Groundbreaking Legislation On Property Tax And Sales Tax Exemptions For Illinois Hospitals

Illinois Governor Patrick Quinn just signed into law a comprehensive and groundbreaking legislative package that significantly changes the criteria for establishing and maintaining property tax exemptions and sales tax exemptions for Illinois not-for-profit hospitals and their affiliates. The new laws, which became effective on June 14, 2012, are intended to end the controversy and uncertainty surrounding the test for charitable property tax exemptions for hospitals that have plagued the industry for many years.

Concepts Underlying New Exemption Laws

In the underlying legislative findings, the Illinois General Assembly states: "[I]t is essential to ensure that tax exemption law relating to hospitals accounts for the complexities of the modern health care delivery system." The findings also indicate that the legislation is intended to increase access to hospitals and other health care facilities by low-income and underserved individuals.

Simply stated, to be eligible for property and sales tax exemption, hospitals must demonstrate that the dollar value of the amount of their services or activities that (i) address the health care needs of low-income or underserved individuals and (ii) relieve the burdens of government relating to the health care of low-income or underserved individuals, equals or exceeds the dollar value of a hospital's property tax exemption.

New Property Tax Exemption Rules

The legislation adds a new Section 15-86 (35 ILCS 200/15-86) to the Illinois Property Tax Code (Code), entitled "Exemptions related to access to hospital and health care services by low-income and underserved individuals." Significantly, this change relieves hospitals and hospital affiliates seeking a charitable purpose property tax exemption from the previous burden of establishing that they are "institutions of public charity" pursuant to Section 15-65 of the Code. In recent years, the Department and the Illinois courts were increasingly finding that hospitals failed to meet this burden, without providing clear guidance as to what would be sufficient to satisfy the requirement.

Section 15-86(c) provides that a "hospital applicant" shall be issued a charitable exemption for property for which exemption is being sought if the value of qualifying services or activities of the "relevant hospital entity" for the applicable year equals or exceeds the estimated property tax liability for the year for which exemption is sought.

Some key definitions found in the new legislation are set forth in the Appendix attached hereto, including "hospital," "hospital affiliate," "hospital applicant," "hospital owner," "hospital system" and "relevant hospital entity." As discussed further below, these definitions establish a more flexible construct designed to address the various ownership and organizational structures existing in today's health industry environment.

Under the new legislation, the applicant seeking exemption for a hospital can be either a hospital owner or a hospital affiliate. A hospital affiliate is broadly defined as an entity (other than a hospital owner) that controls, is controlled by, or is under common control with one or more hospital owners and that supports, is supported by, or acts in furtherance of the exempt health care purposes of at least one of those affiliated hospitals. Any number of organizational structures will come within this definition. Examples are a parent entity in a health care system, a joint venture between two hospital owners, or a joint venture between a wholly owned subsidiary of a hospital owner and a for-profit developer, provided that it is the hospital owner that directly or indirectly controls that joint venture.

The definition of relevant hospital entity provides choice and flexibility when determining which qualifying services or activities can be included in the Section 15-86(c) value calculation. When the applicant is a hospital affiliate, it can elect to satisfy the Section 15-86(c) quantitative test either (i) by calculating only its qualifying services or activities and comparing the amount to the estimated tax liability of its properties, or (ii) by calculating the qualifying services or activities of the hospital system to which it belongs and comparing the amount to the estimated tax liability...