Is every property owned by a South Carolina nonprofit hospital exempt from property tax?

Plain-English summary

South Carolina Revenue Ruling #05-18 rejected a blanket property-tax exemption for everything owned by a charitable entity that operates a hospital. Ownership and nonprofit status were not enough. The property had to be devoted to and necessary for the hospital's functional operation.

The Department reasoned that a broader reading would exempt unrelated property such as a shopping center, vacant land, or a manufacturing plant merely because a hospital organization owned it. It also warned that property helping the hospital financially or making employees more comfortable was not automatically necessary to hospital operations.

The ruling applied the test through fact-specific examples. A donated shopping center producing rent for a hospital wing was taxable. Offices used by hospital-employed physicians for hospital work qualified, but offices of unaffiliated doctors, dentists, a bank, restaurant, and pharmaceutical representatives did not. An employee child-care center did not qualify. An attached parking garage serving patients, staff, and hospital vehicles did qualify, but any portion used by unrelated businesses could be separately taxed.

What this means for you

Nonprofit hospital systems

Review each parcel, building, and identifiable portion by actual function. Revenue support, convenience, proximity, or common ownership does not by itself establish the exemption described by this ruling.

Owners of mixed-use medical buildings

The ruling allowed a building to be divided. Space used by hospital-employed doctors for the hospital's work could qualify while space serving unrelated private users could be separately valued and taxed.

Assessors and tax professionals

The inquiry is case-specific. The ruling's examples are not automatic categories; it expressly says a change in one fact may change the result.

Common questions

Q: Is property exempt because its rent supports the hospital?
A: No. The ruling's shopping-center example remained taxable even though the rent would fund a new hospital wing.

Q: Are physician offices exempt?
A: It depends. Offices used by hospital-employed physicians to perform hospital work qualified in the example; offices of doctors with only admitting privileges or no hospital affiliation did not.

Q: Did the employee child-care center qualify?
A: No. The ruling treated it as an employee convenience rather than property necessary for the hospital's functional operation.

Q: Could a parking garage qualify?
A: Yes, where it served hospital patients, staff, ambulances, and hospital vehicles. A portion used by unrelated businesses could be separately taxable.

Citations and references

• S.C. Constitution art. X, § 3(b) — charitable hospitals and related institutions
• S.C. Code Ann. § 12-37-220(A)(2) — corresponding ad valorem property-tax exemption
• S.C. Code Ann. § 44-7-130 — hospital definition consulted by the ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR05-18.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 12265, Columbia, South Carolina 29211
Website Address: http://www.sctax.org

SC REVENUE RULING #05-18

SUBJECT:

Property Tax Exemption for Nonprofit Hospitals
(Property Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous advisory opinions and any oral directives in conflict
herewith.

REFERENCES:

S. C. Code Ann. Section 12-37-220(A)(2)(2000)
South Carolina Constitution, Article X, §3(b)(Supp. 2004)

AUTHORITY:

S. C. Code Ann. Section 12-4-320(2000)
S. C. Code Ann. Section 1-23-10(4)(Supp. 2004)
SC Revenue Procedure #05-2

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public and to Department personnel. It is an advisory opinion
issued to apply principles of tax law to a set of facts or general
category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court
decision, or another Departmental advisory opinion.

Question:
Is every piece or item of property owned by a charitable entity that operates a hospital exempt
from ad valorem property taxation under Article X, §3(b), of the South Carolina Constitution and
Code Section 12-37-220(A)(2)?
Conclusion:
No. In the opinion of the Department, the property must be devoted to, and necessary for, the
functional operation of the hospital in order for the property to be exempt from ad valorem
property taxes under the constitutional provision and Code Section 12-37-220(A)(2). While each
situation must be examined on a case-by-case basis, examples are provided at the end of this
document that provide guidance as to how the principles expressed in this revenue ruling will be
applied by the Department. Please note, the examples are fact specific and a change in one fact
may result in a different conclusion as to the exempt status of the property.

