On certification to the Superior Court, Appellate Division, whose opinion is reported at 391 N.J. Super. 434 (2007).
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
The issue raised in this appeal is whether a rural hospital's off-site building that houses its Health and Wellness Center through which the hospital provides physical therapy and cardio-pulmonary rehabilitation services is exempt from local property taxation under N.J.S.A. 54:4-3.6. That statute exempts from taxation real property used in the work of certain nonprofit organizations, including "all buildings actually used in the work of associations and corporations organized exclusively for hospital purposes."
Hunterdon Medical Center (HMC) is a nonprofit corporation that owns and operates a general, acute-care hospital in Flemington, New Jersey. Its certificate of incorporation, in effect since 1983 and amended in 2001, reflects that it was organized for charitable purposes, including the establishment and management of a hospital and medical and health center. In 1998, HMC opened its Health and Wellness Center (Wellness Center or Center) in Readington Township, nine and one-half miles from the Flemington hospital campus. The property is improved with a three-story building that totals over 26,000 square feet. According to HMC, the Center plays an integral part in the hospital's provision of continuum-of-care services to the community through exercise, fitness, diet, and other programs. The Center also provides physical therapy service (PT Service) and cardio-pulmonary rehabilitation (CP Rehab) for patients who require such services and who prefer to take advantage of the Center's location rather than travel to HMC's main facility in Flemington. During the tax years in question, the Center was open to the general public through the payment of membership dues. The area of the Center open to the public is primarily located on the first floor, and includes a pool, running track, weight training and aerobic exercise equipment and classroom areas. The second floor houses the suite for the Center's PT Service program as well as additional exercise equipment and treatment rooms for private physical therapy.
Prior to the 2000 tax year, the Center received an exemption from local property tax pursuant to N.J.S.A. 54:4-3.6. However, for the 2000 tax year and all subsequent years, the Readington Township Tax Assessor revoked the exemption and issued a tax assessment of $3,300,000 for the property, $2,000,000 of which was allocated to the facility. HMC filed tax complaints with the Tax Court for the 2000 through 2005 tax years, seeking the reinstatement of the tax exemption for the Center. The Tax Court conducted an eight day trial and concluded that only the space exclusively dedicated to the CP Rehab service qualified for exemption. As for the Wellness Center and the PT Service, the court determined that HMC did not establish that those activities were uses for the exempt purpose.
The Tax Court rejected HMC's application of the well-established "reasonably necessary test," finding it unhelpful in the evaluation of the particular use of this property. The court explained that no prior decision addressing a "hospital purposes" exemption concerned a hospital-owned facility having characteristics like those present in this matter, namely: location distant from the main hospital; not used for a purpose supportive of the hospital's core function; and used as part of the hospital's "continuum of care" mission to enhance and improve the general health status of the population in the area. Describing the "continuum of care" mission to be a new and materially expanded version of hospital services, the court devised its own analytical framework for differentiating between off-campus hospital facilities that would qualify for tax exemption under N.J.S.A. 54:4-3.6. The court's test comprised three components: (1) the nature and extent of the integration between the hospital and the subject facility; (2) the extent to which the activity conducted in the facility is under the control or supervision of the hospital medical staff; and (3) whether the facility serves primarily hospital patients or members of the general public. The court added two further considerations to the third component. The first relates to the extent to which the facility competes with commercial or privately owned-facilities. The second relates to whether tax exemption can be granted in proportion to the percentage of use by hospital patients of a facility, incorporating the predominant use standard to determine whether the facility, in its entirety, qualifies for exemption. The Tax Court applied that analytic framework to the Center and separately to the PT Service, concluding that each should be declared ineligible for exemption because neither met the newly articulated methodology for assessing whether the "hospital purposes" requirement of the statute was satisfied.
HMC appealed. In affirming the Tax Court, the Appellate Division accepted the Tax Court's analytic construct as an appropriate means for examining whether a hospital's off-site, medically used facility is being used for "an exempt purpose" and agreed with the new test's application to this matter. The Supreme Court granted HMC's petition for certification.
