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Sunday, 03 September 2017 16:53

State court could clarify which nonprofits can claim tax-exempt status

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A Michigan Supreme Court decision could add clarity to questions over which nonprofits can claim property tax exemptions. A Michigan Supreme Court decision could add clarity to questions over which nonprofits can claim property tax exemptions. Courtesy Photo

GRAND RAPIDS — Adding clarity to the definition of the word “charitable” as it applies to Michigan nonprofits could enable more organizations to claim tax-exempt status.

Earlier this year, the Michigan Supreme Court heard arguments in a case involving Grand Rapids-based Baruch SLS Inc., a faith-based nonprofit that operates 24 assisted-living facilities throughout Michigan. The organization filed a lawsuit against Tittabawassee Township after that municipality denied Baruch’s request for property tax exemptions because it didn’t meet its burden of proof to demonstrate that it was a charitable institution.

In a June 28 opinion, Supreme Court justices said tax assessors, the Michigan Tax Tribunal, and Michigan Court of Appeals misinterpreted the factor that prevents charitable organizations from discriminating when determining who is eligible to receive their services. This is one of six criteria the court established to assess a nonprofit as “charitable.” The court is expected to issue a decision by Sept. 19.

Rob Collier, president and CEO of the Grand Haven-based Michigan Council of Foundations, said the opinion is favorable to Michigan’s nonprofit community because it provides clarity to the question that has been asked by assessors and others about what “non-discrimination” means.

“It will be utilized when the Michigan Nonprofit Association goes forward with efforts to enact legislation to provide clarity on nonprofit property tax exemptions,” Collier said. “The goal is to reduce the number of cases where folks are having to go to the Tax Tribunal, which can take a lot of money, effort and work.”

Joan Bowman, a spokesperson for the MNA, said her organization is pleased with the court’s June opinion and is looking forward to hearing specifics in the September decision.

Officials in Kent County also are anticipating the outcome, but for very different reasons.

Matt Woolford, the equalization director for Kent County, said the concern he has is that it’s being portrayed as a clarification when it may in fact not clarify the statute. Instead, it may simply expand the number of previously taxable properties that could now be eligible for exemptions.

“The more properties that are exempted, the more everybody else has to absorb the shift in the tax burden. It’s something we are going to monitor closely,” Woolford said. “We are going to be closely examining the mix of properties subject to this to make sure it’s limited in scope.”

Interim Kent County Administrator Wayman Britt said he thinks the Michigan Supreme Court decision has the potential to affect the county, but he doesn’t know to what extent.

“We’re always concerned about the loss of property tax revenue,” Britt said.

CITIES FEEL PINCHED

If the court’s decision broadens the definition of “charitable” as it applies to 501(c)(3) organizations, more nonprofits likely will attempt to secure tax-exempt status, said Thomas King, an attorney with Kreis Enderle Hudgins & Borsos PC.

King, whose practice areas include governmental law, said the broadening of the definition will enable more nonprofits to qualify as charitable.

“It will affect municipalities that are more urbanized than non-urbanized,” King said.

As an example, he cited the city of Kalamazoo, which has a higher concentration of nonprofits in its urban core as opposed to other municipalities. He said municipalities in this situation end up with a greater percentage of exempted real and personal property.

Western Michigan University, which has a growing number of properties in downtown Kalamazoo, pays fees to the city for fire services, among others, King said. But he added that those fees aren’t equivalent to what the institution would pay if it were taxed on each of its downtown facilities — which are used by people living outside of the city.

“This makes Kalamazoo’s tax base a little more difficult to negotiate and to come up with budgets,” King said. “If these exempt properties were equally concentrated throughout the area, it would not be as much of a problem.”

However, the city of Kalamazoo is also the county seat and like many jurisdictions with that designation, it hosts many exempt entities such as religious institutions, colleges and state-owned property, said Kalamazoo City Assessor Aaron Powers. He said more than 50 percent of the city’s land mass is exempt.

Some of these properties have been exempt for more than 100 years, Powers added.

“Significant confusion exists that if a 501(c)(3) makes income tax payments, this does not mean it’s exempt from paying property taxes,” he said. “This specific statute is relative to charitable organizations such as hospitals and colleges that are exempt under other statutes.”

He said he doesn’t know if the Michigan Supreme Court’s decision will create an influx of nonprofits seeking exemptions in Kalamazoo.

Kent County’s Woolford thinks Kalamazoo is more susceptible than the city of Grand Rapids to any changes handed down by the Supreme Court because of the large university presence in the Southwest Michigan city.

A similar situation is present in East Lansing, where a battle is brewing between the city and its largest employer, Michigan State University.

In June, East Lansing City Council approved a November ballot proposal that, if passed by voters, would tax residents 1 percent of their income. Nonresidents who work in the city would be taxed at 0.5 percent of their income. The proposal also would lower property taxes from roughly 17 mills to a maximum of 13 mills.

The income tax was one of several recommendations following months of research by the East Lansing Financial Health Review Team, which was established to address the city’s nearly $200 million debt.

Besides the income tax recommendation, the team also commissioned a report that concluded MSU cost the city about $3.75 million in uncompensated public works, law enforcement and fire services in 2015. MSU currently pays about $326,000 a year for fire protection from East Lansing Fire Department.

NO ‘MASSIVE EXPANSION’ EXPECTED

Kent County’s Woolford said it’s important to keep in mind that this definition is applied to nonprofits that own property and have a charitable purpose, which is a comparably small number when viewed through the lens of all taxed institutions.

“There’s not going to be a massive expansion under this property tax law,” Woolford said.

Woolford has identified 3,465 nonprofits currently operating in Kent County, but he doesn’t know how many of them actually own property.

“I don’t know the extent to which nonprofits in Kent County are actually property owners,” Woolford said. “I don’t know the extent of how applications for expansion of the definition will be rolled out. Many of the nonprofits are renting and they might be renting out a portion of the larger structure. There are certainly larger institutions where this could have an impact.”

Kreis Enderle’s King said many larger municipalities are struggling with the implications of this trend.

“All municipalities are required to have a balanced budget,” he said. “They have a certain amount of the budget that’s fixed, which means the tax rate goes up and fewer properties pay. If it’s ultimately determined by municipalities and legislatures that the definition is unfair, the legislature could certainly change that exemption.”

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Jane C. Simons

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jsimons@mibiz.com

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