Ohio Tax Healthcare & Non-Profit Industries Unique Tax Issues - - PDF document

26th Annual

Tuesday & Wednesday, January 24‐25, 2017

Hya Regency Columbus, Columbus, Ohio

Ohio Tax

Workshop U

Healthcare & Non-Profit Industries … Unique Tax Issues

Tuesday, January 24, 2017 4:15 p.m. to 5:15 p.m.

Biographical Information Jeffrey L. Stansberry, CPA, MT - Tax Manager, OhioHealth 80 E. Broad St, Columbus, OH 43215 jeffrey.stansberry@ohiohealth.com (614) 544-4336 Fax (614) 544-4470 Jeff started his career in public accounting and was at GBQ Partners for over four years. He then transitioned into industry and was at BISYS/Citi for over six years. After being in public and industry for nearly two decades, he decided to shift his focus into the tax exempt sector. For over three years, Jeff has lead up the tax department at OhioHealth, central Ohio’s largest healthcare system. Jeff is responsible for leading OhioHealth’s annual federal, state, and local tax compliance process while providing oversight and communication to the entire system of

• ver 20,000 employees.

Jeff is a graduate of The Ohio State University with a BS in Business Administration (Honor Classes) and received a Masters in Taxation from Capital University Law School. Christopher J. Swift, Partner, Baker Hostetler LLP 1900 East 9th Street, Suite 3200 Cleveland, OH 44114-3482 cswift@bakerlaw.com 216.861.7461 Chris Swift is a healthcare and tax lawyer who counsels the healthcare industry and other businesses by guiding them through governmental, tax and regulatory issues. He keeps non-profit

• rganizations tax-exempt, assists all taxpayers in reducing state and local taxes and finds tax and

regulatory incentives to grow companies. He currently serves both as a National Co-Leader of the firm’s Healthcare Industry Team and as Coordinator of the Cleveland office’s Tax, Personal Planning and Employee Benefits Group. He served as a member of the firm’s Policy Committee from 2004 through 2009. Chris has lectured on state and local taxes to several organizations, including the Cleveland Metropolitan Bar Association, the Columbus Bar Association and the Committee on State Taxation. In 1988, he was the Chair of the Cleveland Bar Association’s State and Local Tax Institute. In 1990- 91, he served as Chair of the Cleveland Bar Association’s General Tax Committee. Chris has also served as Chair of the 2008 Cleveland Tax Institute and the CMBA’s 1998 Health Law Institute. Chris is a member of the American, Ohio and Cleveland Metropolitan Bar Associations, as well as the American Health Lawyers Association. Since 1997, Chris has been listed annually in the Best Lawyers in America. He was named by Best Lawyers as “2010 Cleveland Tax Lawyer of the Year” and “2011 Cleveland Health Care Lawyer of the Year.” Both honors are bestowed upon only one lawyer per specialty in each community. Chris has been named an “Ohio Super Lawyer” for the past ten years. Stephen M. Palmer, CPA, State and Local Tax Manager Plante Moran, 65 E. State St., Ste. 600, Columbus, OH 43215 614-222-9137 Fax: 248.327.8537 Stephen.Palmer@plantemoran.com Stephen spent more than 6 years at the Ohio Department of Taxation primarily involved in auditing various Ohio taxes. The Ohio tax auditing experience crossed multiple industries and included pass- through entity tax, sales and use tax, the former Ohio franchise and personal property taxes, income tax, and withholding tax. For more than five years, Stephen has provided value added service to clients in the private sector. His experience includes multi-state taxation in the manufacturing, distribution, healthcare, and service industries. Stephen has also been involved in writing state and local tax alerts for internal and external use. Stephen is a graduate of Cedarville University, is a member of the Ohio Society of CPAs, and is a member of the tax committee for the Ohio Chamber of Commerce.

Healthcare Industry & Nonprofit Entities Unique Tax Issues

Jeffrey Stansberry ‐ OhioHealth Christopher Swift ‐ Baker Hostetler Stephen Palmer ‐ Plante Moran

Impact of External Change

• Federal and State Health Care Policy

‒ EMTALA and other Safety Net Acts applicable to for‐profit providers ‒ Affordable Care Act ‒ Expansion of Medicaid ‒ Schedule H of Form 990

• Correlation of Value of Tax Benefits to Level of

Charitable Care

‒ Percentage of Charitable Care is decreasing

• How Much is Enough?

