The following state tax developments could affect tax-exempt organizations operating in certain states. Given the possible effects on their operations, tax-exempt organizations should consider monitoring their respective states' tax developments regularly.

Arkansas hospital denied property tax exemption for property leased to a physicians' group

On April 1, 2026, in Baptist Memorial Hospital v. Towell, 2026 Ark. App. 209, the Arkansas Court of Appeals affirmed a lower court ruling that found a nonprofit hospital group (NEA Hospital) could not claim a property tax exemption for portions of hospital property that were leased at fair market rate to a physicians' group (NEA Clinic) because the group did not operate as a public charity.

Following the Craighead County assessor's denial of a tax exemption for the property leased to NEA Clinic, the Craighead County Circuit Court found unpersuasive NEA Hospital's claim that the nominal rents received from NEA Clinic did not affect the property's eligibility for the state's property tax exemption for property used for exclusively charitable purposes. On appeal, the Court of Appeals found that the lower court's holding was consistent with over 100 years of state Supreme Court precedent that leased property is ineligible for the exemption.

For Arkansas tax-exempt organizations, this decision highlights that leasing property — whether to related or unrelated parties and particularly on commercial terms — poses a substantial risk to their property tax exemption, regardless of the ultimate use of the rental income.

Indiana updates Tax Information Bulletin on IRC conformity

In a revised Tax Information Bulletin¹ (TIB), the Indiana Department of Revenue (DOR) listed Internal Revenue Code (IRC) provisions the state does not fully adopt. The DOR also highlights Indiana's limited conformity to federal tax law and underscores the need for taxpayers in Indiana to carefully evaluate the timing of wage deductions and related adjustments when employee retention credits (ERCs) are received or finalized after the original filing year. Because of revised IRS guidance, wages that are disallowed for federal income tax purposes when claiming ERCs may be reported for Indiana income tax purposes in a year following the year in which the wages were paid.

Missouri finalizes amendments to tax-exempt organization regulations

The Missouri DOR finalized regulations² on February 28, 2026, to clarify that the sales tax exemption for tax-exempt organizations applies only to purchases made by an organization for the purpose of furthering the organization's exempt function. The final regulations further clarify that an organization's sales tax exemption letter should not be presented by an employee or member of an organization when the employee or member, rather than the organization, is the ultimate purchaser of goods or services.

Pennsylvania provides guidance on Educational Improvement Tax Credit Program

The Pennsylvania Department of Community and Economic Development has issued guidance³ for scholarship and educational improvement organizations seeking to be added to the state's list of organizations qualifying for the Educational Improvement Tax Credit (EITC) Program. The guidance provides organizations with information on eligibility criteria, initial applications and annual renewal applications, including a "Program Flow Chart" to assist organizations with the application and renewal process. The guidance also emphasizes that continued participation in the EITC Program hinges on compliance with strict use-of-funds requirements, annual reporting obligations and narrowly defined statutory purposes. An organization may be removed from the program due to noncompliance.

Virginia appeals court affirms nonprofit's property fails to satisfy exclusive use requirement

The Virginia Court of Appeals has affirmed⁴ a lower court decision finding that property owned by the non-profit Christian Scholars Network (CSN) did not satisfy the exclusive-use requirement to qualify for a property tax exemption, as the property was not exclusively used for religious or charitable purposes.

Montgomery County denied a property tax exemption to CSN, an IRC Section 501(c)(3) nonprofit organization formed to "engage Virginia Tech students, scholars, and community members in the rich intellectual traditions of the Christian faith and explore its implications for every aspect of life." CSN owned a two-unit office condominium, which it used for networking and other events, and allowed organizations affiliated with Virginia Tech and other local churches and religious groups to use the property for free. CSN also allowed a for-profit organization, Abundant Life Christian Counseling (ALCC), free use of the property to provide mental health services to clients, for which it charged $100 per hour for such services.

On appeal of Montgomery County's assessment of property taxes, the trial court concluded — and the Court of Appeals agreed — that CSN's claimed exemption from property tax was properly denied, finding the property was not exclusively occupied or used for religious worship or charitable purposes. Particularly, the trial court found the activities of ALCC could not be characterized as religious services, and the extensive third-party use of the property was fatal to CSN's claim. The appeals court affirmed the trial court's holding, finding that each of the exemptions CSN claimed contained an exclusive-use requirement that CSN did not satisfy.

Implications

These developments reflect a complex and evolving landscape for state and local tax exemptions for charitable and religious entities in different jurisdictions.

Tax-exempt organizations should continue to closely monitor legal developments in their respective states and localities to understand their tax obligations, eligibility for exemptions or credits and other tax developments that may affect their operations.