It’s no secret in Indiana that taxes, and specifically real estate property taxes, are a subject of hot debate. Good, bad, or indifferent, it appears there is some consensus that regardless of their propriety, the changes represented by Senate Bill 1 (SB1) and pushed by Governor Braun and his supporters will do two things, 1) put more money in Hoosier households pockets, and 2) reduce the funds available for Indiana’s cities, towns, counties, schools, townships, and libraries. Accelerate Indiana Municipalities has summarized these bills and talking points extensively. But, what does this type of legislation mean for our local nonprofit community?
If you have or are working on an application for property tax exemption, beware! As the pot of available tax dollars shrinks, local officials feel the stress to do more with less, and when that’s not possible, to find more tax dollars. The pot of taxable real estate is finite, and as Mark Twain said, “they’re not making it anymore!”
Traditionally, all buildings within Indiana are subject to property tax. However, Indiana Code sets out a handful of exemptions to this requirement. One of these exemptions, found in Indiana Code 6-1.1-10-16, provides that buildings owned, used, and occupied for educational, literary, scientific, religious, or charitable purposes can apply for, and be granted, a property tax exemption.
It’s important to keep in mind that exemptions are not automatic, they are not self-renewing in all cases, they are subject to audit, and if not properly applied for, they can be lost. Moreover, even if they wanted to, local officials are without statutory authority to allow a late filing. With the mounting pressure to find more tax dollars for essential services, scrutiny on applications for exemption is increasing. It’s now more important than ever that you understand how your exemption has been granted, and what you need to do to maintain it.
It’s logical to think an organization that is exempt from income taxation—because it meets certain requirements under Internal Revenue Code Section 501(c)(3)—should also be exempt from Indiana property taxation. After all, the language used in Internal Revenue Code Section 501(c)(3) and Indiana Code 6-1.1-10-16 is quite similar on its face. However, the instructions for Form 136 (Application for Property Tax Exemption) state the issue quite succinctly.
Why am I not automatically exempt for property tax purposes if I am exempt for income tax purposes?
The granting of a federal or state income tax exemption does not entitle a taxpayer to a property tax exemption because an income tax exemption does not depend so much on how the property is used, but how the money is spent. (See Raintree Friends Housing, Inc. v. Indiana Department of Revenue, 667 N.E. 2d 810). It has also been determined that a worthwhile activity or noble purpose alone is not enough because a property tax exemption is justified when it helps accomplish some public purpose. (See National Association of Miniature Enthusiasts v. State Board of Tax Commissioners, 671 N.E. 2d 218).
Since what it means to be “charitable,” “educational,” or have “religious activities” is not specifically defined by statute, an entire body of case law devoted to developing these issues has grown over the years. Those cases typically find a charitable purpose exists when an organization demonstrates enough evidence that (1) its charitable actions relieve those it serves of “human want” in a way that is different from everyday purposes, and (2) that the benefit is positive enough that it justifies the lower tax revenue.
When you file for property tax exemption, the Property Tax Assessment Board of Appeals (PTABOA) considers the exemption. It’s important you advocate for your position! Local officials need every tax dollar, and if you don’t demonstrate why you are entitled to the exemption, they will not grant or sustain it. The PTABOA grapples with these issues locally, and appeals of their decisions are handled on a statewide basis with the Indiana Board of Tax Review.
If you aren’t sure about the status of your exemption, whether you need to refile, or even how or why you are exempt from property tax, it’s important to consult your advisors. If the leadership and boards of our local nonprofit community do not understand this topic thoroughly, it could represent thousands of dollars in unanticipated expenses. The deadline to file for an exemption is April 1 of every year.
Christopher Nusbaum is a Partner with Carson LLP. He is a leader of the Allen County Bar Association’s Real Property Section and member of the Community Foundation’s Professional Advisor Leadership Council.
by Christopher Nussbaum, Author