2

Basis for Federal Income Tax Exemption

• Section 510(c)(3) requires that the corporation

be “organized and operated exclusively for religious, charitable, scientific . . . Or educational purposes” and that “no part of the net earnings of which inures to the benefit

• f any private shareholder or individual.”

3

Choice of Entity

• Chapter 1702 of the Ohio Revised Code (Ohio

Nonprofit Corporation Law)

• Some nonprofits are unincorporated associations,

trusts, limited liability companies, partnerships,

• r disregarded entities
• Section 501 of the Internal Revenue Code

‒ While many nonprofits are tax‐exempt for federal income tax purposes under Section 501(c)(3), there are many subsections like Section 501(c)(4) ‒ Some nonprofits are taxable ‒ Some for‐profit corporations are tax‐exempt

4

Choice of Entity

• Different Rules for Different Taxes

‒ Federal Income Tax ‒ FUTA/SUTA

• Reimbursing Employer Status

‒ Ohio Franchise Tax ‒ Ohio Sales & Use Tax ‒ Ohio Real Property Tax ‒ Ohio Commercial Activity Tax

5

Ohio Nonprofit Corporation Definition

• Ohio Rev. Code 1702.01(C) defines “Nonprofit

Corporation” as a “corporation that is formed

• therwise than for the pecuniary gain or profit
• f, and whose net earnings or any part of

them is not distributable to, its members . . . .”

6

Ohio Public Benefit Corporation Definition

• “Public benefit corporation” is defined as a

“corporation that is recognized as exempt from federal income taxation under section 501(c)(3) . . . . Or is organized for a public or charitable purpose . . . .” Ohio Rev. Code (“ORC”) 1702.01(P).

• Sometimes the ORC piggybacks on Section

501(c)(3), but not always.

7

Healthcare Exemptions‐Status

‒ Disregarded entities of a Section 501(c)(3) entity (i.e. single member LLCs) may qualify for the status exemption of its tax‐exempt member. ‒ A single member LLC that operates with a nonprofit purpose shall be treated as part of the same legal entity as its member, and all assets and liabilities of that single member shall be considered to be that of the member. Filings or applications for exemptions or

• ther tax purposes may be made either by the single

member LLC or its member. ‒ Verify that LLC is organized as a nonprofit.

8

Basis for Ohio Franchise Tax Exemption

‒ Other than nonprofit corporation organized under Ohio Rev. Code Chapter 1729 (Agricultural Cooperatives), nonprofit corporations are not subject to the Ohio franchise tax. Ohio Rev. Code 5733.01. ‒ Federal Tax‐Exempt Status was not required. ‒ Many hospital systems used taxable nonprofit corporations for certain activities. ‒ Because the Ohio Franchise Tax has been repealed, this is historical.

9

Basis for Ohio Commercial Activity Tax Exemption

‒ Defined by rule to be very broad. ‒ Two criteria

• Organized other than for pecuniary gain or profit
• Operates consistent with its organization

‒ Includes entities organized under ORC 1702, 1707, 1711, 1713, 1715, 1716, 1717, 1719, 1721, 1724, 1725, 1727, or 1733 ‒ Includes organizations formed for funding political campaigns ‒ Charitable lead trust is a nonprofit during the lifetime of the

• grantor. The trust loses its nonprofit status when the grantor

passes away ‒ If all owners are nonprofit organizations, distributions to these

• wners does not deprive the nonprofit status

10

Basis for Ohio Sales Tax Exemption

• Purchases by organizations exempt from

taxation under Section 501(c)(3) are generally exempt from Ohio sales and use tax. Ohio rev. Code 5739.02(B)(9) and 5741.02(C)(2).

‒ Some states like Florida and Kentucky require tax‐ exempt hospitals to include current federal determination letter in application.

11

Healthcare Exemptions‐Status

• Purchases by Section 501(c)(3) Entities

‒ Sales of tangible personal property or services to

• rganizations exempt from taxation under section

501(c)(3) of the Internal Revenue code of 1986, and to any

• ther nonprofit organizations operated exclusively for

charitable purposes in this state, no part of the net income

• f which inures to the benefit of any private shareholder
• r individual, and no substantial part of the activities of

which consists of carrying on propaganda or otherwise attempting to influence legislation; sales to offices administering one or more homes for the aged or one or more hospital facilities exempt under section 140.08 of the Revised Code; and sales to organizations described in division (D) of section 5709.12 of the Revised Code.

