In a rare state high court decision on hospital property taxes, the Arkansas Supreme Court ruled late last week that a not-for-profit hospital must pay taxes on county property it leases on behalf of doctors.
It was the second negative tax development for a not-for-profit hospital last week connected to the hospital's dealings with physicians (See story, p. 3).
In a narrow 3-2 vote, the five-member Arkansas Supreme Court said that Crittenden Hospital Association in West Memphis, Ark., must pay taxes on a medical office building and parking lot it leases from Crittenden County.
In 1977 Crittenden County issued bonds for improvements to the hospital to help recruit physicians. The county leased the new building to the Crittenden Hospital Association, a not-for-profit corporation that operates 95-bed Crittenden Memorial Hospital. The association leases space in the building to doctors in private practice. It hasn't raised the rent since the building opened.
The state constitution provides a high standard of proof for a tax exemption: "public property used exclusively for public purposes . . . and buildings and ground and materials used exclusively for public charity."
The association contended that attracting physicians was a public purpose, and it therefore applied for a tax exemption. It sued the Crittenden County Board of Equalization after the agency denied the exemption application. The circuit court ruled in favor of the county assessor and the hospital appealed.
It also argued that the medical office building should be considered part of the hospital, because one couldn't function without the other.
The hospital will owe back taxes of $73,000 for 1993 through 1996, the county assessor's office said.
Chief Justice W.H. Arnold, in the majority opinion, wrote that the hospital "rents the building exclusively to for-profit private healthcare providers" and that the building "is in competition with other tax-paying medical facilities in the county."
The hospital also claimed that forcing it to pay property taxes on the building would threaten its survival, but the majority strongly doubted that "the hospital would not survive without a tax-free physicians' office building."
Justice Ray Thornton, in a dissent, argued that the hospital's mission to provide charity care justified the tax exemption.