Property Tax Exemption Guide for Nonprofits
Background
In May, 2009 the Governor signed a bill that for the first time in Minnesota’s history that defines a ‘charity’ for property tax exemption purposes. This new law was adopted in response to a 2007 Minnesota Supreme Court decision that narrowed the definition of charity that developed in case law throughout the previous thirty-five years, since the North Star decision. North Star outlined six factors to be considered by assessors in determining whether an organization was an institution of purely public charity. Under North Star, no one factor was determinative over the others and not all had to be satisfied. The December, 2007 Under the Rainbow Childcare Center decision declared that the third factor must be met in order for an organization to qualify as an institution of purely public charity.

The new statute, Minnesota Statutes section 272.02, subdivision 7, modified and codified the North Star factors to provide clarity and consistency in the definition of charity. Section 272.02, subd. 7 requires that an organization satisfy all six factors. If an organization fails to satisfy factors 2, 3, or 5, the organization may provide a ‘reasonable justification’ for its failure of those factors. An assessor must heed the justification and may accordingly grant exemption.

The new statute is effective for 2009 assessments, and taxes payable in 2010. On March 1, 2010 the Minnesota Department of Revenue released a Bulletin with examples of what may qualify as a reasonable justification for failure to satisfy one of these factors. The Bulletin was sent to County Assessors statewide and nonprofits may find it valuable to review it.

This guide is intended for nonprofit property owners that have historically been exempt as institutions of purely public charities as a guide on the new law.

The Assessment Process
Nonprofit organizations apply to the Internal Revenue Service to seek 501(c)(3) status. This federal determination allows nonprofits to collect tax-deductible donations and exempts them from corporate income tax liability. If an organization received a federal 501(c)(3) determination letter from the IRS, it is exempt from state corporate income tax liability as well. Nonprofits may also be exempt from property and sales tax in Minnesota. These exemptions are not automatic, based on 501(c)(3) determination.

If an organization is applying for exemption for the first time, it must apply to its county assessor (or in some cases, a city assessor). The organization must submit an Application for Property Tax Exemption (see page 16 of Bulletin) to the county assessor on or before February 1 of the assessment year.

Once a property is granted exemption, it must participate in a three-year assessment review. 2010 is a re-assessment year. Starting in 2009, organizations may have received applications from their county assessors as part of this cycle. The application most likely explained the law change, stated the new factors and asked the organization to answer some questions related to the new standard. The next reassessment year is 2013, and every third year thereafter. Once an organization receives a properly granted exemption, it will remain in effect unless there is a material change in facts.

The Statute
Minnesota Statutes section 272.02, subdivision 7 states:
Institutions of purely public charity that are exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code are exempt if they meet the requirements of this subdivision. In determining whether real property is exempt under this subdivision, the following factors must be considered:

1. Whether the stated purpose of the organization is to be helpful to others without immediate expectation of material reward;
2. Whether the institution of public charity is supported by material donations, gifts, or government grants for services to the public in whole or in part;
3. Whether a material number of recipients of the charity receive benefits or services at reduced or no cost, or whether the organization provides services to the public that alleviate burdens or responsibilities that would otherwise be borne by the government;
4. Whether the income received, including material gifts and donations, produces a profit to the charitable institution that is not distributed to private interests;
5. Whether the beneficiaries of the charity are restricted or unrestricted, and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives; and
6. Whether dividends, in form or substance, or assets upon dissolution, are not available to private interests.

A charitable organization must satisfy the factors in clauses (1) to (6) for its property to be exempt under this subdivision, unless there is a reasonable justification for failing to meet the factors in clause (2), (3), or (5), and the organization provides to the assessor the factual basis for that justification. If there is a reasonable justification for failing to meet the factors in clause (2), (3), or (5), an organization is a purely public charity under this subdivision without meeting those factors. After an exemption is properly granted under this subdivision, it will remain in effect unless there is a material change in facts.

Statement of Best Practices
In Minnesota, taxation is the rule and exemption is the exception. In other words, nonprofits have to prove they are worthy of the property tax exemption. In addition to status as a 501(c)(3) federal tax-exempt institution, the organization must also indicate that its Minnesota parcel furthers exempt or charitable purposes. This requires that in addition to an IRS 501(c)(3) determination letter, an organization:

• receives financial support from the public,
• dispenses its services or benefits in a charitable manner or alleviates a burden of government, and
• does not unreasonably restrict who it benefits.
While these qualifying requirements may seem burdensome, most currently exempt organizations already satisfy these requirements that are the hallmark of the nonprofit sector – perhaps without realizing it. Nonprofits should document their public support and benefit, and clearly and concisely qualify and if necessary quantify their answers to application questions.

