Property-Tax Exemptions to Nonprofits Upheld

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Private schools and other nonprofit institutions breathed a collective sigh of relief last week after the U.S. Supreme Court struck down a Maine law that denied property-tax exemptions to nonprofit organizations that primarily serve out-of-state residents.

Although the 40-year-old statute appears to have been the only one of its kind in the nation, officials from nonprofit institutions across the board, including boarding schools and private colleges, had expressed fears that if Maine's approach were upheld, more states might seek to provide greater tax benefits to institutions that mostly serve in-state residents.

In a challenge to the law by a Christian Science summer camp in Harrison, Maine, the Supreme Court ruled 5-4 that the state's refusal to extend a property-tax exemption to nonprofit institutions that primarily benefit nonresidents was a violation of the U.S. Constitution's commerce clause.

Justice John Paul Stevens, writing for the majority in Camps Newfound/Owatonna Inc. v. Town of Harrison (Case No. 94-1988), said that a state law making such a distinction between for-profit companies would unquestionably burden interstate commerce in violation of the Constitution.

"We see no reason why the nonprofit character of an enterprise should exclude it from the coverage of ... the commerce clause," Justice Stevens said.

Economic 'Protectionism'

The case involves a Christian Science-run youth summer camp that draws some 95 percent of its young charges from outside Maine. The state, like most others, provides certain tax exemptions for nonprofit institutions that benefit the public good.

But Maine bars property-tax exemptions to charitable groups that operate primarily for the benefit of out-of-state residents. Thus, the town of Harrison denied the camp's request for an exemption from the approximately $22,000 it owes in property taxes per year.

The Maine Supreme Judicial Court upheld the statute, ruling that the disparate treatment of nonprofits had only minor effects on interstate commerce.

In an opinion joined by Justices Sandra Day O'Connor, Anthony M. Kennedy, David H. Souter, and Stephen G. Breyer, Justice Stevens noted that some nonprofit educational institutions, hospitals, research organizations, and even museums "generate significant earnings."

"Although the summer camp in this case may have a relatively insignificant impact on the commerce of the entire nation, the interstate commercial activities of nonprofit entities as a class are unquestionably significant," he said.

But the disparate tax treatment of nonprofits that benefit in-state residents vs. those that primarily benefit nonresidents is a form of the economic "protectionism" forbidden under the commerce clause, Justice Stevens said.

"The history of our commerce clause jurisprudence has shown that even the smallest scale discrimination [in interstate commerce] can interfere with the project of our federal union," he said.

Justice Antonin Scalia, writing in dissent, said the Maine law "has nothing to do with economic protectionism," but was designed to compensate or subsidize those organizations that contribute "benefits the state might otherwise provide."

"Such self-interested behavior (or, put more benignly, application of the principle that charity begins at home) is inherent in the very structure of our federal system," Justice Scalia said. He was joined in dissent by Chief Justice William H. Rehnquist and Justices Clarence Thomas and Ruth Bader Ginsburg.

Nonprofits' Fears

A large array of groups representing nonprofit entities had filed friend-of-the-court briefs in the case urging the high court to strike down the law. They included the American Council on Education, the National Association of Independent Schools, the American Association of Museums, and the United Way of America.

The Washington-based NAIS told the court that if more states adopted Maine's approach, some boarding schools might "be forced to limit the number of out-of-state students accepted" to maintain their state tax exemptions.

The Annandale, Va.-based Christian Legal Society argued that if the Maine statute were upheld, "churches, Bible camps, religious schools, colleges and universities, and any number of other ministries would be penalized with loss of tax exemption for, in effect, practicing their religion by ministering to people across state lines."

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