Illinois Court Of Appeals Deals Potentially Fatal Blow To Illinois Hospital Property Tax Exemption

After a long, hard fight to create a workable property tax exemption for hospitals in Illinois, the Illinois Court of Appeals has struck down the statute providing exemption for hospitals, finding it unconstitutional and unenforceable since its inception.

Background

The Illinois Constitution allows for the enactment of a statute providing exemption for "property used exclusively for . . . charitable purposes." Ill. Const. 1970, Art. IX, § 6. Such a statute was enacted, providing property tax exemption for property "actually and exclusively used for charitable or beneficent purposes," including property of "institutions of public charity." 35 ILCS 200/15‑65.

This charitable property tax exemption statute (and its prior versions) did not specifically identify nonprofit hospitals as exempt entities. Nevertheless, for some years, Illinois courts treated nonprofit hospitals as exempt "institutions of public charity."

In more recent years, the standard to apply when determining if a nonprofit hospital qualifies as a charitable institution for property tax exemption has become unclear. This uncertainty resulted in an Illinois Supreme Court decision in 2010, in which the Court denied property tax exemption, holding that the nonprofit hospital did not meet the standards to be considered an exempt "charitable" institution. Provena Covenant Medical Center v. Dep't of Revenue, 925 N.E.2d 1131, 236 Ill. 2d 368 (2010). After Provena, property tax exemption was denied for other hospitals. This only led to further uncertainty about nonprofit hospitals' tax‑exempt status. In an attempt to create a workable standard, key stakeholders took this problem to the state legislature.

As a result of these efforts, Property Tax Code section 15‑86 (35 ILCS 200/15‑86) (the "Hospital Exemption Statute") was enacted in 2012, and provides in pertinent part:

A hospital applicant satisfies the conditions for an exemption under this Section with respect to the subject property, and shall be issued a charitable exemption for that property, if the value of services or activities listed in subsection (e) for the hospital year equals or exceeds the relevant hospital entity's estimated property tax liability, as determined under subsection (g), for the year for which exemption is sought.

(Emphasis added.)

The Hospital Exemption Statute compares the value of services and activities a hospital applicant provides to low‑income or underserved individuals in a year with the estimated...