Factor 1: If an organization’s Articles of Incorporation state that the organization is incorporated for a charitable purpose and it has received a 501(c)(3) determination letter, then the organization’s undertaking is to be helpful to others with immediate expectation of material reward – it satisfies factor one.

• Supporting Documents:
o Articles of Incorporation
o Federal IRS 501(c)(3) determination letter

Factor 2: This factor is a bit more nuanced than the first and contains a few terms that need definitions.

• The word material appears in factors two, three, and four of the statute that defines purely public charity for property tax exemption purposes. As former Hennepin County Assessor Tom May testified during legislative hearings in 2009, “material” is somewhere in between “some” and “substantial.” Although it is not defined in M.S.A. § 272.02, subd. 7 (2009) or elsewhere in Minnesota tax statute, it does have a commonly accepted legal understanding as a word used to indicate relational value and not quantitative value. Where as the word “substantial” may have a certain threshold percentage required for the factor to be satisfied, “material” is relational to an organization’s particular facts and circumstances.
• The words government grants refer to a “a written instrument or electronic document defining a legal relationship between a granting agency and a grantee when the principal purpose of the relationship is to transfer cash or something of value to the grantee to support a public purpose authorized by law in a general manner instead of acquiring by professional or technical contract, purchase, lease, or barter property or services for the direct benefit or use of the granting agency.” This definition of government grant distinguishes between government contracts that benefit a third party member of the general public, as opposed to a direct benefit to the granting agency through a technical contract. An example of a technical contract that directly benefits the government granting agency may be a contract for technology services or office supplies. Whereas, under this definition of government grant, a per diem for a bed filled in a homeless youth shelter or Medicaid reimbursement for a person with a traumatic brain injury is a grant, as is a lump sum designated ahead of an environmental clean-up project.

Factor two considers the sources of an organization’s financial support, which are documented in organizational 990s and financial statements. Many nonprofit organizations are supported by community members through individual gifts and/or donations, community and private foundations through grants for projects or general operating expenses, or a unit of government through a programming grant or reimbursement for services rendered to members of the public. A nonprofit may not rely solely on financial support from these sources; it may also include diversified streams of income such as earned income, rental income, or endowment income. While these sources of funding may not be considered material gifts, donations, or government grants, they may be sufficient in providing a reasonable justification for the failure of the factor on its face.

For example, an organization on its face fails factor two because it does not receive material donations, gift, or government grants. The organization is a 501(c)(3) nonprofit whose mission is to support emerging artists. The organization’s primary revenue is generated by renting space to other 501(c)(3) nonprofit organizations with similar charitable missions and to emerging artists at below-market rents. The rental income is sufficient to cover the majority of the organization’s operating costs, and the organization has sufficient interest income from its substantial endowment to cover the remainder of its expenses. The organization’s sustainable income and operational structure fulfills its foundational purpose and mission. Because the organization is able to be sustainable without soliciting donations, it does not receive material donations during the year. In this situation, the organization would have a factual basis for its reasonable justification for failing factor two.

• Supporting Documents:
o Organizational Form 990s
o Financial statements
o Annual fundraising reports

Factor 3: Factor three is what the Minnesota Supreme Court considered the essence of charity in the Under the Rainbow case in 2007. This factor relates to how an organization dispenses its goods or services and requires that a material number of the recipients of the charity receive the goods or services free or at a reduced cost.

Many nonprofit organizations provide services and programs for free or reduced cost. Some organizations do this through scholarship programs for classes, events or daycare services. Some organizations may charge beneficiaries based on a sliding scale for medical or dental services, or even let patrons determine how much they can contribute for a performance, show or exhibit. Many organizations host free events or seminars, allow free access to museum or educational space on set days every month or provide a free space to emerging artists or other nonprofits to host events. Some organizations travel to schools or community centers to conduct free trainings or teach classes related to their mission. When applying for property tax exemption, consider and list and quantify the various concrete, documented ways the applying organization benefits the community for free or reduced cost.

Some organizations such as group homes and long-term care facilities may be prohibited from providing services for free or reduced cost. These organizations are required to charge rates set by the state and cannot deviate from them. This would be an example of organizations that may not meet factor three but which have a reasonable justification for failing to satisfy the requirement.

