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New Jersey Assembly No. 1135 (the bill), which became law on February 22, 2021, requires tax-exempt hospitals to pay community service contributions, establishes the "Nonprofit Hospital Community Service Contribution Study Commission" and reinstates a property tax exemption for nonprofit hospitals with on-site for-profit medical providers.

Property tax exemption for nonprofit hospitals

Under the bill, a tax-exempt hospital or satellite emergency care facility will not be subject to property tax to the extent the property is used for exempt purposes. Specifically, the bill exempts from property tax any property, including land and buildings, used as a hospital or satellite emergency care facility and owned by an association or corporation organized as a nonprofit entity under New Jersey law; any portion of the property leased to a for-profit entity or otherwise used by a for-profit medical provider for medical purposes, however, will be subject to tax.

The bill defines the terms hospital, medical provider and satellite emergency care facility

with regard to the property tax section of the legislation. For tax years 2014—2020, the bill provides that "property that would have been exempt from taxation pursuant to [the property tax section of the bill,] had that section been effective in those tax years, shall not be assessed as an omitted assessment … or as a regular assessment." However, the bill also states that "[n]othing in this section (regarding assessments for prior years) shall be construed to require a municipality to refund any taxes paid on such property as a result of such omitted assessments or regular assessments pursuant to any previous settlement of litigation or other agreement."

Community service contributions

The bill provides that each owner of property used as a tax-exempt hospital or satellite emergency care facility will be annually assessed a community service contribution payable to the municipality where the hospital or facility is located. If the hospital and municipality had already entered into a voluntary payment-in-lieu-of-taxes (PILOT) program, the hospital will be required to pay the greater of the community service contribution or the PILOT.

For tax year 2021, the requisite annual community service contribution will be:

• $3.00 per day for each licensed hospital bed in the prior tax year
• $300 per day for each satellite emergency care facility in the prior tax year

Beginning with tax year 2022, each year's community service contribution will increase by 2% over the prior tax-year's amount. For purposes of calculating a hospital's annual community service contribution, the number of licensed beds in existence at the hospital on January 1, 2020, is the minimum number on which that hospital's community service contribution may be calculated going forward.

Annual community service contributions must be paid in equal quarterly installments on the first day of February, May, August, and November each year. A municipal lien will be imposed to collect any unpaid balance older than 30 days. Each municipality receiving a community service contribution must remit 5% to the county in which the municipality is located.

The bill requires the New Jersey Commissioner of Health to adopt pertinent regulations within four months.

Under limited circumstances, a hospital will be exempt from remitting annual community service contributions. To qualify as exempt, two requirements must be documented by December 1 of the pre-tax year:

1. The owner must certify to the NJ Department of Health that:
• The hospital did not bill or collect payment from an individual for inpatient services during the current calendar year
• The hospital's forbearance of payment was lawful and consistent with an advisory opinion issued by the federal government
2. The hospital has provided community benefit over the preceding three years averaging at least 12% of the hospital's total expenses and has documented this on IRS Form 990, Schedule H, part 1, line 7K, column F

New commission

The bill also establishes the Nonprofit Hospital Community Service Contribution Study Commission, which must submit a report to the governor and legislature every three years; the initial report is due within one year. Each report must: (1) analyze the new law's financial impact on hospitals, satellite emergency care facilities, and municipalities; (2) assess whether the size of the annual community service contributions is adequate; (3) analyze the administration and equity of the contributions; and (4) convey any recommendations for improving the administration, equity, etc. of the annual community service contribution system.

Implications

This bill represents the culmination of an effort to address the property tax exemption issues for nonprofit hospitals in New Jersey that arose after the decision in AHS Hospital Corp v. City of Morristown in 2015. In that decision, the New Jersey Tax Court denied a property tax exemption for Morristown Medical Center primarily because the for-profit and nonprofit hospital activities were significantly commingled. Since that decision, numerous municipalities and hospitals have entered into litigation in which the municipalities are seeking to put the hospitals on the property tax rolls. Other hospitals in New Jersey have entered into PILOT programs with their respective taxing jurisdictions that may be unfavorable when compared to the bill. Thus, organizations specifically subject to the enactment of this bill should use it to reevaluate any PILOT program renewals in the foreseeable future.

On a broader scale, although the bill may be viewed as helpful to nonprofit hospitals and health systems in the New Jersey, it does provide another example of a taxing authority's effort to tie the state's tax exemption benefits to the benefits that the exempt organization provides to the community. (See also Tax Alert 2020-0995.) Healthcare systems should monitor this bill and other state exemption legislation to gauge their success and potential for expansion to other jurisdictions.

Because the standard for exemption rests, in part, on the percentage of community benefit that the tax-exempt hospital reports on Form 990, Schedule H, this bill serves as another example of a taxing authority's effort to tie the organization's tax exemption to the community benefit the hospital provides. As such efforts increase, organizations should remain vigilant in capturing evidence supporting all the benefits that they provide to their communities.

Please contact your Ernst & Young LLP Professional for further information.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us here.

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