12

Healthcare Exemptions‐Status

• Definition of “Charitable Purposes” for Ohio

Sales & Use Tax

‒ “Charitable purposes” includes the relief of poverty; the improvement of health through the alleviation of illness, disease, or injury; the

• peration of an organization exclusively for the

provision of professional, laundry, printing, and purchasing services to hospitals or charitable institutions and the operation of a home for the aged, as defined in section 5701.13 of the Revised Code.

13

Healthcare Exemptions‐Status

• Certain sales by Section 501(c)(3) Entities

‒ Sales of services or tangible personal property, other than motor vehicles, mobile homes, and manufactured homes, by organizations exempt from taxation under section 501(c)(3) of the Internal Revenue Code of 1986, or nonprofit organizations operated exclusively for charitable purposes, provided that the number of days on which such tangible personal property or services, other than items never subject to the tax, are sold does not exceed six in any calendar year. If the number of days on which such sales are made exceeds six in any calendar year, the

• rganizations shall be considered to be engaged in

business and all subsequent sales by it shall be subject to the tax.

14

Healthcare Exemptions‐Status

• Purchases of building and construction

materials and services sold to construction contractors for incorporation into a building under a construction contract with a section 501(c)(3) entity when the building is used exclusively for exempt purposes.

15

Recent Case Law on Sales and Use Tax Exemption

• Medical transcription services do not fall under

“professional or personal services” for purposes of the use tax exemption.

‒ Medical transcription fits the definition of automatic data processing (rather than service) because transcriptionists do not alter, analyze, or adjust the material and no specialized training is required. Columbus Oncology Associates, Inc. v. Testa, Ohio Bd. of Tax Appeals, 2014‐ Ohio‐3984 (Sep. 28, 2015). ‒ Medical transcription is not a service because it requires no specialized training; suggests that services from transcriptionists who attend a certified program may be treated differently. Dayton Physicians, LLC v. Testa, (Slip Opinion) (Ohio App. 2 Dist.) 2016‐Ohio‐5348 (Aug. 12, 2016).

16

Historical Background on Property Tax Exemption

• Prior to New Deal, local government or

charitable organizations were responsible for alleviation of poverty and providing health care for the poor.

‒ Local governments owned and operated hospitals, requiring public expenditures

• Exemptions trace back to English Statute of

Charitable Uses of 1601.

17

Historical Background on Property Tax Exemption

• Thirty‐nine states require both charitable
• wnership and charitable use for exemption

for ad valorem taxation.

• 11 states only require exempt use.

18

Real Estate Exemption: Out‐of‐State Developments

• Illinois – Carle case to be heard in Illinois Supreme

Court this month (Jan. 2017) to resolve an appellate court split over constitutionality of 2012 Illinois law.

‒ 2012 law – restricted property tax exemptions for nonprofit hospitals to situations where amount of charity care/beneficial services were ≥ property taxes for the year. ‒ Carle Foundation health systems set to be taxed for the year 2015 because charity care did not equal or exceed taxes ‒ Appealing from Fourth District appellate court ruling that 2012 law was unconstitutional on its face because it grants a charitable exemption without requiring property be used “exclusively” for charitable purposes, in accordance with IL constitution

19

Summary of Appellate Court Ruling ‐ Carle (Illinois)

• The unfavorable 1/5/16 Illinois ruling (Carle Foundation v. Illinois) says the Illinois

Constitution allows lawmakers to exempt only property "used exclusively" for "charitable purposes."

• Nothing will change for Illinois not‐for‐profit hospitals for the time being since

this ruling is not final since this particular case is likely headed to the Illinois Supreme Court.

• The ruling is yet another setback for not‐for‐profit hospitals, which have come

under increased scrutiny in recent years over their tax exemptions.

• This Illinois appeals court reversed a lower court ruling that initially sided with

the hospital.

• Illinois is once again attacking the real estate tax exemption of 501c3 hospitals as

an Illinois appeals court decision has reopened a statewide dispute over whether hospitals should be exempt from paying property taxes.