• Supporting Documents:
o Annual Report with Program highlights and statistic related to free and reduced cost goods/services provided
o Payment policies for services
o Scholarship announcements
o Public accessibility plan and report

Factor 4: Factor four relates to the restriction against private inurement. If an organization has received an IRS 501(c)(3) determination letter, the organization will generally satisfy this factor. In the statute that defines purely public charity for property tax exemption purposes, “profit” is defined as earnings distributed to private interests. This enunciation of “profit” is based in I.R.C. § 501(c)(3) and I.R.S. Publication 557 that discusses the rules and procedures for organizations that seek recognition of exemption from federal income tax. “No part of the organization’s net earnings will inure to the benefit of private shareholders or individuals.” A federally determined § 501(c)(3) organization generally fulfills the statute’s factor four requirement.

Accordingly, as long as surpluses and reserves are not distributed to private interests, a nonprofit will properly satisfy factor four. In order to qualify for property tax exemption as an institution of purely public charity, among other requirements, profits produced to a Minnesota nonprofit organizations are not allowed to be distributed to private interests. As the Minnesota Supreme Court wrote in a recent case, North Star factor four (on which the bill factor four is modeled) is “not intended to discourage charitable institutions from engaging in financial planning with an eye toward long-term viability.” Croixdale v. County of Washington, 726 N.W.2d 483, 488 (Minn. 2007). In fact, the Principles and Practices for Nonprofit Excellence [hyperlink], an MCN publication based on the fundamental values of quality, responsibility and accountability advises that nonprofits should practice good fiscal management and “should work diligently to avoid recurring deficits and to secure appropriate levels of funding to carry out their missions and activities.” Minnesota Council of Nonprofits, Principles and Practices for Nonprofit Excellence, at 3, 15 (2007) (available online at http://www.mncn.org/info_principles.htm).

• Supporting Documents:
o Articles of Incorporation
o Federal IRS 501(c)(3) determination letter

Factor 5: Factor five relates to who an organization serves. The statute requires that the beneficiaries served cannot be unreasonably restrictive in relation to the organization’s charitable mission. The Department of Revenue Bulletin provides clear examples of when an organization does not meet this factor.

• Supporting Documents:
o Articles of Incorporation
o Federal IRS 501(c)(3) determination letter

Factor 6: Factor six relates again to the non-distribution requirement to which all 501(c)(3) organizations must adhere. The IRS requires that if a 501(c)(3) organization dissolves, its assets must be distributed for an exempt purpose. This may include another 501(c)(3) exempt-organization, the federal government, or state or local government. Qualifying 501(c)(3) organizations’ Articles of Incorporation contain a provision that ensures assets shall be distributed by the Board of Directors for exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code. Generally, if an organization has received a 501(c)(3) determination letter, it will satisfy this factor.

• Supporting Documents:
o Articles of Incorporation
o Federal IRS 501(c)(3) determination letter

Action Steps
Once an organization completes its exemption application initially or as part of the three-year assessment cycle, the county assessor will make a determination on the organization’s property tax-exempt status. Nonprofits should pro-actively provide relevant supporting documents with the application. If an assessor needs additional information related to the application, the Minnesota Department of Revenues recommends that the assessor allow for up to 60 days to receive the additional information. The assessor must consider all documentation provided by the applicant.

Appeal Options
Upon review of a property tax exemption application, the assessor should respond in writing. The letter should clearly outline the assessor’s determination. If the application is approved and the organization is granted exemption, the exemption will remain in effect unless there is a material change in facts. Approval of property tax-exempt status does not excuse organizations from re-applying as part of the three-year assessment cycle.

Review Board. If an organization’s property tax exemption is denied, it has some options. An organization may consider contacting the Minnesota Department of Revenue to appear before a non-binding, advisory Review Board. The Review Board is made up of the Department of Revenue, the Minnesota Association of Assessing Officers, and the Minnesota Council of Nonprofits. The goal of the Review Board is to help create consistency and set norms in assessment practices statewide. The Board will begin reviewing denied or questionable exemption requests quarterly, beginning in February, 2010. The Board reviews the facts of the organization in relation to the questioned factor. The review board will issue a written response to the assessor and the institution, outlining its advisory opinion as to whether or not the organization meets the requirements for property tax exemption. The written opinion is non-binding and advisory to the county assessor. For more information on requesting Review Board consideration, see the March 1, 2010 Revenue Bulletin.

