Property Tax Exemption: It’s Not Enough to Have a Good Cause

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[W]hile [the Plaintiffs] activities were laudable, they were not charitable.”

When it comes to making a case for an exemption from property tax, a good cause is often not enough.  Consider the case of Web Innovations & Tech. Servs., Inc. v. Dep't of Revenue, 2013 IL App (4th) 120749-U, which was decided in September of 2013.  This is a cautionary tale for nonprofit organizations interested in property tax exemption.  Even an organization’s most noble purposes, in themselves, may not be enough to persuade the taxing authority to grant an exemption.  Property tax exemption is evaluated according to a higher standard. Organizations seeking exemption must also demonstrate that their use of the property in question is primarily charitable

In this case, the Plaintiff, Web Innovations and Tech Services, Inc. (“WITS”), was denied property tax exemption by the Illinois Department of Revenue (“Department”) concerning a parcel of land on which it conducted its recycling operations.  WITS sought administrative review of the Department’s denial. 

No doubt, Plaintiff’s cause was laudable:  “to keep reusable materials out of the landfill and improve technology awareness and availability to the underserved through recycling/refurbishing and educational opportunities using recycled and refurbished technologies.”  The court considered evidence that reflected the magnitude of the organization’s activities.  In 2009, WITS received 1,750,000 pounds of electronics were collected at its Illinois recycling facility.  In addition, the court noted that WITS conducted the following programs: A Free Computer Program, A Youth/Teen Program, A Seniors and Veteran Technology Program, and A Disaster Victims Recovery Program.   

Despite the organization’s “good cause” and the above-listed programs, the court affirmed the Department in concluding the organization was not eligible for property tax exemption.  What was the problem?  The court explained that though the Plaintiffs activities at the property were laudable, they were not primarily charitable, as defined under Illinois law.

The court looked to the key cases, Provena I and Provena II, which distinguish between merely beneficial activities and those activities which are “charitable.”  Under Illinois law, the word “charitable” is a term of art.  The Court explained:  “Charity is an act of kindness or benevolence.  There is nothing particularly kind or benevolent about selling somebody something. Charity is generosity and helpfulness, especially toward the needy or suffering… To be charitable, an institution must give liberally.  Removing giving from charity would debase the meaning of charity, and we resist such an assault upon language…  a gift is, by definition, free goods or services and one can make a gift by charging nothing at all or by undercharging a person, that is, charging less than one's cost.”  Web Innovations & Tech. Servs., Inc., 2013 IL App (4th) 120749-U at 6 (citations omitted).   

With this definition in hand, the Court examined WITS’s activities more closely. The court, like the Department, found that WITS’s charitable activities were actually a very small percentage of the organization’s overall activities.  To begin with, the organization received substantial income from “program service revenue,” that is, its recycling activities.  WITS charged fees for the recycling of certain items.  The court also found that even with total income of $477,144, the organization gave away only 53 computers.  Of those 53 computers, 20 were provided in exchange for service hours from the recipient.  The court concluded that the level of truly charitable gifts to the needy were insignificant when compared with the organization’s revenues.  The court stated, “WITS primarily used its property for its recycling activities and the charity it did dispense, giving away electronic items for free or at a reduced price, was minimal in comparison with those activities.”  Accordingly, the court affirmed the Department’s denial of WITS’ property tax exemption for the parcel of land in question.

            Organizations concerning property tax exemptions should be mindful of the lessons taught in this case.  The standard for property tax exemption is higher than the standard to receive federal income tax exemption.  State law requires that a property under consideration for exemption be used primarily for charitable purposes.  An entity’s organization for charitable purposes is alone not enough.  Entities organized for charitable purposes should also carefully evaluate programming to ensure that their activities are actually charitable as the court sets forth above.  If organizations charge fees, or require services in exchange for benefits received, in quid pro quo-type arrangements, such arrangements might be disregarded as non-charitable by the Department.  To the extent that such non-charitable activities outweigh truly charitable activities, a property will likely be disqualified for an exemption from property tax.  As the court stated, it is not enough for non-profit entities to have good, laudable causes.  Such entities must also operate such that their activities are considered charitable.