NJ Superior Court Upholds Hospital Only PILOT Statute Against Constitutional Challenge

Chris and Kathy, two young hot shot attorneys over at Day Pitney, LLP, have written an excellent summary of the NJ Superior Court’s upholding of a PILOT against uniformity and other state constitutional grounds.  Here are excerpts:

However, in 2015, the Tax Court, in AHS Corp. v. Town of Morristown, 28 N.J. Tax 456 (Tax Ct. 2015), held, among other things, that the hospital in that case entangled and commingled its activities with various for-profit entities and therefore impermissibly “operated and used its property for a profit-making purpose,” and therefore the entire portion of the property used as a hospital did not qualify for a real property tax exemption under N.J.S.A. 54:4-3.6. In response to that decision, the Legislature enacted Chapter 17 in an attempt to mitigate its impact, despite the fact that for-profit medical services commonly were being provided at nonprofit hospitals. The Superior Court noted that Chapter 17 was intended to resolve the conflict between the for-profit and nonprofit complexities of modern hospitals by establishing a clear and predictable system in which complex modern hospitals make a reasonable contribution to their host communities, while providing these hospitals a measure of tax relief to help them continue to fulfill their nonprofit mission. Nonprofit hospitals, in lieu of paying property taxes, would pay municipalities the ACSC [Annual Community Service Contribution, NJ’s phrase for PILOTS] to offset the cost of municipal services that directly benefit the hospitals and their employees.

In upholding Chapter 17, the Superior Court held that because, inter alia, the ACSC is a fee and not a tax, it is not violative of the uniformity clause. The court also found that Chapter 17 did not violate the exemption clause because, among other things, the clause is not so rigid that the Legislature is without any authority or discretion in the clause’s application. The court reasoned that the line of inquiry for the exemption has simply shifted to where the focus is not on the mere presence of for-profit medical providers at the premises of a nonprofit hospital but rather on whether such presence complies with Chapter 17’s conditions. The court also held that Chapter 17 was not unconstitutional “special legislation” because the basis of the enactment of Chapter 17 was to continue the property tax exemption for nonprofit hospitals, and in so doing, it acknowledged the obvious, practical, real-world operations of modern hospitals. The court reasoned the Legislature’s basis for Chapter 17 was “rational and promote[d] the legislative and constitutional intent” of a tax exemption for nonprofit hospitals. For similar reasons, the court found that Chapter 17’s retroactivity clause was not manifestly unjust and did not violate any of the plaintiff’s equal protection or due process rights.

For real good and on point background see Professor Evelyn Brody’s 2016 Tax Notes article.  

darryll jones