Minnesota Tax Court. The organization may ultimately appeal the exemption denial to Minnesota Tax Court. A nonprofit petitioner must file an appeal by April 30th of the year in which the taxes become payable. If notice of exemption denial is not given until after February 28th of the year the tax is payable, the organization has 60 days from the date of mailing of the notice to initiate an appeal.

Minnesota Department of Revenue Bulletin to County Assessors
On March 1, 2010 the Property Tax Division Information and Education Section of the Minnesota Department of Revenue released a bulletin regarding exemption guidelines for institutions of purely public charities. The Bulletin was sent to county assessors across the state as guidance on the meaning of "reasonable justification" for failing factors 2, 3, or 5 of the new statute that defines an institution of purely public charity for property tax exemption purposes. The Bulletin outlines backgroun information on the new statute, the legal requirements of charities to attain and maintain property tax exemption and examples of what may qualify as a reasonable justification for failing to meet a factor. It is prudent for organizations to review the Revenue Bulletin. The Minnesota Council of Nonprofits will no prepare a Guide for Nonprofits and will post it at www.mncn.org as soon as possible.

Statute to clarify institutions of purely public charities signed into law!
Governor Pawlenty signed HF 1298. (May 18, 2009)
HF 1298, the public finance or tax policy bill was signed into law on Saturday, May 16, 2009. Included were the provisions to preserve charitable tax exemptions. More specifically, these provisions:

• Include a codification and modification of the North Star factors (the six factors used to determine property tax exemption eligibility) that more accurately represent current assessment practices and the nonprofit sector realities and structures. Modifications include acknowledgment that nonprofits partner with government to serve and otherwise benefit all Minnesotans.
• State that qualification for exemption requires that all six modified factors must be satisfied, unless there is a good reason that three of the six are not, that should be substantiated with a factual reason by the applying organization.
• State that once an exemption is granted properly, it will remain in effect until there is a material change in organizational facts related to the six factors.

MCN will continue to work with the Department of Revenue and the Minnesota Association of County Assessors in the next steps of implementation, including news on the Department of Revenue Bulletin and the creation of the Advisory Board consisting of representatives from Revenue, the Assessors' Association, and MCN. We will also be contacting currently tax exempt organizations and continue posting information for nonprofits related to this issue.

We would like to thank everyone who contributed to the effort to preserve charitable tax exemptions. Whether you served on the monitoring group, attended legislative hearings, participated in MCN’s Day at the Capitol, or contacted your legislator, this victory could not have been possible without the hundreds of people who helped make the voice of the nonprofit sector heard loud and clear at the Capitol. We would especially like to thank our allies at the Department of Revenue and the Minnesota Association of Assessing Officers, who played a key role in developing and advocating for compromise language that satisfied all parties involved.

Stay tuned to the PCTEC website and upcoming communications from MCN for news on implementation, next steps, and what the passage of HF 1298 means for your organization.

The Issue

Nonprofit organizations rely on property and sales tax exemptions to provide vital services to their clients, many of whom are those most in need. However, due to a 2007 Minnesota Supreme Court decision, changes to the definition of "organizations of purely public charity" could have drastic effects on many nonprofits' ability to receive these tax exemptions. In order to protect the nonprofit sector and the those who rely on its services, the Minnesota Council of Nonprofits spearheaded the Preserve Charitable Tax Exemptions campaign to inform and mobilize nonprofit advocates, elected officials, and the general public around the necessity of restoring a proper definition of an "institution of purely public charity."

Background

A December, 2007 Minnesota Supreme Court decision in Under the Rainbow Child Care Center vs. County of Goodhue, narrowed the definition of "organizations of purely public charity" that is used in determining property tax exemption. In 2008, with little time and resources MCN was able to successfully advocate for a temporary Moritorium on Changes in Assessment Practices. This year, the Minnesota Council of Nonprofits and other organizations are encouraging the Minnesota legislature to pass legislation that will protect nonprofit property tax exemptions and restore a more balanced definition to "purely public charity."

Since December, MCN has been in communication with nonprofit leaders, attorneys, county assessors, the Department of Revenue, and legislators from all parts of the state to find a remedy. We are happy to report that there is broad support for preserving property tax exemptions for charitable organizations.

Property Tax Exemption and Nonprofit Organizations

There are many types of property that qualify for exemption under separate provisions of Minnesota law [Article X, Section 1 of the Minnesota Constitution and codified as Minnesota Statute §272.02 (7)]. Examples of such properties include "public burying grounds, public school houses, public hospitals, academies, colleges, universities, all seminaries of learning, all churches, church property, houses of worship, institutions of purely public charity, and public property used exclusively for any public purpose." (Emphasis added.)