• The Illinois appeals court ruled that part of a 2012 law that allows hospitals to

avoid taxes is unconstitutional. The 2012 law says that the value of certain charitable and other services offered by a hospital must exceed the estimated value of its property tax liability if it's to get a property and sales tax exemptions. The law was passed after the Illinois Supreme Court, in 2010, upheld a decision to revoke Provena Covenant Medical Center’s property‐tax exemption, worrying

• ther nonprofits across Illinois.

20

Real Estate Exemption: Out‐of‐State Developments

• Oswald case (Illinois) – First District Appellate
• Court. Oswald v. Hamer, 2016 IL App (1st) 152691

(Dec. 22, 2016).

‒ Opposite of Carle Fourth District Case ‒ Held that 2012 law is not unconstitutional on its face because the statute is meant to be “descriptive and illustrative of property that may qualify under constitutional requirements of exclusive use,” and not meant to negate IL constitutional requirement that property be used “exclusively” for charitable purposes

21

Real Estate Exemption: Out‐of‐State Developments

• New Jersey case – (AHS Hospital Corp. d/b/a Morristown Memorial Hospital v.

Town of Morristown, Tax Court of New Jersey, Docket Nos. 010900‐2007, 010901‐ 2007, 000406‐2008 (June 25, 2015). ‒ Held Morristown Memorial Hospital (hospital) failed to meet “profit” test and qualify for property tax exemption ‒ Found that for‐profit activities on hospital property could not be “separately stated and accounted for” in order to grant exemption even for delineated portions of property

• Private, for‐profit physicians worked in all areas of the hospital
• Hospital “entangled its activities and operations” with for‐profit entities

(shareholder in for‐profit entities; made capital loans to for‐profits; used money from profitable hospital departments to subsidize “loss leader” for‐profit areas)

• Hospital failed to show executive compensation was reasonable by state

standards—IRS standard of reasonable compensation did not apply

• Physician contracts split profits with hospital, showing a for‐profit motive

22

Morristown (New Jersey), cont.

• “If it is true that all non‐profit hospitals
• perate like the Hospital in this case, as was

the testimony here, then for purposes of the property tax exemption, modern non‐profit hospitals are essentially legal fictions”

• “Clearly, the operation and function of moder

non‐profit hospitals do not meet the current criteria for property tax exemption”

23

Real Estate Exemption: Out‐of‐State Developments

• Pennsylvania

‒ The former mayor of Pittsburgh sued healthcare giant University of Pittsburgh Medical Center in 2013 to revoke that system's tax‐exempt status. ‒ However, both sides dropped that legal battle after a new mayor took over.

• Texas

‒ Nonprofit hospitals must provide community benefits as a condition of their state tax exemption. ‒ Texas law gives a hospital four alternatives that cover combinations of charity care and government sponsored indigent health care in amounts equal to varying sums of net patient revenue.

24

Basis for Ohio Real Estate Tax Exemption

• “Real and tangible personal property

belonging to institutions that is used exclusively for charitable purposes shall be exempt from taxation . . . .” Ohio Rev. Code 4709.12(B).

• Like most states, Ohio requires both charitable
• wnership and charitable use for ad valorem

exemption.

25

Implications for Ohio Hospitals

• R

eal property tax exemption in Ohio for hospitals is generally governed by two sections [R evised Code §5709.12(B) and §5709.121] employing the general law

• f charity for organizations that use property for charitable purposes.
• Applying these laws specifically to hospitals and other healthcare
• rganizations, the Ohio S

upreme Court has consistently found through various decisions that the property of charitable hospitals is exempt, even if the hospital charges for its services:

‒

“ This Court has embraced an expansive view of charity that involves the provision of public benefit without regard to the ability to pay.” [Planned Parent hood Assoc. v. Tax Comm’ r, 5 Ohio S t.2d 117 (1966)]

‒

“ The provision of medical or ancillary healthcare services qualifies as charitable if those services are provided on a nonprofit basis to those in need, without regard to race, creed, or ability to pay. An organization promoting community health will be acting charitably if it provides services without regard to race, color, creed or ability to pay. It is the use of the property rather than the fact that revenues are collected and received from property which is controlling.” [Church of God in N. Ohio v. Levin, 124 Ohio S t.3d 36 (2009)]

‒

“ The generation of profit by the property ‘ does not remove it from the statutory category of exempt property,’ because ‘ the evidence shows that the parking lot is an essential and integral part of the hospital’s function and not property used mainly for income purposes.’ ” [Girl S cout s-Great Trail Council v. Levin, 113 Ohio S t.3d 24 (2007), cit ing Bowers v. Akron Cit y Hosp., 16 Ohio S t.2d 94 (1968)]

26

Implications for Ohio Hospitals

• The Ohio Department of Taxation has not been using the Provena case to

attack exemption of Chapter 140-bond financed properties under Ohio R evised Code §140.08(A).

