NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
REFORM TAX STATUS FOR NONPROFIT ORGANIZATIONS.
BACKGROUND. Nonprofit organizations constitute one of the fastest-growing sectors of our economy, expanding even during recessions. Some are small operations, but others enjoy huge endowments, prime real estate, luxurious facilities, and lobbyists who pack public hearings to pressure local politicians. Nonprofits add many benefits to our NE communities and the people they serve, helping by offering services that complement government services, many times more cheaply, efficiently, and compassionately. These organizations are tax exempt under federal and state laws. Tax-exempt property comprises a broad category, including office equipment and vehicles. Besides private entities, federal, state, and local governments do not pay property taxes on their buildings and facilities. In 2009, researchers estimated that property tax revenue uncollected because of charitable tax exemptions totaled between $17-$32 billion in the U.S.
THE PROBLEM. Because local governments like counties rely so heavily on property tax revenue, exemptions have a big impact. As more taxable property disappears from the local tax rolls, property taxpayers bear more of the property tax burden. Abuse of the rules occurs. Upon inspection, a number of properties found not used as stated in exemption applications. Hospitals and colleges purchase and use increasing acres of property as investments as they add to and expand their campuses. NE state law exempts those purchases from taxation. These enormous facilities are almost indistinguishable from private businesses, and they use taxpayer services like police, fire, and emergency, and public works services like sewers, water, snowplowing, and garbage removal. Tax-exempt nonprofit hospitals, medical clinics, and social service groups compete with private ones for clientele. Nonprofit fitness centers compete alongside private, taxed ones, and charity gift shops compete with private 2nd-hand shops that pay property taxes. To aggravate the situation, the trend in urban areas across the country sees an increase in tax-exempt properties, thereby shrinking the tax base. Non-profits can lease property or buy it as an investment, property tax-free. When nonprofits buy and use properties that do not promote their public service missions, they do not pay taxes on them.
ALTERNATIVES. Local taxing authorities could request nonprofit organizations to contribute a percentage of what such entities would pay in taxes if their properties were taxable or if their real estate held assessed value of over $500,000. Governments could offer nonprofits a degree of discount or pro-rated discount from a normal tax bill. Nonprofits could pay property taxes at a lower percentage or on a sliding scale, decreasing annually. These groups could make annual tax payments under a formula that considers their revenues and expenses. Legislation could require them to pay property taxes on land, buildings, and equipment separate from their main operations. Local governments increasingly are requesting voluntary PILOTS (payments in lieu of taxes) from nonprofits. These requests can become negotiated, especially with large institutions that understand that they and their employees and clients/patients benefit from municipal services. Some nonprofits already give substantial voluntary payments to local governments. Cities and counties could collect fees for services. Require nonprofits to prove that the land and facilities they own actually are eligible for an exemption and require them to reapply for tax exemption annually.
CRITERIA. Local governments must use as criteria whether most recipients of a charity receive benefits or services at reduced or no cost and whether an organization provides services to the public that alleviate burdens or responsibilities otherwise handled by government. Nonprofits that correlate with government services, like profitless aiding the homeless, elderly, and mentally-impaired, would continue exempt. A renewal process or periodic checks by officials must ascertain that the nonprofit property has not become ineligible. Charities currently are subject to income tax on unrelated business income, profits from businesses they operate not directly related to their charitable operations. Such criteria should apply also to property taxes. Exempt entities must donate a great part of their services, benefit a substantial class of persons who legitimately require charity, and operate free from private profit motive. Unless a nonprofit receives at least 90% of its funding from contributions, it should pay property tax. Exemption should apply only to property regularly used for charitable purposes. Base an exemption on the use of a property, not on ownership. If part of a nonprofit property used for profit, pro-rate the exemption. Ones that offer private memberships and exist mainly to benefit these members should not qualify. Prohibit offering one specific group an exemption, because it apparently falls outside of general exempt categories.
RELIGIOUS EXEMPTIONS. Religious institution exemptions should continue because of danger that government could use its taxing power against a religion or church that has criticized that government. Churches still could make voluntary payments in lieu of property taxes.
