We know that property taxes are taxes that local governments impose on property owners to pay for public safety, sanitation, public schools, and other local services. But we also know that not everyone pays the same and that some landholders are exempt from these taxes. So, do non-profits pay property tax?
The question is especially relevant these days, now that the non-profit sector became the third-largest workforce in the U.S. economy by 2016, with its 12.3 million paid workers representing 10.2 percent of the U.S. private workforce, according to the Johns Hopkins Center for Civil Society Studies’ 2019 Nonprofit Employment Report.
Turns out, nonprofits can be exempted from property taxes, but some face pressure to make other payments to their municipalities. Keep reading to find out how it breaks down.
Non-profits can be exempt from property taxes — but the exemptions aren't automatic.
The National Council of Nonprofits reports that in all 50 U.S. states, property that non-profits own and operate for charitable purposes is exempt from property taxes. And Chron.com adds that tax-exempt purposes also include activity with a “religious, educational, scientific or literary objective.” (That said, property owned by a non-profit but leased to for-profit businesses is subject to property tax.)
But property tax exemption isn't automatic, as Hilary Houston, a lawyer with Vorys Columbus, explained in a Vorys article last year. “Nonprofits often confuse their real property tax liability with their federal income tax liability,” she wrote. “Real property taxes are local taxes imposed either by a county and/or, in some instances, by a municipality. An organization’s nonprofit status may be important for purposes of qualifying for a real property tax exemption.”
“However,” Houston added, “the fact that a nonprofit is recognized by the Internal Revenue Service as being described in Section 501(c)(3) of the Internal Revenue Code is generally not the determining factor and, in some states, it is not even relevant to the analysis.”
Some non-profits pay state or local governments PILOTs — and sometimes it doesn’t seem voluntary.
Some non-profits pay their municipalities “PILOTs” — or payments in lieu of taxes — to offset the lost property tax income and to compensate municipalities for the cost of public services. As a 2010 report by Lincoln Institute of Land Policy notes, Yale University started giving New Haven, Conn., an annual PILOT of $7.5 million in 2010, up from $1.2 million in 1991.
These payments are designed to be voluntary, but there have been cases where municipalities have pressured nonprofits to pay PILOTs by threatening to impose taxes or fees or even threatening to revoke the organizations’ tax exemptions.
As the institute explains, those who support PILOTs argue that non-profits benefit from public services and should help pay for these services, that these payments provide essential revenue. The payments help address tax-exemption equities, especially with large non-profits with valuable property.
Those who are against PILOTs, however, argue that the payments are haphazardly paid and sometimes paid under duress, that they provided unreliable income, and that they might affect non-profits’ ability to employ workers and serve their communities.