• Therefore, the most certain way to avoid problems with Provena for

OhioHealth is to use the exemption for hospital facilities financed with Chapter 140 bonds whenever possible.

• In that regard, Ohio R

evised Code §140.08(A) exempts hospital facilities from all taxes, including real property taxes if:

‒ (i) the facilities are "hospital facilities” (a very broadly defined term), ‒ (ii) the facilities are financed in whole or in part with "obligations"

issued by a "public hospital agency," and

‒ (iii) the facilities are actually used as hospital facilities.

27

ShadoArt Productions Inc. v. Testa

• Long‐term nonprofit lessee applying for charitable‐use

exemption was denied exemption because for‐profit lessor did not qualify for exemption. ShadoArt Productions, Inc. v. Testa, Oh. Supreme Court, Slip Opinion No. 2016‐Ohio‐511 (Feb. 16, 2016).

‒ Lessee: ShadoArt Productions, Inc. dba Shadowbox (nonprofit 501(c)(3) organization ) with 30‐year term and

• ption to purchase. Modified space to create kitchen and
• theater. Mission to provide artistic programming (comedy,

musical and theater performance, collaborations with local arts organizations). Receives funds from ticket sales, food sales, and donations. ‒ Lessor: 503 Front Street, for‐profit organization receiving rental income from properties in area.

28

• Ohio Supreme Court reasoned that 2008 amendment
• f O.R.C. 5715.27 to allow long‐term (30 years or more)

lessees to apply for exemption merely broadened pool

• f applicants for exemption, not scope of exemption.
• Construed “belonging to” in statute to mean

“ownership” (fee title)—owner of property must qualify for charitable‐use exemption for lessee to qualify.

• Interpreted intention of 2008 amendment to include

charitable institutions leasing to other charitable institutions for charitable purposes, not for‐profit

• rganizations leasing to charitable institutions.

29

ShadoArt cont.

ShadoArt’s Siblings – Geneva Area Recreational, Educational & Athletic Trust

• Affirmed denial of exemption where for‐profit

lessor was leasing to nonprofit, even where lessee had a renewable 99‐year lease. Court found that property “belonged to” nonprofit lessor, and thus could not qualify for exemption. Geneva Area Recreational, Educational & Athletic Trust v. Testa, Oh. Supreme Ct., 56 N.E. 3d 940, 2016‐Ohio‐2695 (April 27, 2016).

30

• Lessee: Nonprofit organization running Olympic‐grade

athletic facilities on property. Commissioner found no charitable purpose.

• Lessor: For‐profit LLC, received $1 rent per year.

Commissioner found main purpose was commercial leasing and development of land.

• Court held that even where lessee had renewable 99‐

year lease, property “belonged to” owner of property.

• Use that matters for purpose of charitable‐use

exemption was use of owner (in this case, for‐profit LLC), not of lessee.

31

Geneva, cont.

• Owner of property must use property exclusively for

charitable purposes, not lessee. YMCA of Greater Cleveland

• v. Testa, Oh. BTA, No. 2015‐54 (Dec. 3, 2015).

‒ Owner: Kirtland Midwest Healthcare Group LLC, for‐profit entity ‒ Lessee: Geauga Center for Health and Wellness. 50‐year ground lease in place at time Kirtland purchased land. Subject to lease, YMCA was required to construct buildings comprising the “Project.” Geauga entered into subleases with YMCA and University Hospital to complete the “Project.” ‒ Sublessee: YMCA of Heather Hill, Inc (~45,000 sq ft) and University Hospitals (~5,000 sq ft). 25‐year leases with 3 renewable 25‐year terms. ‒ In 2009 Geauga merged into YMCA.

32

YMCA of Greater Cleveland v. Testa

YMCA, cont.

• Commissioner found that on the date of the tax lien

(2013), property was owned by Kirtland and thus charitable‐use exemption depended on Kirtland’s

• use. Because Kirtland was for‐profit, no exemption.

