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The New Jersey Supreme Court recently ruled that space in a tax-exempt hospital’s off-campus building, where the hospital provides physical therapy services, may be exempt from property tax. This ruling is significant because it may provide a hospital greater flexibility in obtaining property tax exemption for its facilities located away from the hospital’s main-campus.
Set forth below is a brief summary of the case, followed by practical recommendations for hospitals seeking property tax exemption for their offcampus facilities and service locations.
Facts of the Case:
This case involves the tax-exempt status of a hospital’s three-story building located 9 ½ miles from the hospital’s main campus. The building houses the hospital’s cardio-pulmonary rehab service, physical therapy service and wellness center, and a pediatric practice.
At issue is whether the building space at which these services are provided qualifies for property tax exemption under a New Jersey law exempting from property tax “all buildings actually used in the work of associations and corporation’s organized exclusively for hospital purposes.”
2007 Appellate Division Decision:
In a prior decision, the Appellate Division adopted a multi-factor test for determining whether an off-site hospitalowned facility qualifies for property tax exemption, which includes:
(1) the level of hospital and off-campus facility integration;
(2) the degree of hospital medical staff supervision over the off campus activities; and
(3) whether the facility mainly provides services to hospital patients or the general public.
Applying this test, the Appellate Division ruled that the space used by the pediatric practice, wellness center and physical therapy service did not qualify for property tax exemption, mainly because the activities were not sufficiently integrated with the hospital and supervised by the hospital’s medical staff.
2008 Supreme Court Decision:
The sole issue on appeal before the Supreme Court was whether the space used by the hospital’s physical therapy service qualifies for tax exemption.
The Supreme Court first more broadly defined “hospital purpose” stating that “any medical service that a hospital patient may require pre-admission, during a hospital stay (whether it is for less than a day or for one or more days), or post-admission, constitutes a presumptive core ‘hospital purpose.’” Such definition acknowledges the many activities (both inpatient and outpatient) that a modern hospital is expected to perform for its patients.
The Supreme Court then held that where the service is for a core hospital purpose, it qualifies for tax-exemption if delivered in the hospital’s main facility, in another facility on the main campus of the hospital, or in a hospital-owned building adjoining or adjacent to the main campus.
The Court explained, however, that if the service is for a core hospital purpose, but is provided at an off-site location, regulators must examine the remote facility for “functional integration” and for the level of “supervision” by hospital personnel. The Supreme Court set forth the following considerations in connection with such examination:
1. The nature and extent of the services provided at the off-site location;
2. The extent to which the activity conducted in the facility is under the control or supervision of the hospital medical staff, or personnel; and
3. Whether the facility serves primarily hospital patients and employees or primarily members of the general public. The Supreme Court noted that, if the off-site location is not licensed as “hospital-based” by the Department of Health and Senior Services (DHSS), then the following two additional factors should be considered:
(i) whether the facility competes with similar privately-owned facilities; and
(ii) whether the facility (or a part thereof) is actually used predominantly by hospital patients and employees or by others.
With respect to the degree of hospital supervision, the Supreme Court found that the Appellate Division took too narrow an approach by requiring that the physical therapy services be medically supervised by the hospital.
Ultimately, the Supreme Court remanded the case for a re-determination as to whether the space used for physical therapy services qualifies for tax exemption based on the new analytical framework described above.
Practical Recommendations:
Hospitals seeking property tax exemption for their off-campus facilities should consider the following recommendations:
1. Integration. Off-campus facilities should function like a hospital department as opposed to a commercial venture. The facility should adhere to hospital policies and procedures related to clinical and administrative matters. To the extent feasible, consider requiring patients to visit the hospital’s admissions office or triage center before receiving services at the off-campus location. The hospital’s HR Department should participate in the facility’s hiring decisions. Also, it would be helpful if the facility were licensed by DHSS as a hospital based off-site ambulatory care facility.
2.Supervision. The hospital’s physicians or other personnel should supervise (on an ongoing basis) the operations of the off-campus site services. Further, although not required, it would be beneficial to establish a review process for the hospital to oversee clinical policies and quality assurance.
3. Bona Fide Charity Care. Free or discounted services should be provided at the off-site location to indigent individuals, consistent with the hospital’s policies.
4. Location. Off-campus facilities should be located in the community served by the hospital and serve a similar patient base.
© Sills Cummis & Gross P.C.
© Copyright 2012 Sills Cummis & Gross P.C.About the Author
