In the wake of the June 25, 2015 decision of the New Jersey Tax Court in AHS Hospital Corp., d/b/a Morristown Memorial Hospital v. Town of Morristown, and the hospital's subsequent $15.5 million settlement with the town, over a dozen municipalities are pursuing tax appeals that challenge the non-profit status of hospitals throughout the State of New Jersey. With an April 1 deadline for filing tax appeals approaching, additional cases may soon be filed against New Jersey's 62 non-profit hospitals.
This flurry of tax appeals comes in response to the Morristown Memorial Hospital case, in which the New Jersey Tax Court found that the Morristown Memorial Hospital ("MMH") failed to satisfy its burden of proof to establish that it qualified for property tax exemption under N.J.S.A. 54:4-3.6 for the tax years 2006, 2007 and 2008. The Court found that the MMH's property, a 1.1 million square foot campus housing 700 beds and providing a comprehensive range of hospital services, failed to satisfy the third prong of the test for non-profit status set forth in Paper Mill Playhouse v. Millburn Twp.: whether the activities on the property are conducted for profit. The Court found that MMH used its property for a profit-making purpose based upon the entanglement and comingling of efforts and activities with various for-profit entities such as captive physician practices and affiliated for-profit entities.
The Morristown Memorial Hospital court's analysis reflects a focus upon the unfairness of allowing a property tax exemption for non-profit hospitals that operate with arrangements similar to for-profit hospitals that are required to pay property tax, concluding with a call for legislative action: "If the property tax exemption for modern non-profit hospitals is to exist through all of New Jersey going forward, then it is a function of the Legislature and not the courts to promulgate what the terms and conditions will be."
Following Morristown Memorial Hospital, the New Jersey Legislature passed a bill in January 2016 that would have preserved the property tax exemption and required all non-profit hospitals in New Jersey to pay certain fees in lieu of property taxes. However, Governor Chris Christie failed to sign the bill into law before the conclusion of the legislative term in January and the bill expired.
Last Friday, Governor Christie proposed a two-year moratorium on property tax litigation against non-profit hospitals, and the establishment of a Property Tax Exemption Study Commission to undertake a comprehensive review of New Jersey's property tax exemption law, and develop proposals for consideration by the executive branch and the Legislature. The commission would include as its chair the State Treasurer, as well as the Commissioners of Health and Community Affairs, the Secretary of Higher Education, the Executive Director of the New Jersey Health Care Facilities Financing Authority, along with four members with expertise in property taxes appointed by the Governor with input from the Legislature.
Given the evolution of small community non-profit hospitals to modern-day regional or inter-state non-profit health systems, a careful examination of the issues associated with the historical property tax exemption afforded to non-profit hospitals is warranted. Irrespective of this evolution, modern day non-profit hospital systems still provide a valuable and legitimate public or charitable purpose – the provision of necessary health care services that might otherwise not be available to the public at large. This purpose could be detrimentally impacted by imposing an undue property tax burden. These issues call for a resolution by the executive and legislative branches of government rather than an ad hoc determination by a court in the context of litigation.
Governor Christie's plan will require legislation to implement the proposed moratorium on property tax litigation involving non-profit hospitals. However, legislation that curtails the jurisdiction of the court to address property tax issues may be subject to court challenge on a number of state constitutional grounds, including violation of separation of powers, or unconstitutional special legislation that arbitrarily affords privileges to one class of non-profits but not others. Further, it is not clear that a moratorium that impacts pending cases could withstand court scrutiny. Whether and how these issues will be addressed will depend in large part upon the final form of any statute that may be signed into law, and the context in which its interpretation is presented.
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