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The Continued Evolution of Property Tax Exemption for Tax-Exempt Hospitals The Continued Evolution of Property Tax Exemption for Tax-Exempt Hospitals

The Continued Evolution of Property Tax Exemption for Tax-Exempt Hospitals

Historically, Indiana hospitals that are owned by nonprofit and tax-exempt entities have enjoyed property tax exemption. However, with the evolution of the health care industry as well the physical footprint of hospitals, the traditional result of property tax exemption for hospital facilities has not automatically followed.

What has been widely accepted is that the inpatient portion of a hospital facility owned, occupied, and used by a tax-exempt organization generally should be exempt from Indiana property tax. This, however, is often where the consensus between taxing authorities and health systems ends.

Many health systems have expanded their physical space from the historical one building inpatient facility to a more comprehensive integrated health system with a number of facilities, of which some, if not many, are not on the primary hospital campus. This has been further accelerated with health systems acquiring and expanding their physician groups and practices. With this transformation comes the question of which of these facilities should be entitled to property tax exemption.

The Indiana legislature has refined the property tax exemption statutes in an attempt to establish standards to this evolving question. Both Ind. Code §§ 6-1.1-10-16(h) and 6-1.1-10-18.5 provide that the property tax exemption does not extend to the office or a practice of a physician or group of physicians that is owned by a hospital except if the office or practice is (1) substantially related to or supportive of hospital inpatient facilities; or (2) provides or supports the provision of charity care/community benefits.

Even with these standards, however, questions remain. In one case focusing on whether activities were substantially related to inpatient facilities, the Indiana Tax Court determined that a building on a hospital’s inpatient campus that provided MRI, physical therapy, and other services that were “used” by the hospital was exempt from property tax. Indianapolis Osteopathic Hosp. Inc, 818 N.E.2d at 1018-19 (2004).

However, in a recent decision by the Indiana Board of Tax Review (“IBTR”), a medical building located off of the tax-exempt hospital’s primary campus that housed an urgent care facility, physician group, and breast cancer clinic was determined not to be sufficiently supporting the hospital’s inpatient facilities. St. Mary’s Building Corporation, et. al. v. Warrick County Assessor, Pet. No. 87-019-14-2-8-10222-15 et. al. (Feb. 2018).

Equally as important, the IBTR determined that the health system did not provide adequate evidence of providing charity care to justify property tax exemption despite having a financial assistance policy, noting that there needed to be a comparison done between exempt use (where the health system was not paid for services provided) vs. non-exempt use (where the health system was paid). The decision leaves unanswered the question of whether the IBTR would have awarded an exemption only equal to the amount of charity care that was provided.

Additional insight into these questions likely will be forthcoming, as this recent IBTR decision has been appealed to the Indiana Tax Court. However, as health systems continue to expand and evolve, these questions and issues will likely continue to arise. For more information, please contact Matt Ehinger or Kevin Woodhouse.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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