Claire Dawson
Illinois hospitals have long been the subject of debate over their tax-exempt status. While many hospitals in the state are non-profit and receive tax exemptions, there are questions surrounding the extent to which these hospitals benefit their communities. The issue is further complicated by the fact that some hospitals operate like profitable businesses, leading to discussions on whether they should be exempt from certain taxes. With Illinois facing a substantial budget deficit, the state has started challenging the property tax exemptions of several hospitals, arguing that they should contribute more through taxes as they do not provide sufficient charity care.
| Characteristics | Values |
|---|---|
| Hospitals in Illinois that are exempt from tax | Non-profit hospitals |
| Hospitals that are charitable entities | |
| Hospitals that are exclusively charitable institutions | |
| Hospitals in Illinois that are not exempt from tax | For-profit hospitals |
| Forms for tax exemption | Form STAX-300-H, Application for Hospital Sales Tax Exemption (Schedule A and Schedule E) |
| Form STAX-300-HR, Renewal Form for Hospital Sales Tax Exemption (Schedule A and Schedule E) | |
| Form STAX-300-HC, Annual Certification Form for Hospital Sales Tax Exemption | |
| Form PTAX-300, Application for Non-homestead Property Tax Exemption | |
| Form PTAX-300-R, Application for Religious Property Tax Exemption |
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What You'll Learn
Non-profit hospitals are exempt from property tax
Non-profit hospitals in Illinois are exempt from paying property tax. This is because they are considered charitable entities. To qualify for property tax exemption, charitable organizations must demonstrate that the property is owned by a charitable organization and that it is used exclusively for charitable purposes.
Illinois courts use the six 'Korzen factors' to determine whether a property is used for a charitable purpose:
- The organization bestows benefits on an indefinite number of people for their general welfare, or the benefits in some way reduce the burden on the government.
- The organization has no capital, capital stock or shareholders, and earns no profits or dividends.
- The organization derives its funds mainly from public and private charity and holds them in trust for its objects.
- The organization dispenses charity to all who need and apply for it.
- The organization does not provide gain or profit to its members or any private individual.
- The organization places no restrictions on the beneficiaries of its charitable purpose.
Non-profit hospitals in Illinois are also exempt from paying sales tax when selling food or medicine to their patients. However, they incur sales tax liability when selling items such as candy, chewing gum, tobacco products, and razor blades, as these items are not necessary for basic hospital services and place the hospital in competition with community businesses.
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Hospitals must apply for tax exemption
In Illinois, non-profit hospitals are considered charitable entities and are therefore able to obtain tax exemption. However, hospitals must apply for tax exemption and meet specific requirements to qualify and maintain their status.
Application Process
Hospitals in Illinois that wish to obtain tax exemption must submit a request using MyTax Illinois or by mail. They should complete Form STAX-1, Application for Sales Tax Exemption, or apply online using MyTax Illinois. Along with the application, hospitals must provide minimal documentation and a copy of their organizational documents, which outline the permanent dedication of their assets to charitable purposes. There is no fee for this application.
Requirements for Tax Exemption
To qualify for tax exemption, hospitals must meet the general requirements under the Internal Revenue Code (IRC) Section 501(c)(3) and Revenue Ruling 69-545. This includes operating exclusively for exempt purposes, such as promoting health for a broad class of persons that benefits the community. Hospitals must also refrain from distributing net earnings to private shareholders or individuals and avoid substantial political activities or propaganda.
Additionally, hospitals must comply with four basic requirements under Section 501(r) of the ACA:
- Community health needs assessment and implementation strategy
- Financial assistance policies, including adherence to emergency care obligations
- Policies related to hospital charges
- Policies related to billing and collections
Maintaining Tax-Exempt Status
To maintain their tax-exempt status, hospitals must renew their exemption periodically. In Illinois, hospitals with a sales tax exemption certificate expiring on June 30 must file Form STAX-300-HR for renewal by May 15. This renewal ensures a new five-year certificate. To remain compliant, hospitals must also demonstrate their charitable purpose and provide community benefits. This includes maintaining an emergency room open to all, using surplus funds for improvements, and advancing medical training and research.
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Hospitals that sell food and medicine to patients are exempt from sales tax
In Illinois, not-for-profit hospitals and nursing homes that qualify as exclusively charitable institutions are exempt from paying sales tax when selling food or medicine to their patients. This is because charitable organizations are exempt from sales tax in the state. To qualify for an exemption, organizations must be organized and operated exclusively for charitable, religious, educational, or governmental purposes.
Illinois hospitals can apply for a sales tax exemption by completing Form STAX-300-H, Application for Hospital Sales Tax Exemption (Schedule A and Schedule E). Hospitals and their affiliates with a sales tax exemption certificate expiring on June 30 are required to file Form STAX-300-HR, Renewal Form for Hospital Sales Tax Exemption, (Schedule A and Schedule E) by May 15 to renew the exemption. A new five-year certificate is issued upon approval. To maintain a valid sales tax certificate, the hospital must submit Form STAX-300-HC, Annual Certification Form for Hospital Sales Tax Exemption, annually.
