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Circuit Court Subjects Episcopal Nursing Home To Tax

In Episcopal Church Home and Infirmary v. Department of Revenue, Case No. 03-CI-547 (Franklin Cir. Ct., Jun. 13, 2007), the Franklin Circuit Court held that the Episcopal Church Home and Infirmary (“Episcopal Church Home”) was subject to Healthcare Provider Tax (“Provider Tax”).

The Episcopal Church Home is a non-profit 501(c)(3) organization that provides nursing and assisted living services to the elderly residents of its facility. In 1993, the Kentucky General Assembly enacted the Provider Tax in order to comply with newly amended federal requirements related to the ability of states to receive federal Medicaid money. The Provider Tax imposed a two to two and one half percent (2-2.5%) tax on the gross revenue of all inpatient and outpatient hospitals, nursing homes, physicians, home healthcare services, HMO services, and other immediate care facilities for the mentally retarded. The constitutionality of the Provider Tax was upheld in Revenue Cabinet v. Smith, 875 S.W.2d 873 (Ky. 1994). Subsequent to the passage of the Provider Tax, the General Assembly amended it in 1994 and again in 1996 to phase out the taxation of physicians and pharmacies. Notwithstanding such amendments, the other entities providing healthcare services remain subject to the Provider Tax.

The Episcopal Church Home contended that it should be exempt from the Provider Tax for several reasons. First, the Episcopal Church Home argued that the amendments constituted special legislation prohibited by Section 59 of the Kentucky Constitution, and that they violated the Equal Protection Clauses of both the United States and Kentucky Constitutions, and were invalid. Next, the Episcopal Church Home argued that it was an institution of purely public charity and an institution of religion, and was therefore exempt from the Provider Tax under Section 170 of the Kentucky Constitution. Likewise, the Episcopal Church Home claimed that its 1872 Charter from the General Assembly prohibited taxation of its property.

The Court began with a review of the Episcopal Church Home’s Section 59 argument. The Court indicated that the test for whether a tax constituted special legislation was outlined by the Kentucky Supreme Court in Shoo v. Rose, 270 S.W.2d 940 (Ky. 1954). Under the Shoo test, the tax must: (1) apply equally to all in a class, and (2) there must be distinctive and natural reasons inducing and supporting the classification.

The Court indicated that the legislative history provided that the class in this particular case consisted of all medical providers required to be taxed in order to qualify for federal matching funds in the Commonwealth’s Medicaid program, with the primary goal of obtaining such federal funds. Therefore, the Court determined that the class should be comprised of all healthcare providers that must be taxed in order for Kentucky to qualify for federal matching money, including nursing homes.

With regard to the second prong of the Shoo test, the Court determined that there were natural and distinctive reasons for the classification, including the need to comport with the requirements outlined in federal law which were the basis for the Provider Tax in the first place. The Court therefore held that the Legislature had not acted arbitrarily with regard to the amendments to the Provider Tax excluding physicians and pharmacies from the tax.

The Court also dismissed the Episcopal Church Home’s argument related to Section 170 of the Kentucky Constitution. Section 170 exempts from property tax property owned and occupied by religious institutions and property owned by purely public charities. The Episcopal Church Home’s position was that since the Provider Tax liability was paid from its endowment funds, it constituted a property tax, and the tax therefore violated Section 170 of the Kentucky Constitution. The Court held that a taxpayer cannot change the nature of a tax by selecting the account from which it chooses to pay the tax, and concluded that because the Provider Tax is not a property tax, Section 170 was not applicable.

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