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Discussion:
Article X, Section 3(b) of the South Carolina Constitution provides:
There shall be exempt from ad valorem taxation:
…
(b) all property of all schools, colleges and other institutions of learning and all
charitable institutions in the nature of hospitals and institutions caring for the
infirmed, the handicapped, the aged, children and indigent persons, except where
the profits of such institution are applied to private use.
Code Section 12-37-220(A)(2) provides that:
(A) Pursuant to the provisions of Section 3 of Article X of the State Constitution and
subject to the provisions of Section 12-4-720, there is exempt from ad valorem taxation:
…
(2) all property of all schools, colleges, and other institutions of learning and all charitable
institutions in the nature of hospitals and institutions caring for the infirmed, the
handicapped, the aged, children and indigent persons, except where the profits of such
institutions are applied to private use.
While there is no definition of hospital contained in the constitutional provision or Code
Section 12-37-220(A)(2), there is a definition of hospital in Chapter 7, Title 44, the State
Certification of Need and Health Facilities Licensure Act. This Act is used to determine
whether a hospital or an expansion of an existing hospital is needed in a particular
geographical area and to govern the licensing of these hospitals. It defines a “hospital”
as:
A facility organized and administered to provide overnight medical or surgical care
or nursing care of illness, injury, or infirmity and may provide obstetrical care, and
in which all diagnoses, treatment or care is administered by, or under the direction
of persons, currently licensed to practice medicine, surgery, or osteopathy.
See SC Code Section 44-7-130.
The Department of Health and Environmental Control regulations that are associated with the
State Certification of Need and Health Facilities Licensure Act further define “hospital” as:
A facility organized and administered to provide services to accommodate
two or more non-related persons for the diagnosis, treatment, and care of
such persons over a period exceeding 24 hours and provides medical or
surgical care or nursing care of illness, injury, or infirmity and may provide
obstetrical care, and in which all diagnoses, treatment, or care is
administered by or under the direction of persons currently licensed to
practice medicine, surgery, or osteopathy.

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SC Reg. 61-15, Section 103, amended by State Register Volume 17, Issue No. 6, effective June
25, 1993.
Reviewing the constitutional provision and Code Section 12-37-220(A)(2), it might be argued
that the term “all property” seems to allow an exemption for all property owned by an entity that
owns a hospital so long as the profits are not used for private purposes. However, the case law
and the rules of statutory construction require that the term “all property” be construed more
narrowly so that the interpretation of this term does not produce an absurd result.
"However plain the ordinary meaning of the words used in a statute may be, the courts will reject
that meaning when to accept it would lead to a result so plainly absurd that it could not possibly
have been intended by the legislature or would defeat the plain legislative intention." Kiriakides
v. United Artist Commun., Inc., 312 S.C. 271, 275, 440 S.E.2d 364, 366 (1994) (quoted in
Conner v. City of Forest Acres, 363 S.C. 460, 611 S.E.2d 905, 909 (2005)). If possible, the
statute will be construed in a manner that escapes the absurdity and carries the legislative
intention into effect. Id.
To read the constitutional provision and the statute as allowing all property of a charitable entity
that owns and runs a hospital to qualify as exempt from tax would lead to an absurd result as
property that was totally unrelated to the functioning of the hospital would be exempt. The
unintended result of allowing a broad interpretation of the statute would be that property such as
shopping centers, vacant land, or even a manufacturing plant would be exempt from ad valorem
taxes so long as it is owned by an entity that also owns and operates a hospital.
It is unlikely that the intent of the constitutional provision or the statute was to confer a property
tax exemption based on ownership alone. Exemptions based solely on ownership status fell into
disfavor after the railroad industry “obtained a virtual exemption from taxation” in the 1800s.
Town of Morristown v. Woman’s Club of Morristown, 124 N.J. 605, 612, 592 A.2d 216, 220
(1991). Typical of such exemptions was language providing that “all the property and effects of
[the railroad] company shall be exempt from taxation [for a certain period].” Ford v. Delta &
Pine Land Co., 164 U.S. 662, 665 (1897) (considering this language, but holding that, because of
intervening facts, it did not control the issue).
In Ford v. Delta & Pine Land Co., the United States Supreme Court rejected the idea of a
property tax exemption based solely on ownership alone, instead noting that it had been
frequently decided that a general property tax exemption for the property of a corporation is
construed as referring only to the property that is necessary for the entity to conduct its business.
This approach was “founded in the wisest reasons of public policy.” Id. at 667. As the Supreme
Court consistently recognized, a contrary construction would have produced an absurd result:
It would lead to infinite mischief if a corporation, simply by investing its funds in
property not required for the purpose of its creation, could extend its immunity from
taxation, and thus escape the common burden of the government.