CHANGE STATE LAW. Lobby state senators to limit the types of organizations that can apply for tax-exempt status to ones exclusively engaged in religious and charitable work. Only a change in state law (see revisions below) can allow Nebraska counties to strictly grant nonprofits property tax relief and thus relief to NE property taxpayers. Email firstname.lastname@example.org for state senator contact information.
REG-40-002 GENERAL RULES APPLICABLE TO PROPERTY TAX EXEMPTIONS
002.03C Property owned by educational, religious, charitable, or cemetery organizations or any organization created for the exclusive benefit of any qualified organization, and used exclusively for educational, religious, charitable, or cemetery purposes. The property cannot be (1) owned or used for financial gain or profit to either the owner or user, (2) used for the sale of alcoholic liquors for more than 20 hours per week, or (3) owned or used by an organization which discriminates in membership or employment based on race, color, or national origin.
REG-40-005 EDUCATIONAL, RELIGIOUS, CHARITABLE AND CEMETERY PROPERTY TAX EXEMPTIONS
005.01 A five part statutory test is used to determine eligibility for educational, religious, charitable, and cemetery property tax exemptions. The five mandated criteria are ownership, exclusive use, no financial gain or profit, restricted alcoholic liquor sales, and prohibited discrimination. The property must meet all five criteria for the exemption to be allowed.
An organization need not be established solely for educational, religious, charitable, or cemetery purposes; it may be established for a combination of two or more of the exempt uses. For example, a religious organization may own a cemetery or an educational organization which also provides religious activities.
005.01A Educational organization means an institution operated exclusively for the purpose of offering regular courses with systematic instruction in academic, vocational, or technical subjects, or an organization that assists students relating to the origination, processing, or guaranteeing of federally-insured student loans for higher education.
005.01A(1) Educational organization also means a museum or historical society operated exclusively for the benefit and education of the public.
005.01B Religious organization means an organization whose purpose is the dedication to, or profession of, a sectarian creed and belief in a divine or superhuman power, or powers, to be obeyed or worshipped, or the furtherance and enrichment of spiritual faith involving a code of ethics and a spiritual philosophy.
005.01C Charitable organization means an organization operated exclusively for the purpose of the mental, social, or physical benefit of the public or an indefinite number of persons.
005.01D Cemetery organization means an organization whose purpose is to maintain areas formally set apart for the interment of human dead.
005.02 Ownership, except for motor vehicles, means the property must be owned by an educational, religious, charitable, cemetery organization, or any organization for the exclusive benefit of the educational, religious, charitable, or cemetery organization. Ownership also means the right to sell, lease, use, give away, or enter the property and the right to refuse to do any of these. All rights may or may not be vested in one owner or interest holder.
005.03 Exclusive use means the property must be used exclusively for religious, educational, charitable, or cemetery purposes. The property need not be used solely for one of the four categories of exempt use, but may be used for a combination of exempt uses. For purposes of this regulation, the term exclusive use means the predominant or primary use of the property as opposed to incidental use. The exemption will not be lost if the property is used in an incidental manner as long as the predominant or primary use of the property is for one or more of the exempt uses.
005.03A If the property, when considered as a whole, is not used exclusively for exempt purposes, but the property has a separate and distinct exempt use portion, an exemption for the value of the portion used for exempt purposes will be allowed. No exemption for a portion of the property is allowed where the exempt and nonexempt uses are commingled and the property, when considered as a whole, is not used exclusively for exempt purposes. Property which is vacant and unused for any purpose is not entitled to an exemption.
005.03B An organization claiming a property tax exemption has the burden of establishing that the property is used exclusively for exempt purposes. The following is a list of factors to be considered in determining if the organization is allowed the tax exemption in whole or in part.
005.03B(1) In the case of a private residence, an officer or employee of the organization is required to reside in the residence as part of his or her employment and for the convenience of the organization. The property must be used for the convenience of the organization and its members to such a degree that the property is an integral part of the organization. The use of the property as a residence must be incidental to the use of the property as a part of the organization’s mission.
005.03B(2) If property is separate from the organization’s main building, exclusive exempt use of the property must still be proved. The relative proximity of the property to the main building is one factor that may be considered in making this determination.
