New Jersey Nonprofit Hospitals' Property Tax Exemptions Questioned

Nonprofit hospitals in New Jersey may be liable for millions of dollars in annual property taxes under a court ruling involving the town of Morristown and Morristown Medical Center, NJ Advance Media and NJ Spotlight report.

In his ruling (88 pages, PDF) last week, tax court judge Vito Bianco found that the hospital had so intermingled its nonprofit and for-profit services and finances that it no longer qualified for a property tax exemption under state law. Indeed, the only units of the hospital that do qualify for tax-exempt status, Bianco ruled, are the hospital auditorium, its fitness center, and the visitors' parking garage. The case was prompted by the town's attempt to eliminate the hospital's property tax exemption in 2006. Hospital officials argued that the hospital followed long-established "community benefit" practices such as providing charity care, Medicare services, and training for future physicians. However, Bianco ruled that the nonprofit hospital appears to be functionally similar to a for-profit hospital in the way it operates. He also questioned the validity of the property tax exemption for other nonprofit hospitals in the state, writing that they had strayed from the strictly charitable function they served when they were granted those exemptions.

"[I]f the property-tax exemption for modern nonprofit hospitals is to exist at all in New Jersey going forward," Bianco wrote, "then it is a function of the legislature and not the courts to promulgate what the terms and conditions will be. Clearly, the operation and function of modern nonprofit hospitals do not meet the current criteria."

Other nonprofits in the state, especially hospitals and universities, have long been concerned about the case, fearing that a ruling for the town could encourage other municipalities to challenge their property tax exemptions. David B. Wolfe, a property-tax attorney who has been closely tracking the case, told NJ Spotlight that Bianco's ruling was as "broad and sweeping a decision" as he could have written and puts all nonprofit hospitals in the state at risk of losing their property-tax exemption.

While the amount MMC will have to pay the town has yet to be determined, attorneys for the hospital put the annual figure at between $2.5 million and $3 million. It's likely, however, the ruling will be subject to appeal before the case is resolved or any other nonprofit hospital in the state is required to pay property tax. A state lawmaker also has raised the possibility of the state legislature acting to make nonprofit hospitals permanently exempt from property taxes, as happened in Illinois when that state's supreme court upheld a ruling that an Urbana hospital no longer qualified for such an exemption.

"[The New Jersey Hospital Association] and its seventy-two member hospitals are most concerned with anything that creates additional obstacles to our mission of providing high-quality medical care to our communities in a cost-effective manner," said NJHA president and CEO Betsy Ryan in a statement. "The tax court decision that denied Morristown Medical Center's property tax exemption will have repercussions beyond one hospital. The implications of this decision will be the topic of much further discussion and perhaps will need a legislative solution."