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Id.
Tax exemption statutes are strictly construed against the taxpayer. Westview Baptist Church v.
Rembert, 286 S.C. 30, 331 S.E.2d 382 (Ct. App. 1985) (citing Hibernian Society v. Thomas, 282
S.C. 465, 319 S.E.2d 339 (Ct. App. 1984)). Construing the exemption set forth in Section 12-37220(A)(2) as applying only to property that is devoted to, and necessary for, the functional
operation of the hospital avoids an absurd consequence and carries the constitutional and
legislative intent into effect.
While the exemption is limited to property that is devoted to, and necessary for, the functional
operation of the hospital, the question arises as to how to determine what property is devoted to,
and necessary for, the functional operation of the hospital. For example, would property that
contributes to the comfort of the staff of the hospital or that contributes to the economic health of
the hospital be considered devoted to, and necessary for, the functional operation of the hospital?
This issue was taken up in Chisago Health Services v. Commissioner of Revenue, 462 N.W. 2d
386 (1990), a property tax exemption case decided by the Minnesota Supreme Court. In that
case, the court considered whether ambulatory care facilities operated by a hospital (but not part
of the hospital’s emergency room services) and a hospital annex which housed: (a) a business
office that handled the hospital’s business matters and (b) physician’s offices, was “reasonably
necessary” for the accomplishment of “public hospital purposes” and therefore, exempt from ad
valorem property taxes. The court held that in order to qualify for the property tax exemption for
public hospitals, the property must be devoted to, and necessary for, the functional operation of
the hospital, i.e., the property must be necessary to provide those services traditionally provided
by a hospital. The court held that although the auxiliary facilities and the hospital annex
contributed to the economic wellbeing of the hospital, the majority of the property was not
necessary for the functional operation of the hospital. 1
In reaching its conclusion, the Minnesota Supreme Court noted that:
The difficulty with granting tax exemptions to auxiliary properties which
help an exempt institution to survive or to prosper financially is two-fold.
First, it is difficult to know where to draw the line: almost any auxiliary
facility can be found to improve the financial well-being of a hospital.
Secondly, these exemptions, because they are exceptions to the requirement
of uniform taxation, tend to give an unfair competitive advantage to the
exempted facility over similar facilities privately operated.
In conclusion, the rules of statutory construction require that we read the tax exemption allowed
under Article X, §3(b) of the South Carolina Constitution and Code Section 12-37-220(A)(2)
with a view towards a reasonable interpretation that will not result in unintended consequences
or an unwarranted expansion of the exemption. Accordingly, the Department of Revenue will
1

