, according to the Washington, D.C.-based National Council of Nonprofits.

Local communities, especially in the northeastern U.S. in states including Pennsylvania, Rhode Island and Massachusetts, are bullying nonprofits into being "good corporate citizens" by demanding "voluntary"payments in lieu of taxes, called PILOTs, said David Thompson, vice president of public policy.

Or, municipalities in states such as Minnesota are getting around the tax-exempt issue by charging or attempting to charge fees for things like public street lighting in front of their property.

Cities in Michigan or any other state do not have the power to tax the property of charitable nonprofits used for their charitable purpose, Thompson said.

"The assessors are saying the property is not being used by charities for its charitable purpose. They're not repealing the state law; they're getting around it.

"Assessors are applying their own interpretation of the law ... inconsistently (and) creatively," he said. "They're saying certain activities are not tied to the charitable purpose."

Most of the charitable nonprofits in Michigan have annual operating budgets of less than $500,000 and are "a good investment," providing a three-to-one return for every dollar spent on them, according to a study by the Washington, D.C.-based Urban Institute, Murray-Brown said.

But there's been an increasing lack of consistency in how the state's roughly 2,000 tax assessors are interpreting the Wexford case, she said.

"The result is charities are being dragged into lengthy and expensive court cases" or paying taxes they shouldn't have to pay.

Charities fight assessments

By MNA's July count, more than 70 charities from around the state are appealing local property tax assessments before the Michigan Tax Tribunal, up from 42 last year.

In hearing nonprofit property tax appeals, the tribunal's judges generally rely on Wexford and the 2008 Michigan Supreme Court case Liberty Hill Housing Corp v City of Livonia, which further clarified Wexford, said Michael Loepp, communications representative for the Michigan Department of Licensing and Regulatory Affairs.

While some have prevailed before the tribunal, others have not. Some have taken their cases to the Michigan Court of Appeals. And failing again there, at least one has taken its case to the Michigan Supreme Court.

Baruch Senior Ministries, a faith-based nonprofit that operates 23 assisted living, independent living and memory care facilities for seniors across the state, is fighting property tax assessments from 15 of those communities. After losing its appeal of a property tax assessed by the Township of Tittabawassee near Saginaw before the Michigan Tax Tribunal and the Michigan Court of Appeals, Baruch has taken the case to the Michigan Supreme Court.

"Ninety-eight percent of the people who come into our homes spend the rest of their lives with us, even if they run out of funds," founder and President Thomas Noble said last week during testimony before the Senate Finance Committee.

Those people would have to move to state-funded Medicaid facilities if they couldn't stay in Baruch's residences, he said, costing the state an estimated $7 million to $9 million a year, Noble said.

About half of the communities Baruch operates in "say thank you for what you're doing for our community," he said.

"However, we have ... a growing number that are challenging our exemption."

Baruch gets assessed the tax with no rationale from some communities, he said. And it testifies before boards of review in other communities and doesn't get any questions. But it is assessed property taxes in those communities, too. "We've spent a lot of money on appeals; we have decided to appeal everything not approved," he said.

"We're very fortunate we have had the resources to do that. I feel sorry for smaller organizations that don't have the money to do that."

Legislative battle

While the litigation continues, the battle has expanded to the legislative front.

Two special interest bills would carve out property tax exemptions for masonic groups and sportsmen clubs.

Senate Bill 570, introduced in October 2015 by Sen. Peter MacGregor, R-Rockford, would exempt 501(c)(3) nonprofit sportsmen clubs established for the primary purpose of educating the public in conservation, hunting, fishing, archery or hooting sports and firearms safety, passed the Senate in September and is before the House Committee on Tax Policy.

And Senate Bill 732, introduced in February by Sen. Rick Jones, R-Grand Ledge, to exempt the state's 275 Masonic lodges, which are organized as nonprofit fraternal groups, from property taxes, passed the Senate last week and is now before the House Committee on Tax Policy.

Companion House Bill 5325, introduced by Rep. Ken Goike, R-Ray Township, the same month, has not moved since it was referred to committee in February.

The Michigan Municipal League is opposed to the sportsmens club and Masonic lodge bills.

"Masonic lodges are fraternal organizations ... they may do some charitable work, but that's not their primary or chief or sole purpose," Hackbarth said.

"From our understanding, (a sportsmens club) is a completely commercial operation where people are members and pay a subscription or membership fee to belong to this club ... our understanding of 570 was that it was targeted at specific situations in the sponsor's district."

At the behest of the Michigan Nonprofit Association, with support from groups including the Council of Michigan Foundations, Sen. Jack Brandenburg, R-Harrison Township, introduced a bill in May to address the issue more broadly. Senate Bill 960 would codify the requirements to be considered a charitable nonprofit for purposes of property tax exemption.

The criteria for charitable nonprofit exemption has been inconsistently applied from municipality to municipality, Brandenburg said last week during a Senate finance committee hearing on the bill.

In the works for about two years, according to Brandenburg, SB 960 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. The bill passed the Senate finance committee last week and is headed to the full Senate, despite strong opposition from groups including the Michigan Department of Treasury, the Michigan Municipal League, the Michigan Townships Association and Michigan Association of School Boards, who argue that the bill expands the number of nonprofits that could qualify for the exemption by broadening the standards set out in the Wexford case.

Murray-Brown contends the language in the version of the bill passed tightens the Wexford qualifications for exemption by requiring an organization to not only be a 501(c)(3), which is organized as charitable under the IRS code since it provides a community benefit, while also meeting additional criteria outlined in the bill.

"The intent is to make this easier for nonprofits to have a road map to follow to claim the exemption and to give assessors the same certainty," she said.

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

Unlike other classes of nonprofits such as membership groups, charitable nonprofits provide a community benefit, serving a greater good as opposed to benefiting a single entity.

Beyond that, the bill would require nonprofits deemed charitable and exempt from all property taxes to meet two of four criteria based on standards laid out in the Wexford case. Those criteria 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.

It has an overall nature that promotes charity, regardless of the amount it devotes to charitable activities on an annual basis.

Opponents of the bill, including the Michigan Municipal League, Michigan Townships Association and the Michigan Department of Treasury, believe the language in the bill is too broad and would allow more nonprofits to qualify for exemptions from property taxes.

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

"But the tests in the bill are not as complete ... as they are in Wexford."

There's no requirement in 960 that a charitable institution is one organized chiefly or solely for charity or that it lessens the burdens of government, although those are criteria that could be met to be qualified as charitable, he said. "That's why the current version of 960 broadens the number of groups that would be able to claim exemption."

"You can have a lot of nonprofit purposes other than being charitable and be qualified to be a 501(c)(3)," Gursky said. "Because you're organized for the purposes of something scientific, educational or literary, it doesn't mean you're charitable."

Treasury estimates SB 960 could impact revenue by a median amount of about $50 million a year — a figure that includes sportsman clubs, Masonic groups and other non-charitable organizations posing a loss to the State School Aid Fund and local entities. About half of the taxes collected move into the State School Aid Fund and the rest support schools, libraries and other local services funded by millages, including those supporting the Detroit Zoo and the Detroit Institute of Arts.

Dexter Mayor Shawn Keough was among others testifying against 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."

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