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Nonprofits battle court tax ruling

DULUTH - The Minnesota Supreme Court delivered Michelle Finholdt news that is considered bad by far more nonprofit organizations than just the Red Wing day care center owner.

DULUTH - The Minnesota Supreme Court delivered Michelle Finholdt news that is considered bad by far more nonprofit organizations than just the Red Wing day care center owner.

Some lawmakers are pushing a bill to turn the news from bad to good.

A December high court ruling against Under the Rainbow sent a shock wave through the state's 4,500 nonprofits that own property. The court said Finholdt's operation lacked the necessary criteria to exempt it from property taxes.

"It pretty much wipes us out," Finholdt said. "We pay $16,000 a year in property taxes. It's a struggle."

The Supreme Court ruled against Finholdt because her nonprofit business failed to meet a set of criteria established 33 years ago in another court case. The test of six requirements helps tax assessors determine whether a nonprofit qualifies as a "purely public charity" and therefore is eligible to receive state property and sales tax exemptions.

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On a 4-3 vote, the Supreme Court said Under the Rainbow failed to meet one requirement it considers critical for determining tax exemptions - that it provide some low-cost charity care.

"It's a huge threat," said Mark Peterson, president and chief executive officer of Lutheran Social Services.

Peterson said the Supreme Court's decision means all nonprofits are vulnerable to losing their exemption status, and could shut down.

"We own 58 properties across the state," Peterson said. "The economics of human services are such that adding yet another fixed cost to our service would throw almost all of them into a loss position."

Some state lawmakers also are worried about the impact of the court's decision, and have sponsored legislation that would impose a one-year moratorium preventing assessors from applying the court's decision to their assessments.

"I am very concerned this bill gets into law," said Rep. Paul Marquart, DFL-Dilworth, who sponsored the House bill and leads a key tax committee. "What this bill does is say 'Let's take a time out, step back, take a look at what the ruling means and as a state come to a conclusion about how we're going to decide tax exempt status.'"

Sen. Tom Bakk, DFL-Cook, Senate Taxes Committee chairman, supports the moratorium bill, but he said he believes the Supreme Court's decision was correct, and the Legislature should evaluate it carefully in light of the state's budget deficit.

"Just because you have (nonprofit status) from the federal government, doesn't mean you have a pure charity business that should be exempt from property taxes," Bakk said. "And if you're exempt from property taxes you're also exempt from state sales taxes. So there's an impact on the state's general fund based on what assessors do out in the field."

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Counties across the state are in the process of assessing property for 2009 taxes. In anticipation of the moratorium's passage, House and Senate leaders have sent a letter to the Revenue Department asking it to direct county assessors to disregard the Supreme Court decision.

Revenue Commissioner Ward Einess doesn't share the urgency of some lawmakers and the nonprofit community. "We don't think (the court decision) changes anything."

"Our reading of the court case is it's not a major departure from our previous interpretations," Einess said. "Now, the nonprofit community has read the case differently and thinks it could potentially be read as a fairly large departure. But our people have vetted this very thoroughly."

Einess said if properties legitimately have been exempted prior to the Under the Rainbow decision, they should remain exempted.

Einess said the Revenue Department supports the moratorium.

"We've been informally meeting with nonprofits and assessors to make sure there's no unintended harm," Einess said.

Officials Einess' department, the nonprofit community and the county assessors' association, have agreed to meet over the next several months with the expectation that lawmakers will return in 2009 with a bill clarifying the criteria determining tax exemptions for nonprofits.

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Minnesota Council of Nonprofits Executive Director Jon Pratt said nonprofits, particularly those that provide social programs, should be able to put all their money back into services.

"It boils down to the original intention of nonprofits," Pratt said. "These institutions take their fees and turn them back into family programs, child care and other services, and are relieving the burdens of government."

Pratt said nonprofits should not have to face the added burden of property and sales taxes.

Marquart agreed. He said the ramifications of the Supreme Court decision are "huge."

"It threw everything up in the air and sent shock waves to nonprofits across the state," Marquart said. "If many of these organizations have to pay property taxes, they'd have to go out of business. Their livelihood hinges on whether or not they have to pay property taxes and sales taxes."

Rep. Dean Simpson, R-Perham, Republican leader on the House Taxes Committee, said he is concerned about the impact of the Supreme Court's ruling, and supports a one-year moratorium.

"It's something I want to follow and see where it ends up," Simpson said. "I do have concern that a lot of these nonprofit facilities will be vulnerable if they have to increase funding to pay taxes. It's hard to get those dollars because it's hard to get people to donate to pay for taxes."

Bakk said there is a "pretty broad feeling" at the Legislature that the Supreme Court decision was correct.

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"The rationale for the moratorium is that we really don't know if it's going to change anything," Bakk said. "So I think we should take a year for people to catch their breath and figure out if there are going to be any impacts and if there are properties that are really going to change classification."

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