005.03B(3) Using income from the property for exempt purposes under federal and state income tax laws does not qualify the property for a property tax exemption. It is the use of the property that establishes whether the property is exempt. If an organization is organized under section 501(c)(3) of the Internal Revenue Code, it will not necessarily be exempt from Nebraska property taxes.
005.03B(4) Exclusive use of the property includes ongoing construction of a building or improvement that, when complete, will be used exclusively for exempt purposes. The future use of the completed building or improvement may be ascertained by the actions of the organization owning the property, including, but not limited to, resolutions of an organization’s board of directors, or the amendment of the organization’s articles of incorporation or bylaws, that indicate a clear intent to use the property for an exempt purpose. During construction, other nonexempt uses must be prohibited to render the property exempt from tax. Demolition of existing structures to prepare the property for its exempt use may be considered an exempt use of the property.
005.04E Exclusive Use. A qualifying organization owns a building, which is used for its office space, and leases a portion of the building to a private law firm. The portion leased to the private law firm is not used exclusively for exempt purposes and is not eligible for an exemption.
005.05 No Financial Gain or Profit. The property must not be used for financial gain or profit to either the owner or user. There is no financial gain or profit if no part of the income from the property is distributed to the owners, users, members, directors, officers, or private individuals. Reasonable salaries paid to employees do not constitute a distribution of financial gain or profit.
REG-40-006 APPLICATION, COUNTY REVIEW, AND APPEAL PROCEDURES FOR PROPERTY TAX EXEMPTIONS
006.01 Any organization or society seeking a property tax exemption for real or personal property, other than motor vehicles, must file an Exemption Application for Tax Exemption on Real and Personal Property by Qualifying Organizations, Form 451, on or before December 31 of the year preceding the year for which the exemption is sought, with the county assessor in which the property is located. The county assessor will then make a recommendation of approval or denial to the county board of equalization. If the exemption is approved by the county board of equalization, it will continue for a period of four years, beginning with years evenly divisible by four. The first year in each period is known as an application year (for example, 2012, 2016, 2020, etc.). If application for exemption is made and approved in an intervening year, the exemption will continue for the remainder of the applicable four-year period.
006.01B To continue the exemption for a succeeding four-year period, an organization or society which previously had been granted an exemption, other than motor vehicles, must file the Form 451 with the county assessor on or before December 31 prior to an application year.
006.05 The county assessor will examine timely filed applications and will recommend either taxable or exempt status for the property to the county board of equalization by February 1 of the year for which the exemption is sought. In making the recommendation, the county assessor may specify that only a certain portion of the property should be exempt if all of the property described in the application is not eligible for exemption. The county assessor will follow this procedure for late applications filed on or before June 30, except that the February 1 date will not apply to those late applications filed after February 1.
006.06 The county assessor must maintain a list of the applications from organizations seeking tax exemption, descriptions of the property, and his or her recommendations to the county board of equalization as to whether the property is taxable or exempt.
006.08 The county assessor or county board of equalization may cause any real or personal property exemption to be reviewed in any year to determine whether the exemption should be continued, even though the ownership or the use of the property has not changed. This review procedure must include a notice of hearing and a hearing by the county board of equalization and will proceed in the same manner as applications made pursuant to REG-40-006.07. The exemption previously allowed may be left unchanged, disallowed, or modified. If the exemption is disallowed or modified, the taxable property will be placed on the tax list retroactive to January 1.
REG-40-010 MOTOR VEHICLE TAX EXEMPTIONS
010.01 Motor vehicles, owned (as defined in the Motor Vehicle Registration Act) and used exclusively by an agricultural or horticultural society, charitable, educational, religious, or cemetery organization or any organization for the exclusive benefit of any charitable, educational, religious, or cemetery organization may be exempt from the motor vehicle tax. To qualify for an exemption, the criteria established in REG-40-004 and REG-40-005 must be met. The tax exemption for a motor vehicle extends through one registration period. Exemption from motor vehicle tax does not necessarily exempt the vehicle from sales and use taxes or wheel tax.