33

Lancaster School District BOE v. Testa

• BTA affirmed determination that Fairfield Medical

Center (outpatient surgery center) qualified for charitable‐use exemption despite physicians’ status as independent contractors. Board of Education of the Lancaster City School District v. Testa, Oh BTA, No. 2013‐1923 (June 22, 2015).

‒ Board of Education contended that FMC did not qualify for exemption because its physicians were independent contractors who did not have to adhere to charity care policies of FMC. ‒ FMC bylaws stated that all medical staff must adhere to medical center policies, which include its charity care policies.

34

Ohio Hospital Facility Exemption

• O.R.C. 140.08 provides that “hospital facilities” that are “purchased, acquired,

constructed, or owned by a public hospital agency, or financed in whole or in part by obligations issued by a public hospital agency, and used, or to be used when completed, as hospital facilities” … “shall be exempt from all taxation.”

‒ O.R.C. 140.01(E): 'Hospital facilities' means buildings, structures and other improvements, additions thereto and extensions thereof, furnishings, equipment, and real estate and interests in real estate, used or to be used for or in connection with one or more hospitals, emergency, intensive, intermediate, extended, long‐term, or self‐care facilities, diagnostic and treatment and out‐patient facilities, facilities related to programs for home health services, clinics, laboratories, public health centers, research facilities, and rehabilitation facilities, for or pertaining to diagnosis, treatment, care, or rehabilitation of sick, ill, injured, infirm, impaired, disabled, or handicapped persons, or the prevention, detection, and control of disease, and also includes education, training, and food service facilities for health professions personnel, housing facilities for such personnel and their families, and parking and service facilities in connection with any of the foregoing; and includes any one, part of, or any combination of the foregoing; and further includes site improvements, utilities, machinery, facilities, furnishings, and any separate or connected buildings, structures, improvements, sites, utilities, facilities, or equipment to be used in, or in connection with the operation or maintenance of, or supplementing or otherwise related to the services or facilities to be provided by, any one or more of such hospital facilities”

35

Columbus BOE v. Testa

• Matter remanded where record was devoid of evidence indicating

whether wellness center was used as a hospital facility or “in connection with” a hospital facility. Board of Education of the Columbus City School District v. Testa, Oh. BTA, 2014‐Ohio‐4914 (November 17, 2015).

‒ Property: Wellness Center at Wesley Glen. Provides wellness and fitness services (including pool, therapy, fitness center, and juice bar) for Wesley Glen community (residents of assisted living, nursing home, independent living, and rehabilitation units of Wesley Glen). Free use by Wesley Glen residents, staff members, family members. Open to community members for small fee. ‒ Property Owner: Wesley Glen, Inc. ‒ Court found commissioner granted “hospital facility” exemption prematurely where no evidence indicating how members came to use wellness center facility—i.e., whether it was in extension of associated hospital facility in treatment, or at order of medical professional, or simply personal choice, etc.

36

Fraternal Organization Exemption

• Real estate exemption exists for property used primarily for

meetings or administration of a fraternal organization (O.R.C. 5709.17(D)):

‒ Not exempt: real estate held for the production of rental income in excess of thirty‐six thousand dollars in a tax year, before accounting for any cost or expense incurred in the production of such income.” ‒ Fraternal organization means a domestic fraternal society, order, or association operating under the lodge, council, or grange system that qualifies for exemption from taxation under section 501(c)(5), 501(c)(8), or 501(c)(10) of the 'Internal Revenue Code of 1986,' …that provides financial support for charitable purposes … and that has been

• perating in [Ohio] with a state governing body for at least one

hundred years

• Legislative Update: in June 2016, the exemption was expanded to

include property held by fraternal organizations under a governing body that has operated in Ohio for 85 years or more, rather than 100 years.

37

Columbus City School District BOE v. Testa

• Property used for lodging and gathering of a chapter of

the Sioux Tribe.

• Individual chapter of Sioux Tribe applying for

exemption had only existed for around 50 years.

• BTA affirmed commissioner finding that since the
• verall governing body (Tribe) had been in operation in

Ohio for over 85 years, the governing body of the individual chapter need not meet the requirement to qualify for the exemption. Board of Education of the Columbus City School District v. Testa, Oh. BTA, No. 2016‐1 (November 7, 2016).