HELD: Any medical or diagnostic service that a hospital patient may require, whether pre-admission, during a hospital stay, or post-admission, presumptively constitutes a core "hospital purpose" under the tax exemption statute (N.J.S.A. 54:4-3.6). When an off-site facility provides such services, the test for tax exemption also requires consideration of the degree to which the off-site facility's activities operationally are integrated and supervised by hospital personnel.
1. The "reasonably necessary" test has been employed to assess whether particular types of ancillary, non-medical hospital property was actually "in use"' for the exempt "hospital purposes." The reasonably necessary test entered New Jersey jurisprudence with the Appellate Division's decision in Township of Princeton v. Tenacre Foundation, 69 N.J. Super. 559 (1961). The panel there considered whether the on-site residence of the corporate director of a sanatorium and nursing home was exempt from the property tax. It embraced a test that exempts property used "exclusively for any facility which is incidental to and reasonably necessary for the accomplishment of hospital purposes." Id. at 564. The panel concluded that the director's residence served as an integral part of the hospital services and was reasonably necessary because it enabled the director to be available on-site twenty-four hours a day. Subsequent courts have applied the reasonably necessary standard to various hospital-owned, ancillary (non-medical) properties or buildings. Property being put to a non-medical, but arguably supportive, operational purpose -- such as housing for hospital personnel, parking garages and day-care operations -- has been deemed reasonably necessary to a "hospital purpose." When applying the test, reviewing courts have assumed that "hospital purposes" could be distilled to the provision of twenty-four-hour/seven-days-per-week diagnosis and treatment of the sick and injured. The reasonably necessary test does not assist in the determination of whether a hospital, in embarking on a medically oriented task, has exceeded permissible "hospital purposes" because the test does not define such purposes. The Court finds the limiting definition of a "hospital" employed by these cases -- a facility that provides continuous long term care for periods exceeding 24 hours -- too restrictive to control what should be recognized as legitimate "hospital purposes" for the purpose of the tax exemption provided by N.J.S.A. 54:4-3.6. (pp. 16-26)
2. In the Court's view, any effort to encapsulate what a hospital must provide for its patient population reasonably would include any service, medical and diagnostic, required by its patients. Such required services necessarily would include services needed both pre- and post-admission to the hospital, whether as an inpatient or outpatient. That such a range of services are core to a hospital's functioning on behalf of its patient population is mirrored in the regulatory licensing standards for hospitals. The Department of Health and Senior Services, which promulgates hospital licensing standards, presently defines a "hospital" as "an institution . . . which maintains and operates facilities for the diagnosis, treatment or care of two or more non-related individuals suffering from illness, injury or deformity and where emergency, out-patient, surgical, obstetrical, convalescent or other medical and nursing care is rendered for periods exceeding 24 hours." N.J.A.C. 8:43G-1.2. The Department's regulations also permit hospitals to move functions out of the "main" hospital facility, provided the services are sufficiently integrated with the main hospital. Thus, hospital activities have been allowed some flexibility to migrate from a hospital's main campus, but in a controlled way and subject to close regulation. (pp. 26-29)
3. The Court recognizes the following principles for use when reviewing the tax-exempt eligibility of particular hospitals. The definition of a hospital as a twenty-four-hour continuous care operation is overly restrictive for purposes of the analysis. The early hospital tax-exemption cases did not focus on the range of medical activities engaged in by entities actually organized to operate as hospitals. Any medical service that a hospital patient may require pre-admission, during a hospital stay, or post-admission, constitutes a presumptive core "hospital purpose" under N.J.S.A. 54:4-3.6. Whether the hospital delivers such services in the hospital's main facility, in another facility on the main campus, or in a hospital-owned building adjoining or adjacent to the main hospital campus, makes no difference in the analysis for a statutory exemption. The use is presumptively for core "hospital purposes." As the hospital-used property is situated away from the main hospital campus and adjacent or adjoining property, concerns about hospital integration and