The court did recognize that the portion of the hospital annex that served as the business office
for the hospital as well as the company’s emergency centers, would qualify as reasonably
necessary to the functional operation of the hospital, however, since that area had not been
separately identified at the trial court level, the court did not address the issue further.
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construe the tax exemption under the constitutional provision and Code Section 12-37-220(A)(2)
as requiring that the property be devoted to, and necessary for, the functional operation of the
hospital in order to qualify for the exemption.
The following examples may help to illustrate the principles discussed above.
CAVEAT: THE FOLLOWING EXAMPLES ARE FACT SPECIFIC AND A CHANGE IN
ONE FACT MAY RESULT IN A DIFFERENT CONCLUSION AS TO THE EXEMPT
STATUS OF THE PROPERTY.
Example 1 - Shopping Center
Hospital C is owned by Corporation C, a 501(c)(3) organization under the Internal Revenue
Code. Corporation C operates the hospital which provides both emergency and nonemergency medical services to constituents of County C, 24 hours a day, seven days a
week. Hospital C is able to provide these services on both an outpatient and an inpatient
basis. Recently, Corporation C received a gift of real property from a donor that consists of
a shopping center located in County C. The corporation plans to use the proceeds it
receives from the rents of tenants at the shopping center to fund a new wing for the hospital.
Under the facts given above, the shopping center is not devoted to, and necessary for, the
functional operation of the hospital and therefore will not qualify for the exemption.
Example 2 – Medical Office Building
Hospital A is owned by Corporation A, a 501(c)(3) organization under the Internal Revenue
Code. Corporation A operates the hospital which provides both emergency and nonemergency medical services to constituents of County A, 24 hours a day, seven days a
week. Hospital A is able to provide these services on both an outpatient and an inpatient
basis. Next to the hospital, Corporation A owns a medical building that houses offices for
several doctors, some of whom are employees of the hospital, some of whom have
admitting privileges at the hospital, and others who have no affiliation with the hospital.
The physicians who are employed by the hospital have their offices in the medical building
because there is no room for them in the hospital itself and these offices provide a space
where the physicians may review patients’ charts, conduct research, and confer with other
doctors about patients’ conditions and treatment. The medical building also houses several
dentists’ offices, a bank that is used by hospital employees as well as others, a restaurant,
and the offices of pharmaceutical representatives that sell products to the hospital.
Under the facts presented above, those offices that are occupied by the doctors who are
employees of the hospital will qualify for the exemption. These doctors’ offices are
devoted to, and necessary for, the functional operation of the hospital since the doctors are
performing the hospital’s work in their offices. However, the property associated with the
offices of those doctors who merely have admitting privileges at the hospital or who have
no affiliation with the hospital, the dentists’ offices, the bank, the restaurant, and the
pharmaceutical representatives’ offices will not qualify for the exemption as they are not

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devoted to, and necessary for, the functional operation of the hospital but instead serve a
private purpose. The portions of the building that relate to the non-qualifying doctors’
offices, the dentists’ offices, the bank, the restaurant and the offices of the pharmaceutical
representatives will be separately valued and will be subject to ad valorem taxation, unless
another exemption applies to these facilities.
Example 3 – Child Care Center
Hospital B is owned by Corporation B, a 501(c)(3) organization under the Internal Revenue
Code. Corporation B operates the hospital which provides both emergency and nonemergency medical services to constituents of County B, 24 hours a day, seven days a
week. Hospital B is able to provide these services on both an outpatient and an inpatient
basis. However, recently Hospital B has found it difficult to attract nursing staff to staff the
afternoon and evening shifts at the hospital. In order to attract employees to staff these
difficult shifts, the hospital has set up a child care center next door to Hospital B that
provides 24 hour care for the children of the hospital staff of Hospital B, including child
care for the children of those employees who work the afternoon and evening shift at the
hospital. The child care center is owned by the hospital and is run by staff employed by the
hospital and all expenses of the child care center are paid from monies received from the
hospital’s operations.
Under the facts given, the child care center is not eligible for the exemption. The day care
is provided for the convenience of the employees of the hospital and is not devoted to, and
necessary for, the functional operation of the hospital.
Example 4 – Parking Facility
Hospital D is owned by Charitable Institution D, a 501(c)(3) organization under the Internal
Revenue Code. Charitable Institution D operates the hospital which provides both
emergency and non-emergency medical services to constituents of County D, 24 hours a
day, seven days a week. Hospital D is able to provide these services on both an outpatient
and an inpatient basis. In order to serve the hospital’s staff and the patients that use the
hospital, Charitable Institution D owns a parking facility that is located right next to, and is
attached to, the hospital. In addition to patients, visitors and staff parking in the garage, the
garage housed ambulances and other hospital vehicles when they are not in use. All
expenses of the parking garage are paid from monies received from the hospital’s
operations.
Under the facts given, the parking garage will qualify for the exemption. It is devoted to,
and necessary for, the functional operation of the hospital since it houses the ambulances
which are used in transporting patients to the hospital and is also used for employee parking
and patient parking.

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If in addition to providing parking for patients, employees and the ambulances, the parking
garage was also used to provide parking for unrelated businesses or entities, such as
doctor’s offices for those doctors who are not employees of the hospital, then that portion of
the parking garage that is attributable to the unrelated businesses or entities will be valued
separately and will be subject to ad valorem taxation unless another exemption applies to
these facilities.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank
Burnet R. Maybank III, Director
December 13
, 2005
Columbia, South Carolina

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