In an opinion filed January 5, 2016, the Illinois Fourth District Appellate Court ruled that the Illinois statute authorizing hospital property tax exemptions is unconstitutional. Until formal guidance is released from the Illinois Department of Revenue, this decision will likely create a period of uncertainty for hospitals that have secured or that are seeking hospital-based property tax exemptions in Illinois. Nonprofit hospitals seeking tax exemption in Illinois should continue to file applications for property tax exemption with the applicable county board of review or board of appeals. Hospitals already exempt from property tax should continue to file the proper certificates of status with the county assessor or supervisor of assessments before the January 31 deadline.

Statutory Background

The Illinois Constitution authorizes the General Assembly to create laws exempting certain property from taxation so long as such property is "used exclusively for...charitable purposes." The Constitution does not require that the property be owned by a particular type of owner. The vagueness of the "charitable purposes" standard has created a fair amount of uncertainty for hospital and non-hospital-based exemptions. This uncertainty came to light in a 2010 Illinois Supreme Court decision where the Court found that a hospital did not satisfy existing statutory standards for being a "charitable" institution.

A statute passed in 2012 sought to clarify exemption standards for hospitals by creating a new hospital-based exemption. The 2012 standard authorizes a property tax exemption for property owned by a nonprofit hospital providing unreimbursed services to low-income or underserved individuals (or government entities) in an amount equaling or exceeding the hospital's estimated property tax liability for the year in which exemption is sought. While the 2012 statute creates criteria for determining whether a hospital property owner is "charitable," it does not directly address the use of the property as a criterion for exemption.

Court's Rationale

The Appellate Court held that the 2012 statute violates the Illinois Constitution because it grants exemption without requiring the property to be "used exclusively for...charitable purposes," which is the constitutional standard. Instead, the 2012 statute requires only that the owner be charitable, as measured by the test set forth in the statute. The court did not take issue with the test itself, which may leave room for legislature to save the statute by incorporating the constitutional standard for charitable use through an amendment.

Effect of Decision - How Hospitals Should Respond

Since the court did not take issue with the comparative standard set forth in the 2012 statute, nonprofit hospitals seeking exemption should continue providing charity care at levels that meet or exceed their estimated property tax liability until administrative guidance is issued or the case is appealed to the Illinois Supreme Court for clarification.

Decisions of the Illinois Fourth District Appellate Court are binding on all lower courts within the state, regardless of locale,1 unless there is a conflict among the districts, in which case the Fourth District ruling would be binding only upon lower courts within the Fourth District.2 If the case is appealed and the Illinois Supreme Court affirms the decision of the Appellate Court, it is possible that hospitals that were granted property tax exemptions under the current statute would be stripped of that exemption retroactive to enactment of the 2012 statute; however, until guidance is issued or an appeal decided, hospitals should proceed under the status quo.

In oral arguments for this case, the attorney for the Illinois Department of Revenue stated that the Department's position is that the 2012 statute "can be constitutionally read if the court breaks apart...charitable ownership and charitable use," with the constitution and case law properly defining charitable use and the legislature properly defining charitable ownership via statute. It is unclear whether the Department will continue to espouse this viewpoint following the ruling.

While the effect of this decision is limited to Illinois, in the wake of a recent legislative push in New Jersey to implement certain payments in lieu of taxes, this decision marks another shot across the bow for hospital property tax exemptions nationwide. Hall Render continues to monitor these legislative and case law developments and will continue to update clients as developments occur.