supervision become more pronounced, even when the use is for a core hospital purpose as identified above. For tax-exemption examination purposes, then, the Court incorporates much of the test devised by the Tax Court below. The test is not to determine the worthiness of the "hospital purpose" but rather the importance and the integration of the proposed use to the hospital's accomplishment of a legitimate task. The factors that a court should consider include: (1) the nature and extent of the services provided at the off-site location; (2) the extent to which the activity is under the control or supervision of the hospital medical staff or personnel; and (3) whether the facility serves primarily hospital patients and employees or primarily members of the general public. Two additional considerations should be included in the analysis under factor three above, although neither should be treated as dispositive: (1) whether the facility competes with like commercial or privately owned facilities; and (2) whether the facility, or the particular disputed part, is actually used predominantly by patients and hospital employees or by commercial members. (pp. 29-33)
4. Based on the test articulated herein, the Court is uncertain that the Tax Court's determination in respect of the PT Service should be affirmed. The integration of that service with the HMC seemed to be coextensive with that found for the CP Rehab Service. Also, because the definition of core "hospital purposes" would presumptively include the delivery of physical therapy services on an out-patient basis, which could be, and were at one time, provided at the main HMC campus, the Court questions whether the Pt Service at the Center should receive different treatment. Last, to the extent that the Tax Court required medical supervision, this Court's analysis eschews such a narrow approach to the type of supervision required. To ensure that this remaining matter is thoroughly, and properly, examined, the Court remands for re-examination of the PT Service. (pp. 33-34)
The judgment of the Appellate division is AFFIRMED in part and REVERSED in part, and the matter is REMANDED to the Tax Court for further proceedings.
CHIEF JUSTICE RABNER and JUSTICES LONG, ALBIN, WALLACE, RIVERA-SOTO and HOENS join in JUSTICE LaVECCHIA's opinion.
The opinion of the court was delivered by: Justice LaVECCHIA
In New Jersey, all real property is subject to local property taxation, N.J.S.A. 54:4-1, unless its use has been exempted. See N.J. Const., art. VIII, § 1, ¶ 2 (authorizing legislatively sanctioned tax exemptions based on property's use). One such exemption is found in N.J.S.A. 54:4-3.6, which exempts real property used in the work of various nonprofit organizations, including "all buildings actually used in the work of associations and corporations organized exclusively for hospital purposes."
The issue raised is the applicability of that exemption to a rural hospital's off-site building that houses its Health and Wellness Center through which the hospital provides physical therapy and cardio-pulmonary rehabilitation services for patients choosing to attend that location as opposed to seeking those services at the hospital's main facility. Whether the property is exempt depends on the sweep of the term "hospital purposes" in N.J.S.A. 54:4-3.6. The Tax Court developed, and the Appellate Division affirmed, a test that examined the degree to which the off-site facility's activities operationally were integrated and supervised by hospital medical staff. Hunterdon Med. Ctr. v. Readington Twp., 22 N.J. Tax 302, 332-33 (2005), aff'd, 391 N.J. Super. 434 (App. Div. 2007). Although we find such factors to be relevant in the inquiry, we conclude that the key first step in our analysis must be to determine the meaning of "hospital purposes" in N.J.S.A. 54:4-3.6.
In our view, the analysis for "hospital purposes" must take into consideration the many medical pursuits permitted to the "modern" hospital in New Jersey. A hospital can no longer be restrictively equated with a nineteenth, or even twentieth, century vision of a monolithic building, in which is offered continuous inpatient care or emergency treatment, twenty-four hours per day, to the sick, disabled, and infirm. Licensing authorities have allowed hospital activities to evolve as inpatient stays have diminished. Today, treatment often is delivered on an outpatient basis at a hospital's main facility, as well as at off-site facilities, backed up by the promise of ready inpatient care from the general, acute-care hospital when necessary. Thus, a fair definition of core "hospital purposes" must acknowledge the variety of activities that a modern hospital can be expected to perform for patients, be they inpatients or outpatients. That said, a hospital's expansive view of its mission does not necessarily equate with "hospital purposes" in the tax exemption analysis.