38

McMakin Lodge v. Testa

• Masonic lodge used one floor for

meetings/administration and rented another floor to a public library; could not qualify for fraternal organization exemption for the floor rented by public library. Although rent received from the library was under the statutory limits in O.R.C. 5709.17(D), the floor was not used “primarily” for meetings and administrative functions of the organization. McMakin Lodge v. Testa, Oh. BTA, 2014‐Ohio‐4570 (September 17, 2015).

39

Religious Use Exemption

• Church sought charitable‐use and public worship exemptions for

property taxes for dormitories on church grounds. BTA granted exemption under public worship exemption. Grace Cathedral, Inc. v. Testa, Oh. Supreme Ct., 143 Ohio St.3d 212, No. 2015‐2067 (June 2, 2015).

‒ O.R.C. 5709.07(A)(2): "[h]ouses used exclusively for public worship, the books and furniture in them, and the ground attached to them that is not leased or otherwise used with a view to profit and that is necessary for their proper occupancy, use, and enjoyment.” ‒ Court found dormitory on church grounds qualified for public worship exemption because, like on‐site parking facilities for churches, it was used at times of worship to offer congregants lodging in close proximity to services, and fellowship after. ‒ “Need only facilitate public worship in a ‘principal, primary, and essential way’, or provide a use incidental to the primary use.”

40

Religious Use Exemption

• The Tax Commissioner denied the public worship exemption for a Christian

radio station when it moved into a new facility. The BTA affirmed the denial, but the Ohio Supreme Court reversed. Christian Voice of Cent. Ohio

• v. Testa, Oh. Supreme Ct., 147 Ohio St.3d 217, 2016‐Ohio‐1527 (April 14,

2016)

‒ The 4‐3 majority found that the exemption should be allowed for property used to

• perate the Christian radio station because the primary use of property is for public

worship and not for profit. O.R.C. 5709.07(A)(2) ‒ Justice Sharon L. Kennedy wrote in her opinion that the radio station “has dedicated all its land and buildings to charity and religion, and … [has] the necessary attributes of a church.” ‒ Public worship for purposes of the exemption is “the open and free celebration or

• bservance of rites and ordinances of a religious organization.”

‒ The Court found that the real property must be used in a “principal, primary, and essential way to facilitate public worship” which can be met even when there are “auxiliary buildings or portions of building” when the primary building qualifies. ‒ Dissenting opinion written by Chief Justice Maureen O’Connor disagreed that the radio station was really a house of worship.

41

Potential Unintended Consequences

Loss of Real Estate Tax Exemption

• Increased Expenses  Reduced Net Income
• Reduced Net Income  Lower Bond Ratings

resulting in higher expense

• Elimination or Deferral of Capital Improvements

that have no Return on Investment (ROI)

‒ Cafeterias, Public Areas, Fountains, Landscaping ‒ Renovated patient Wings/ERs

• Potential hospital closures

42

Cleveland Clinic Foundation v. Wilkens and Beachwood BOE, BTA Case No. 2005‐A‐1726 (July 21, 2014)

• CCF demonstrated that it provides charity

care, without regard to a patient’s ability to pay.

• Recent Ohio Supreme Court case law does not

require a threshold amount of unreimbursed care.

• Accordingly, CCF operated as a charitable

institution and qualifies for real estate tax exemption.

43

Cleveland Clinic Foundation v. Wilkens and Beachwood BOE (con’t)

• Near the end of the 9 years of litigation, the Tax

Commissioner conceded that the Beachwood facility was exempt under Section 5709.12.

• Whether the property was also exempt as an

educational and/or research institution was not addressed.

• The BTA decision was not appealed.
• Ohio reached a different result than Illinois and a

few other states.

44

Good Shepherd Home for the Aged, Inc. v. Testa, BTA Case No. 2012‐1797 (August 29, 2014)

General Rules

• Absent exemption, all real property is subject

to taxation in Ohio.

• Exemption statutes must be strictly construed.
• Taxpayer has the burden of showing in what

manner and to what extent the Tax Commissioner’s determination is in error.

• Settled while pending before the Ohio

Supreme Court.

45

Good Shepherd v. Testa (con’t)

“Home for the aged” means a place for aged and infirm persons that inter alia:

• Is a nursing home, residential care facility or

residential facility.

• Is owned by organizations exempt from federal

income tax under IRC Section 501.

• Is open to the public without regard to race, color
• r national origin.
• “Provides services for the life of each resident

without regard to the resident’s ability to continue payment for the full cost of the service.”

