Healthcare News & Insights

Will ruling force NJ hospital to pay millions in property taxes?

ThinkstockPhotos-473009874A recent ruling by the Tax Court of New Jersey, has hospital executives a little on edge wondering if this could set a precedent beyond the state. 

On June 25, the court ruled Morristown Medical Center is not entitled to tax exemption on almost all of its property in Morristown. This decision, according to the hospital’s attorneys, could cost between $2.5 million and $3 million a year.

For hospitals struggling to stay afloat in New Jersey, this comes as a crashing blow, as many fear other municipalities will follow Morristown’s example.

The ruling, issued by Judge Vito Bianco, applies only to the medical center’s property taxes, not its federal tax status as a nonprofit. But it still has huge ramifications, considering there are 50 nonprofit hospitals in New Jersey.

Significant changes

In the past, hospitals have been exempt from property taxes (and other taxes) based upon their origins founded in religious and charitable traditions.

But just like the Bob Dylan song says, “the times they are a changin’.”

Nowadays, hospitals are sophisticated centers of medical care, as well as education, providing a variety of medical services regardless of whether a patient can pay. They’re also intertwined with nonprofit and for-profit subsidiaries and unaffiliated corporate entities.

The court decision even mentioned the Supreme Court has observed that “a hospital is a complex business vitally affected with public interest.” And today’s facilities generate significant revenue and pay their professionals competitive salaries.

What went wrong?

According to the Center for Nonprofits, in New Jersey, to be entitled to property tax exemption, an organization has to show it’s:

  • organized for a charitable purpose only,
  • property is only used for such a charitable purpose, and
  • use and operation of the property is not for profit.

After examining the history of hospitals, Judge Bianco found the medical center had strayed too far from its strictly charitable function for which it was granted exemptions. So much so, it was impossible to untangle the center’s nonprofit and for-profit services and finances.

Other noteworthy elements of the decision:

  • Only the auditorium, fitness center and the visitors’ garage weren’t included in the hospital’s property that was deemed to be taxable for failing the “profit” test
  • Compensation played a significant role in the decision. According to the official court document, “the hospital failed to meet it’s burden to establish the reasonableness of the compensation paid to its executives. Furthermore, the hospital failed to convince the court that the standard applicable to the IRS should be adopted in New Jersey.”
  • If other hospitals in New Jersey are structured like Morristown, they aren’t justified in receiving property tax exemption either.

Now what?

Hospital officials haven’t said whether or not they would appeal. However, since the decision, Atlantic Health System, the Morristown Hospital parent company, has made some adjustments to its legal team. While this is normal after a big court case, it indicates there could be extensive appeals before the matter’s resolved.

According to NorthJersey.com, Atlantic Health spokesman Rob Seman said that while they were disappointed with Bianco’s decision, it “does not call into question the charitable status of the hospital. We remain a not-for-profit organization.”

Betsy Ryan, New Jersey Hospital Association President and CEO, believes the ruling will have repercussions beyond one hospital. She also said the association is concerned with the obstacles it might create when it comes to fulling its mission of providing quality care to its surrounding communities.

In a article on NJSpotlight, Morristown Mayor Timothy Daugherty said that while Bianco’s opinion was “well-reasoned and thorough,” they still plan to support Morristown Medical Center in any way they can so the facility continues to service its patients by continuing to offer a wide array of quality medical services.

One aspect to keep in mind about the ruling is that having to pay property taxes will likely force the hospital to reduce the amount of free and discounted services it offers.

 

 

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