The Rainbow decision potentially impacts those nonprofits that qualify for exemption as "a purely public charity." Minnesota law does not clearly define what is and is not “purely public charity,” and this has led to a great deal of uncertainty for many nonprofit organizations.

Frequently Asked Questions about Charitable Tax Exemptions

Click here to download a pdf version of these FAQs. Answers to these questions are meant to provide information for nonprofit organizations that are currently exempt from paying property tax and/or sales tax in light of recent Minnesota Supreme Court decisions. The answers to these frequently asked questions were written by Gina DeConcini, a partner in the Corporate Finance & Transactions Group at Oppenheimer Wolff & Donnelly LLP and a volunteer with LegalCORPS.

What kinds of charitable organizations are eligible for exemptions from paying Minnesota property taxes?

Why is this coming up now? Did the Under the Rainbow and Afton Historical Society Press cases create some sort of a law change?

What offices make the initial determinations regarding property and sales tax exemptions?

What information is required to support consideration for a property tax exemption as an organization of purely public charity?

For organizations seeking to show that they provide goods or services free or at a considerably reduced rates as a "substantial" part of their operations, what constitutes "substantial?"

How are government funds considered in determining whether an organization's goods or services are provided free or at considerably reduced rates?

Will county assessors be reexamining exempt property for possible revocation of property tax exemption based on the Under the Rainbow decision?

If an organization is denied a property tax exemption, how is it appealed?

For 2008 and 2009 property tax assessments, what dates are relevant for organizations to know whether they have a tax liability?

How is eligibility for the charity sales and use tax exemption determined?

If an organization is denied its property tax exemption on the basis that it is not a "purely public charity," will it lose its sales and use tax exempt status in Minnesota?

If an organization is denied a sales and use tax exemption, how can it be appears?

Where can I get additional information about whether or not my organization is affected by these changes?

What kinds of charitable organizations are eligible for exemption from paying Minnesota property taxes?

Organizations that qualify as tax-exempt charitable entities under Section 501(c)(3) of the Internal Revenue Code for income tax purposes must still apply separately for exempt status in Minnesota from property and/or sales tax. This exemption request can be denied (or revoked) if the organization does not also operate as a “purely public charity” under Minnesota law.

Note that many kinds of organizations or property that might be viewed as charitable qualify for exemption under separate provisions of Minnesota law and are not affected by the following discussion. Examples of such unaffected properties are those owned and used directly by hospitals; cemeteries; public schools, colleges, and universities; churches and other houses of worship; emergency shelters for victims of domestic abuse; and property used exclusively for a public purpose such as public libraries or public wetlands.

Minnesota law does not contain a clear definition of what does and does not qualify as a “purely public charity,” and this has led to a great deal of uncertainty for many nonprofit entities. The Minnesota Department of Revenue Property Assessor’s Manual (“the Manual”) defines institutions of purely public charity as those that are “administered wholly or exclusively for the benefit of the public, although the property devoted to such use need not be owned by the public.”

The Manual includes a partial listing of organizations that it considers examples of those that do and do not qualify as institutions of purely public charity. Among those listed that do not qualify for exemption (and are therefore taxable) are “commercial and civic organizations, clubs, fraternities, fraternal and benevolent organizations, lodges, and veteran’s groups.” Among those that may qualify are “nursing homes, rest homes, and drug and alcohol treatment centers, if these institutions are widely held, with no gain of any kind going to the members, admission open to all persons without regard to race, religion, or financial ability and support should not rest entirely on the patient’s or guest’s payment, but to a substantial extent on contributions.” The Manual also describes the circumstances under which rental housing property may qualify as a “purely public charity.”

Other than this brief guidance – which clearly does not address the majority of charitable organizations operating within Minnesota – the criteria or “tests” for determining whether an organization qualifies as a “purely public charity” have been historically developed as a result of case law. The three primary Minnesota Supreme Court cases to address this subject include the 1975 North Star case and the 2007 companion cases of Under the Rainbow and Afton Historical Society Press. These cases appear to agree that there are six general criteria that can be used in establishing whether an institution is a “purely public charity,” although they are not clear and even disagree with each other with respect to how many of these criteria are required for a given organization to qualify for a tax exemption, definitions of how to decide whether a given criteria is met, or whether some criteria are to be given more weight than others.