We therefore hold that any medical or diagnostic service that a hospital patient may require pre-admission, during a hospital stay (whether it is for less than a day or for one or more days), or post-admission presumptively constitutes a core "hospital purpose." Beyond having to satisfy that definition, other factors should be considered when an entity, organized for hospital purposes, claims an exemption for an off-site building (not on adjacent or adjoining property) that is allegedly being used to provide hospital-integrated medical services. For such off-site medical activities that fit within our definition of core "hospital purposes, we adopt, in large part, the hospital-integration and related factors identified by the Tax Court and affirmed by the Appellate Division in this matter.
Hunterdon Medical Center (HMC), a nonprofit corporation organized under N.J.S.A. 15A:1-1 to 16-2, owns and operates a general, acute-care hospital in Flemington, New Jersey. See N.J.A.C. 8:43G-1.3 (establishing classifications of hospitals). Its certificate of incorporation, in effect from 1983 through 2001, reflected that it was organized for charitable purposes, including the establishment, erection, operation, support and management of a hospital and a medical and health center or institution, and related facilities, where medical and surgical diagnosis, treatment, care, and nursing, and improvement of, and benefits to, [patient] health, will be rendered to persons of any creed, race, nationality, or color; and also including as a part thereof, medical research, the training of physicians and auxiliary personnel.
Although HMC adopted an amended certificate of incorporation in May, 2001, the overall import of the purpose clause remained unchanged.*fn1 HMC was organized to operate a hospital and related ancillary facilities and services.
The record before the Tax Court demonstrated that in 1998 HMC opened its Health and Wellness Center (Wellness Center or Center) on the property at issue. According to HMC, the Center plays an integral part in the hospital's provision of continuum-of-care services to the community it serves. Through exercise, fitness, diet, and other programs, HMC promotes physical and mental wellness and health consciousness. The Center also provides physical therapy and cardio-pulmonary rehabilitation for patients who require such services and who prefer to take advantage of the Center's more convenient location in Readington Township rather than travel to HMC's main facility in Flemington for therapy sessions.*fn2
In addition to housing the Center, with all its component parts, the building also contains a hospital-owned pediatric physician practice (Pediatric Practice), which had existed as a private practice prior to its acquisition in December 1997.*fn3 The Center, however, fully occupies the first two floors of the building. Its main area is located on the first floor (approximately 16,000 square feet) and includes a pool, running track, weight training and aerobic exercise equipment, locker rooms, and reception and classroom areas. During the tax years in question, the Center was open to the general public through the payment of membership dues. However, individuals also could access the fitness equipment and facilities if they were patients of one of the two services that the hospital provides through the Center, namely, physical therapy and cardio-pulmonary rehabilitation.
The Center also has space on the building's second floor that houses a suite for the Center's physical-therapy service program (PT Service) that contains treatment rooms for private physical therapy. The Center's second-floor space also contains exercise equipment specifically oriented to physical therapy. PT patients have priority over the use of the second-floor equipment; however, all Center users can access it. Conversely, PT patients use the general exercise equipment and facilities available on the first-floor of the Center, as do the cardio-pulmonary rehabilitation patients who are served through the specialized Cardio-Pulmonary Rehabilitation (CP Rehab) program that HMC also provides through the Center.
Prior to the 2000 tax year, HMC's Readington facility had received an exemption from local property tax, pursuant to N.J.S.A. 54:4-3.6. However, for the 2000 tax year and all subsequent years, the Readington Township Tax Assessor revoked the tax exemption and issued a tax assessment of $3,300,000 for the property, $2,000,000 of which was allocated to the facility. HMC filed complaints with the Tax Court for the 2000 through 2005 tax years, seeking the reinstatement of the tax exemption for the Wellness Center in its entirety, including its PT Service and CP Rehab Service, and the Pediatric Practice.*fn4 The Tax Court conducted an eight-day trial that focused on the 2000, 2001, and 2002 tax years,*fn5 and concluded that only the space exclusively dedicated to the CP Rehab Service qualified for exemption under N.J.S.A. 54:4-3.6. Hunterdon Med. Ctr., supra, 22 N.J. Tax at 341. The court declared the remainder of the building -- the areas that house the Wellness Center, with its PT Service area, as well as the Pediatrics Practice -- taxable. Ibid. The court found that the ...