States Seek Revenue from Not-for-Profit Hospitals
In April 2015, Governor Dannel Malloy, a Democrat from Connecticut, proposed state legislation to allow municipalities to levy property taxes on any off-campus property owned by a hospital. The reason for the proposed legislation, Governor Malloy stated, was due to the loss of local taxes previously paid by medical practices which were purchased by not-for-profit hospitals in recent years.
The Connecticut Hospital Association (“CHA”) stated that Connecticut hospitals invested $1.5 billion, or 15 percent of total revenue, in community benefit initiatives in 2013. “The proposed taxes will threaten hospitals’ ability to maintain community benefits at current levels and would affect access and services for all patients,” stated Jennifer Jackson, Chief Executive Officer of CHA. Local governments continue to face financial pressures and stresses over the loss of tax revenue due to not-for-profit hospitals purchasing local providers. By local governments limiting tax exemptions of not-for-profit hospitals may hinder hospitals’ ability to provide certain medical services for insured patients and the poor.
Other states are also attempting to enact similar tax initiatives. The North Carolina Hospital Association is in the process of opposing a bill that would reduce the amount of sales tax that not-for-profit organizations can recover from the state. The result would be a reduction in the $31.7million in annual sales tax refunds which may be sought by tax-exempt organizations, primarily impacting hospitals. The bill’s sponsor said the large sales tax refunds sometimes provide not-for-profit hospitals with a competitive advantage which puts them in a position of being able to purchase their for-profit competitors.
Oregon legislation, with the support of county tax assessors, would only provide tax exemptions to those not-for-profit hospitals which provide a minimum amount of charity care. Any clinics or medical practices purchased by not-for-profit hospitals would only be allowed a conditional exemption. In order to receive a tax-exemption, the clinic or physician office owned by a not-for-profit hospital would be required to dedicate at least fifteen percent of its gross annual patient revenue to charity care.
Through Senate Bill 346, introduced into legislature on February 24, 2015, the State of California is attempting to establish new standards for regulating how not-for-profit hospitals report community benefits. As noted in the bill, “This bill would declare the necessity of establishing uniform standards for reporting the amount of charity care and community benefits a facility provides to ensure that private not-for-profit hospitals and not-for-profit multispecialty clinics actually meet the social obligations for which they receive favorable tax treatment, among other findings and declarations.” The Bill would clearly define what constitutes charity care, including delineating that uncollected fees or accounts written off as bad debt do not constitute charity care. Additionally, the Bill seeks to ensure that community benefit spending meets the true community needs and denotes how these funds should be allocated in addressing these needs.
As previously noted in our Withum Weekly Pulse in December 2013, the State of New Hampshire is discussing the possible introduction of a bill which would apply the business enterprise tax to not-for-profit hospitals and private colleges and universities. Although to date this change has not been formally introduced, the New Hampshire legislature is continuing to pursue the bill’s introduction. Additionally, Governor Paul LePage is in the process of introducing a proposal which would enact legislation to allow localities to tax large not-for-profit hospitals.
With the financial pressures and stresses over the loss of tax revenue, local governments continue to look for ways to tax not-for-profit hospitals to fund state deficits. These possible tax assessments may be detrimental to a not-for-profit hospital’s ability to provide certain medical services in the communities they serve.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