The six criteria (sometimes called the “North Star test” for the case that first listed them) include:
(1) whether the stated purpose of the undertaking is to be helpful to others without immediate expectation of material reward;
(2) whether the entity involved is supported by gifts in whole or in part;
(3) whether the recipients of the “charity” are required to pay for the assistance received in whole or in part;
(4) whether the income received from gifts and donations and charges to users produces a profit to the charitable institution;
(5) whether the beneficiaries of the “charity” are restricted or unrestricted and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives; and
(6) whether dividends, in form or substance, or assets upon dissolution are available to private interests.

Other than organizations that clearly meet all six of these criteria (a charitable food shelf, for example), there is currently no clear rule for determining whether an organization qualifies for exemption in Minnesota. Because of this uncertainty, the Minnesota Council of Nonprofits and other organizations are encouraging the Minnesota legislature to pass legislation that will give board members and volunteers clear guidance to the question “Is our organization eligible for property tax and sales tax exemption in Minnesota?”

Why is this coming up now? Did the Under the Rainbow and Afton Historical Society Press cases create some sort of a law change?

The exemption from all state taxes for institutions of purely public charity is required by Article X, Section 1 of the Minnesota Constitution and is codified as Minnesota Statute §272.02 (7). There has not been a substantive change to this statute for decades, and there has been no challenge to the principle that purely public charities are and will continue to be exempt from both property and sales tax.

The concern that has been raised in the wake of the two December 2007 Minnesota Supreme Court decisions of Under the Rainbow Childcare Center v. County of Goodhue and Afton Historical Society Press v. County of Washington is that these cases appear to create a new standard for determining whether a given organization qualifies for exemption under the existing statute. At the very least, these cases make it clear that the six criteria (listed in the response to the first FAQ) that were articulated in the 1975 Minnesota Supreme Court decision of North Star Research Institute v. County of Hennepin cannot be relied upon in the same manner as they have been interpreted by nonprofit entities (and most assessors) for the 32 years since the North Star decision.

Under the Rainbow Childcare Center v. County of Goodhue (“Rainbow”)

This case involved a nonprofit children’s daycare center (Under the Rainbow Childcare Center) located in Red Wing, Minnesota. Its mission statement is to “provide care for children away from their homes,” and the entity has not realized a profit in any of the years of its existence. Under the Rainbow’s practice was to charge tuition for each child attending the center based on average rates for other daycare centers in the county. The tax court found the tuition rates to be “at or just below” market rates.

Under the Rainbow referred families who could not afford its tuition to Goodhue County social services, and its clients included children whose families had sufficiently low incomes and thus received child care assistance payments from various government sources. Although Rainbow’s executive director testified that Under the Rainbow wrote off several thousands of dollars in unpaid childcare payments each year, Under the Rainbow offered no scholarships and had in the past pursued collection efforts against families that were delinquent in their payments.

The tax court initially evaluated Under the Rainbow against the six North Star factors, and found that, because the organization met five of the six factors (all except for factor three, involving whether recipients of the “charity” are required to pay for the services), the daycare did qualify for the property tax exemption. In reversing this decision in favor of the County, the Minnesota Supreme Court stated that the factors of North Star were never intended by the Court to be read as having equal weight, and that “an entity cannot be an institution of purely public charity without satisfying North Star factor number three.”

The Court summarized their position by stating that “it is not sufficient that an organization serves a worthwhile purpose, or even that it does so on a nonprofit basis.” The “essence of charity,” the Court said, is the “provision of services as a gift to the recipient.” That said, the Court did concede that the services do not need to be provided entirely free of charge to satisfy factor three, and that a charitable gift should be sufficient if is provided “free of charge or at considerably reduced rates,” with the latter defined as “considerably less than market value or cost.” The provision of these charitable services must not be an incidental part of the organization, and the organization must be able to prove that its intended purpose is to provide a “substantial portion” of its goods and services on a charitable basis. The Court did not define “substantial portion” for these purposes.

Afton Historical Society Press v. County of Washington (“Afton”)

One week after issuing its opinion in Rainbow, the Minnesota Supreme Court issued another opinion related to the definition of a “purely public charity” in Afton. Unlike Rainbow, the Court held in favor of the charity in this decision.

This case involved a publishing house (Afton Historical Society Press) that published some materials for retail sale at a profit, sold others at “substantially less than cost”, and donated other published materials to charity. Revenues from the for-profit sales were funneled back into the organization and helped to fund the reduced price and donated book projects.