46

Good Shepherd v. Testa (con’t)

BTA affirmed the Tax Commissioner’s denial of a “home for the aged” real estate tax exemption for Good Shepherd.

• Residence Admission Agreement indicated that a resident

could be discharged if resident “fails to pay for his or her portion of services provided.”

• Even though Good Shepherd’s witnesses testified that in

practice no resident has ever been discharged due to inability to pay, the facility did not qualify for exemption because it was not obligated to provide the services for the life of each resident .

• Possession of the right to terminate violated the statute

whether exercised or not.

47

Medicaid/Medicare Issues

Items paid by Medicaid or Medicare may be taxable. The Medicaid/Medicare recipient is considered end user, liable for sales tax on purchases of TPP & taxable services, unless exemption exists.

48

Medicaid Health Insuring Corporations

• R.C. 5739.01 (MMM) “Medicaid health insuring

corporation” means a health insuring corporation that holds a certificate of authority under Chapter 1751. of the Revised Code and is under contract with the department of job and family services pursuant to section 5111.17 of the Revised Code.

• Health care services provided or arranged by a

Medicaid health insuring corporation for Medicaid enrollees residing in Ohio are subject to sales and use tax.

49

Medicaid Health Insuring Corporations

• The corporations are designated by statute as the

consumers like construction contractors of the services, rather than the individual receiving the services. As the consumer, the corporation is liable for and must pay the tax

• n services it provides or arranges for Medicaid enrollees

residing in Ohio. The corporations would be issued direct payment permits allowing them to remit the tax directly to the state. The purchase of services by a Medicaid health insuring corporation is not subject to the exception for resale or to the drug, medical equipment, government or charitable exemptions. The price is the amount of managed care premiums received each month by a Medicaid health insuring corporation. Payment must be made monthly.

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Medicaid Health Insuring Corporations

• Is the Medicaid HIC sales and use tax an

impermissible healthcare‐related tax?

• R.C. 5739.01(B)(11)(b) provides that if CMS

determines this tax to be an impermissible healthcare‐related tax, then upon notification to the Tax Commissioner the transactions are no longer subject to Oho sales or use tax beginning with the first day of the following month.

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Impact of Ohio’s Expansion of Medicaid Program

• Effective January 1, 2014, Ohio’s Medicaid

program was expanded to cover individuals earning up to 138% of Federal Poverty Level ($15,860 for an individual).

• Estimated $13 billion over next seven years.
• $100% federal subsidy continues until 2016,

95% ‐ 2017 and 90% thereafter.

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Ohio’s Medicaid MCO Use Tax

• Ohio currently imposes a use tax on only

Medicaid MCO providers.

• Impact of tax:

‒ Projected revenue from MCO use tax for local tax bases in FY 2018 and FY 2019 is around $200 million.

• Distributions to local tax bases are based on percentage
• f Medicaid enrollees.

‒ Allows state to draw down federal Medicaid funds without harm to providers or state.

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Future of Ohio’s Medicaid MCO Use Tax

• CMS letter (July 2014) to state directors warning

sales/use taxes aimed at Medicaid MCOs were impermissible.

• Ohio has until July, 2017 (new budget cycle) to either

reform the tax to comply or abolish it.

• Issues:

‒ Healthcare tax must be broad based and apply to all services in a permitted class; ‒ Be uniform so that all taxpayers pay same rate; and ‒ Reimbursement rates cannot create “hold harmless” situation in which taxes are returned directly to providers (unless taxes amount to less than 6% of revenue to provider class).

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Other States and Medicaid MCO Taxes

• Michigan, California, and Pennsylvania had

similar taxes. General fix has been to broaden use tax to capture not merely “Medicaid” MCOs but all MCOs.

• December, 2016 – Michigan legislature passed a

bill that would eliminate the Medicaid MCO use tax until the HICA sunset (July, 2020) or HICA repeal, whichever is earlier

‒ HICA – Health Insurance Claim Assessment. 1.0% rate

• n paid claims of carrier or third party administrator

for health and medical services

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Questions?

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Contact information

Jeffrey L. Stansberry, CPA, MT Tax Manager, Corporate Finance Ohio Health Jeffrey.Stansberry@ohiohealth.com Chris Swift Partner Baker Hostetler Cswift@bakerlaw.com Stephen Palmer SALT Manager Plante Moran Stephen.Palmer@plantemoran.com

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