Legislature Cleans Up After Morristown Hospital
The legislative response to Morristown Hospital, Assembly Bill 1135, became law on February 22, 2021.
Morristown Hospital, a Tax Court case decided in 2015, stripped Morristown Hospital of its property tax exemption. The case dealt at length with the modern reality that many nonprofit hospitals include for-profit operations within their walls, including private practice groups and ancillary facilities like restaurants and shops. The Tax Court found that, among other reasons, the hospital’s for-profit operations vitiated its property tax exemption in its entirety. The case put in question the realty tax-exempt status of almost every nonprofit hospital in the state and, by extension, the tax exemption of many educational, religious, and charitable institutions which, similarly to hospitals, combine nonprofit and for-profit uses.
Morristown Hospital injected uncertainty regarding nonprofits’ property tax exemptions and spawned litigation. After much debate among competing factions, including municipalities on one side and nonprofits on the other, the legislature has finally acted to bring clarity to the landscape.
The new law provides for nonprofit hospitals to pay community service contributions based on the number of licensed beds in a given hospital, or a flat, per-day rate for satellite emergency care facilities. However, if the hospital or satellite emergency care facility has previously entered into a voluntary agreement with a municipality, the hospital or satellite care facility will pay the higher of the community service contribution or voluntary agreement payment for the duration of the voluntary agreement. Five percent of the payment will be remitted to the county.
A voluntary agreement is defined to include, without limitation, a PILOT agreement.
To address the mixed uses in many hospitals and emergency care facilities, a key issue in Morristown Hospital, the new law provides that if any portion of the property is leased to a profit-making organization or otherwise used by a profit-making medical provider for medical purposes related to the delivery of healthcare services directly to the hospital, that portion shall be exempt from property taxation, provided that the portion of the hospital or satellite emergency care facility is used exclusively for hospital purposes; otherwise, any portion of the property that is leased to a profit-making organization or otherwise used for purposes that are not themselves exempt from property taxation, shall be subject to property taxation. Accordingly, for-profit medical offices in a hospital or emergency care facility will be exempt from realty taxes if the for-profit offices are used for medical purposes related directly to the hospital, provided the balance of the hospital or emergency care facility is used exclusively for hospital purposes.
The new law has retroactive effect, barring omitted or regular assessment of properties that would have qualified under the new law, from 2014 forward; however, a municipality will not be required to refund any taxes paid on exempt property as a result of an omitted or regular assessment pursuant to a previous settlement of litigation or other agreement for those years.
Notably, the new law bars individual taxpayers from filing tax appeals with respect to the property of others. This prohibition isn’t limited to hospital property. The prohibition on private third party tax appeals is itself a significant change in the law. Municipalities continue to have the right to appeal the assessment or exemption status of any property in their counties.