In Afton, the tax court also reviewed the facts using the six part North Star factors, but concluded that the entity failed because it only met factors one, four, and six. The Supreme Court disagreed, finding (1) that Afton Historical Society Press also met factor three because a substantial number of its books were sold below cost or given away; and (2) that the organization was allowed to carry on both commercial and charitable functions, as long as the commercial activities were subordinate to its charitable operations. The entire entity qualified for exemption.

To summarize the answer to this FAQ, there has not been a law change, but many charities that have previously received a property tax exemption where the exemption was based on equally weighing each of the North Star factors are now concerned that these two new cases could lead local assessors to re-evaluate their exempt status under the language of the two new cases.

What offices make the initial determinations regarding property and sales tax exemptions?

For property tax, the county assessor’s office for the county where the property is located makes the initial decision. For sales and use tax, the Minnesota Department of Revenue Sales and Usage Tax Division (651-296-6181 or 1-800-657-3777) makes the initial exemption decision.

What information is required to support consideration for a property tax exemption as an organization of purely public charity?

A nonprofit entity that believes it qualifies for a property tax exemption as an institution of purely public charity must file an application for exemption with the assessor in the district where the property is located on or before February 1 of the assessment year. For most exempt properties, this application must be re-filed every three years. Thus, no matter what year the entity initially filed, re-applications for all properties are due on the same schedule – in 2010, 2013, 2016, etc.

The application for property tax exemption may require the following documentation:
(1) Proof of 501(c)(3) status;
(2) Articles of incorporation;
(3) Financial statements or other documents showing the most recent three years of donations and revenues (generally in the form of IRS Form 990);
(4) Documentation that goods or services are provided without charge or at less than market value; and
(5) Evidence that the facility is providing and will continue to provide goods or services to the economically disadvantaged.

In addition, the application asks several questions including:
(1) Why should the property be granted an exemption?
(2) Is any part of this property used for commercial purposes?
(3) Is any part of this property used for residential purposes?
(4) What is the stated purpose of this entity?
(5) Is the entity supported by gifts in whole or in part?
(6) Are the recipients of the organization required to pay for assistance in whole or in part?
(7) Does the income received from gifts and donations produce a profit?
(8) Are the beneficiaries of the charity restricted?

For organizations seeking to show that they provide goods or services free or at considerably reduced rates as a “substantial” part of their operations, what constitutes “substantial?”

As discussed above, the Rainbow case held that the provision of charitable services “must not be an incidental part of the organization,” and the organization must be able to prove that its intended purpose is to provide a “substantial portion” of its goods and services on a charitable basis. The Court did not define either “incidental” or “substantial portion” for these purposes. Unfortunately, there is therefore currently no clear guidance as to what percentage of a charity’s goods and services must be given away or sold at “substantially less than fair market value.”

How are government funds considered in determining whether an organization’s goods or services are provided free or at considerably reduced rates?

This is currently one of the areas of uncertainty in Minnesota law as a result of the Under the Rainbow decision. Because of this lack of guidance, the Minnesota Council of Nonprofits and other organizations are encouraging the Minnesota legislature to pass legislation that will give organizations clear guidance to this issue.

Will county assessors be reexamining exempt property for possible revocation of property tax exemption based on the Under the Rainbow decision?

Because the Rainbow and Afton decisions are so new, there is no data available to indicate whether assessors have begun to re-examine exempt property. The assumption is that these cases will create an incentive for counties to aggressively review all institutions of purely public charity. The Minnesota Council of Nonprofits and other organizations are encouraging the legislature to enact clarifying legislation before a substantial number of nonprofit entities are affected by the new case law.

If an organization is denied a property tax exemption, how is it appealed?

Organizations that are denied a request for exempt status or who are notified that their exempt status is to be revoked can file a protest with the Minnesota Tax Court if they wish to appeal the county assessor's determination.

Minnesota law prohibits local and county boards of appeal and equalization from granting exemptions that have been denied. Therefore, the local and county level appeal processes that are generally followed for property tax disputes relating to valuation or classification of property do not apply where the dispute relates to exempt status.

For 2008 and 2009 property tax assessments, what dates are relevant for organizations to know whether they have a tax liability?

Property that is exempt from property tax on January 2 of a particular year but loses its exemption prior to July 1 of that same year will be placed on the current assessment roles for that year. Property that is sold or otherwise loses its exempt status after July 1 will not be added to the assessment roles until the following year.

