The ruling in Rainbow Child Care Center, Inc. v. County of Goodhue (docket A07-468) on December 6, 2007 altered the Minnesota property tax criteria for nonprofits. And according to Revenue Notice # 07-12, the Minnesota Department of Revenue indicates revocation of sales tax exemptions in cases where organizations have been denied exemption for real estate taxes.

The result of this court case may notably reduce the amount of nonprofits that qualify for property tax exemption in Minnesota, and is representative of a trend that could negatively affect tax-exempt organizations nationwide.

A reversal of the Court’s decision will require legislative action. Many organizations and trade associations have already begun lobbying efforts.

Organizations impacted by this ruling
This ruling only impacts charities seeking exemption under the umbrella of “institutions of purely public charity.” Therefore, public burying grounds, public school houses, public hospitals, academies, colleges, universities, all seminaries of learning, all churches, church property, houses of worship, and public property are not affected. The exemption determination is made at the county level. Individual counties have latitude in interpreting whether or not an organization meets the definition established by the Court. Nevertheless, this recent ruling certainly provides the counties with more leverage to deny or revoke property tax exemptions.

Case background
Based on a 1975 decision, the Court provided six criteria to consider when determining if an organization qualifies for property tax exemption:

1. Whether the stated purpose of the undertaking is to be helpful to others without immediate expectation of material reward.
2. Whether the entity involved is supported by donations and gifts in whole or in part.
3. Whether the recipients of the “charity” are required to pay for the assistance received in whole or in part.
4. Whether the income received from gifts and donations and charges to users produces a profit to the charitable institution.
5. Whether the beneficiaries of the “charity” are restricted or unrestricted and, if restricted, whether the class of persons to whom the “charity” is made available is one having a reasonable relationship to the charitable objectives.
6. Whether the dividends, in form or in substance, or assets upon dissolution are available to private interests.

In a case held during the same time period, the Court indicated that it is not essential that every factor mentioned be present before an institution qualifies for exemption.

However, the Court has now altered their position, ruling that “the third factor must be satisfied if an organization is to be deemed an institution of purely public charity.” The Court specifically stated, “An organization that does not provide goods and services free or at considerably reduced rates as a substantial, not just an incidental, part of its operations is not exempt from payment of real property taxes as an institution of purely public charity.”

The Court also clarified its interpretation of “free or at considerably reduced rates” to mean “considerably less than market value or cost.” They further indicated that merely operating at a loss is not sufficient. Finally, the Court declared that receiving payments from the government, in lieu of the public, is not sufficient because the organization is still receiving full compensation for its services.

Contact us
For more information, contact Terry O’Reilly, tax principal, at 1-888-529-2648.