Challenges in Retaining Property Tax Exemption for Charities

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Recently, many not-for-profits (NFP) across the nation faced various setbacks in obtaining and maintaining their property tax exemption. These setbacks have brought additional costs to exempt organizations and taken resources away from their exempt purpose. NFP groups, including churches, continue to raise concerns about the differences in legal authority and interpretations from state to state.

In 2015, the Commonwealth of Pennsylvania’s Senate Finance Committee held a public hearing to address NFP property tax exemptions at state and local levels. David Thompson, the vice president of public policy for the National Council of Nonprofits, addressed two main commonalities regarding property tax exemptions. Those commonalities are “almost every state exempts the property of exempt organizations from taxation,” and “almost every state limits the exemption to properties that are both owned by these organizations and used for the charitable purpose of the organization.” These commonalities are further interpreted and applied differently across the country. Eighteen states have a provision for property tax exemptions within their state constitution. There are 25 other states granting their legislature the authority to exempt NFPs from property taxes. The remaining states have no constitutional provision protecting their NFPs, implying each state can potentially have different rulings on identical cases, which Thompson suggested is why more standardized regulations would help.

In 1969, one case before the Supreme Court challenged the constitutionality of property tax exemptions to religious organizations. In Walz v. Tax Commission of the City of New York, real estate owner Frederick Walz argued the property tax exemption applied to religious bodies violated provisions within the First and Fourteenth amendments to the U.S. Constitution. The court ruled against Walz with four main justifications:

  1. The legislative purpose of tax exemptions isn’t aimed at establishing, sponsoring or supporting religion, and New York’s legislation simply spares the exercise of religion from the burden of property taxation levied on private, for-profit institutions.
  2. The First Amendment tolerates neither governmentally established religion nor governmental interference with religion.
  3. The tax exemption creates only minimal and remote involvement between church and state, far less than taxation of churches would entail. Tax exemption restricts the fiscal relationship between them; thus, tending to complement and reinforce the desired separation insulating each from the other.
  4. The freedom from taxation for two centuries hasn’t led to an established church or religion. On the contrary, it has helped guarantee the free exercise of all forms of religious beliefs.

Recently, St. Raphael Cathedral in Madison, Wisconsin, faced a property tax challenge. In 2007, the cathedral burned due to arson, and the city of Madison started imposing property tax in 2012. The cathedral claimed it shouldn’t have to pay property taxes, since the land was still being used as a religious devotion area and seasonal outdoor services were being provided on the land. The city argued that the unused land didn’t meet the state qualifications for an exempt organization. Within Wisconsin state law, the land had to be exclusively used for exempt purposes and necessary for the location and convenience of the buildings. The city won the case in Circuit Court with the ruling that “for the property to be exempt, there had to be a building” and, therefore, the cathedral didn’t meet the religious exemption qualifications. This potentially raises a new concern for churches that may not meet their state’s classification for a religious exemption.

One major victory for churches and other NFP organizations in 2016 was the Minnesota Supreme Court ruling in First Baptist Church of St. Paul v. City of St. Paul. The court ruled exempt organizations in Minnesota were no longer subject to property taxes disguised as right-of-way maintenance service fees. This decision has significant importance in the ongoing debate about property taxes since the precedent set by Minnesota could potentially trigger a more uniform set of authority. The question arises as to whether the other 17 states with similar property tax exemptions in their constitution will follow the Minnesota Supreme Court’s example.

Churches also need to consider other activities that occur on their property and how they may affect their property tax exemptions. One good example of this is Christ Church Pentecostal of Nashville v. Tennessee State Board of Equalization. In this case, a new church was built that included a bookstore/café and fitness center that offered memberships to the general public. Following a site visit by the State Board of Equalization, a determination was made that most of the new building was exempt, but the portion with the bookstore/café and fitness center was retail/commercial and not used for religious purposes. The church filed an appeal with the Tennessee State Board of Equalization, and an administrative judge heard the matter. The judge denied an exemption for the bookstore/café area but did grant a 50 percent exemption for the fitness center, based on the church’s youth using the area for recreational activities. The church appealed this ruling, which was later upheld by a trial court and the Court of Appeals.

As 2017 progresses, with inconsistent definitions of exempt organization by state, more churches and exempt organizations may face challenges to their property tax exemptions.

Contact your BKD advisor or local property tax assessor for further information on property tax exemption and how it can affect your organization.

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