Keep in mind also that property taxes are assessed a year in advance of the year that they are due. Therefore, entities that were considered exempt in the assessment year of 2007 will not have any property taxes payable in 2008, unless the property lost its exempt status after January 2, 2007, but before July 1, 2007.

Entities that lose their property tax exemption after January 2, 2008, but before July 1, 2008, will have property taxes payable in 2009. Entities that maintain their exempt status until after July 1, 2008, will not have property taxes payable in 2009.

How is eligibility for the charitable sales and use tax exemption determined?

Minnesota Statute §297A.70(4)(a)(1) exempts certain sales to nonprofit organizations that are organized and operated “exclusively for charitable purposes” if the purchased items are used in the performance of the charitable function. The Minnesota Department of Revenue considers the tests for determining whether an organization qualifies for the sales tax exemption to be identical to the tests for determining property tax exemption for “purely public charities.” [Decisions in the property tax cases of Rainbow and Afton have also created a lack of guidance related to determining whether an organization qualifies for sales and use tax exemption in Minnesota.]

This exemption allows purchases on office supplies, furniture, vehicles, computer equipment and other taxed items to be purchased without paying a sales tax. To apply for sales tax exemption, organizations must complete and submit Form ST-16 — Application for Certificate of Exempt Status. Submit the form to Minnesota Department of Revenue, MS 6330, St. Paul, MN 55146.

If an organization is denied its property tax exemption on the basis that it is not a “purely public charity,” will it also lose its sales and use tax exempt status in Minnesota?

As mentioned above, the Minnesota Department of Revenue indicated in Revenue Notice #07-12 that nonprofit entities that are determined not to qualify as “purely public charities” for property tax purposes will also be determined to be ineligible for sales and use tax exemption. The notice, titled “Exempt Status Revocation After Adverse Property Tax Exemption Determination,” was published on October 15, 2007.

This notice also indicates that the Minnesota Department of Revenue considers the tests for determining whether an organization is operated as a “purely public charity” to be identical as that for property tax purposes. “Therefore,” it states, “if there is a final judicial determination that a nonprofit organization has failed to qualify as a charitable organization for property tax purposes it will also not qualify as an exempt charitable organization for sales tax purposes. The Department will initiate revocation of an exempt status number [for sales tax] that may have been given to the organization.”

The logic of this position raises some interesting questions. For example, if the Minnesota Department of Revenue determines that an organization does qualify as a purely public charity for sales and use tax purposes, should that now serve as sufficient evidence to the county assessor that the entity should also be granted a property tax exemption?

If an organization is denied a sales and use tax exemption, how can it be appealed?

Organizations that are notified that their sales tax exempt status will be revoked are entitled to administratively appeal the decision with the Minnesota Department of Revenue. A request for a hearing should be filed with the Department of Revenue within 60 days of receipt of the Notice of Revocation. Details regarding the form and contact information to be included in the request for hearing are included in the Notice of Revocation. Nonprofit entities should be prepared to summarize the grounds for their appeal within the request for hearing. Entities who are denied exempt status may also challenge the decision in either tax court or civil court.

Where can I get additional information about whether or not my organization is affected by these changes?

LegalCORPS, with the assistance of the Minnesota Council of Nonprofits, is offering brief telephone advice by pro bono attorneys to nonprofits who are concerned about their property and/or sales tax exemption. To use this service, visit www.legalcorps.org for details.
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Answers to these frequently asked questions were provided by Gina DeConcini, a partner in the Corporate Finance & Transactions Group at Oppenheimer Wolff & Donnelly LLP. Gina’s practice focuses on tax planning, controversy and merger and acquisition transactions. She joined Oppenheimer with 14 years of experience in the public accounting field. She also serves as treasurer of the Tax Section of the Minnesota State Bar Association. In addition, she is a frequent speaker on multistate and international tax topics for various professional organizations. She received her J.D., cum laude, from the University of Minnesota Law School.

Gina’s efforts were provided in her capacity as a volunteer of LegalCORPS. LegalCORPS assists small Minnesota nonprofits with high-quality, pro bono business legal services they cannot afford. LegalCORPS’ lawyer volunteers assist small nonprofits – whether their mission is in social services, education, cultural and charitable services, promoting economic development or another field. For more information on LegalCORPS, visit www.legalcorps.org.

Questions? Comments? Contact Jeannie Fox at jeannie@mncn.org.