Hospitals with an active sales tax exemption number (e-number) are allowed to engage in a limited amount of retail selling without incurring sales tax liability. This includes sales to members, non-competitive sales, and occasional dinners open to the public (no more than twice a year). However, hospital dining facilities that are open to the general public do not qualify for the exemption. Additionally, hospitals incur sales tax liability when selling items such as candy, chewing gum, tobacco products, and razor blades, as these items are not necessary for basic hospital services and place the hospital in competition with community businesses.
While hospitals that sell food and medicine to patients are generally exempt from sales tax in Illinois, physician offices and sales are not exempt. Physicians must collect sales tax from patients and pay it to the Illinois Department of Revenue (DOR). To avoid paying sales tax to suppliers, physicians must register with the DOR as a retailer and present the registration document when making purchases. Municipalities may also add a local tax to the state sales tax percentage, which physicians are responsible for collecting.
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Hospitals that sell candy, chewing gum, tobacco, and razor blades are liable for sales tax
In Illinois, not-for-profit hospitals and nursing homes that qualify as charitable entities are generally exempt from sales tax when selling food or medicine to patients. However, hospitals that sell candy, chewing gum, tobacco, and razor blades are liable for sales tax. This is because these items are not considered necessary for basic hospital services and selling them puts hospitals in direct competition with community businesses.
To be exempt from sales tax in Illinois, hospitals must be organized and operated exclusively for charitable purposes. They must also apply for and be approved for a sales tax exemption by the state. Hospitals that possess active sales tax exemption certificates are allowed to engage in a limited amount of retail selling without incurring sales tax liability. This includes sales to members, non-competitive sales, and occasional dinners open to the public (no more than twice a year).
Hospital dining facilities that are not open to the general public are also exempt from sales tax. However, when hospitals sell items that are not necessary for basic hospital services, they incur sales tax liabilities. This distinction is made to prevent hospitals from unfairly competing with local businesses.
Hospitals in Illinois can apply for a sales tax exemption by completing and submitting Form STAX-300-H, Application for Hospital Sales Tax Exemption. They must also file Form STAX-300-HR to renew their exemption every five years. Additionally, hospitals must submit Form STAX-300-HC annually to maintain a valid sales tax exemption certificate. These forms can be filed with the Illinois Department of Revenue (IDOR), which issues sales tax exemption numbers (e-numbers) to approved organizations.
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Hospitals' tax exemptions are being challenged
In Illinois, non-profit hospitals are considered charitable entities and are therefore exempt from paying taxes. This exemption is not limited to federal taxes but also covers some state and local taxes. Hospitals that are licensed under the Hospital Licensing Act or operated under the University of Illinois Hospital Act may qualify for a sales tax exemption. To maintain their tax-exempt status, hospitals must meet certain legal requirements, such as setting billing and collection limits, and providing community benefits like running an emergency room open to everyone, regardless of their ability to pay.
Despite the clear benefits of tax exemptions for hospitals, there has been some pushback and challenges to this policy. The main argument against it revolves around the idea that nonprofit hospitals may not be providing enough benefits to their communities to justify their exemption status. This criticism has gained traction due to reports of aggressive debt collection practices by some nonprofit hospitals, including suing patients over unpaid medical debts. Additionally, recent research suggests that nonprofit hospitals may be allocating similar or smaller portions of their operating expenses to charity care compared to for-profit hospitals.
In 2020, the estimated value of tax exemptions for nonprofit hospitals was approximately $28 billion, exceeding the total estimated charity care costs of $16 billion. This figure includes exemptions from federal corporate income taxes, deductions for individual donations, and lower interest rates on issued bonds. However, it's important to note that charity care is just one aspect of community benefits, which also include unreimbursed Medicaid expenses, health professions education, and subsidized health services.
While the legal requirements for tax exemption are relatively straightforward for the IRS to confirm, assessing community benefits is more challenging due to the lack of specificity in the law about qualifying services. To address this, it has been suggested that tax forms be revised to better capture information on hospitals' community benefits, providing clearer justification for exemptions. Additionally, there is a growing trend for hospitals to make Payments in Lieu of Taxes (PILTs) to their local governments, which was not considered in some analyses of state tax exemptions.
In conclusion, while hospitals' tax exemptions are being challenged, it is important to recognize the significant community benefits provided by these institutions. Hospitals offer around-the-clock care, respond to emergencies, and provide financial assistance to those in need. The value of these benefits often far exceeds the tax exemptions they receive, and hospitals dutifully report these contributions annually to the IRS.
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Frequently asked questions
Nonprofit hospitals in Illinois are exempt from local, state, and federal taxes. However, they must report to the IRS annually how much money they spend to benefit their communities.
Hospitals in Illinois must be qualified as charitable entities to be exempt from tax. They must also be not-for-profit entities.
There is a debate surrounding the issue of hospital tax exemptions in Illinois. Some hospitals provide more community benefit than they receive in tax exemptions, while others are in deficit. There is also a question of whether tax-exempt hospitals are receiving preferential treatment over for-profit hospitals.
