In a case watched closely by Maine’s nonprofit organizations, the Maine Supreme Judicial Court has held that Hebron Academy, a private secondary school, was exempt from property tax on its various school buildings. The property tax exemption applies to real estate and personal property of charities and scientific and literary institutions (including the state’s hospitals and many of its private schools) that the organizations own and occupy or use solely for their own purposes.
Hebron Academy occasionally rented its facilities to outside users when not in use by the students and faculty. For example, the hockey rink was rented to the public, the ball fields were used by summer camps, and the facilities were available for weddings. After rejecting the town’s argument that Hebron Academy was not a “literary and scientific institution,” the primary issue facing the court was whether that rental violated the requirement that the property be used solely for the Academy’s own purposes.
The court restated the general rule that an organization does not occupy or use its property solely for its own purposes if it allows any use of the property that does not promote its tax-exempt purposes. However, the court recognized that there is an exception to the general rule for uses which are sufficiently “incidental” to the organization’s exempt purpose. There are two types of incidental use: (1) uses related to institutional necessity, such as a parking lot that serves a hospital, and (2) uses that are de minimis and that do not interfere with the institution’s major tax-exempt purpose, such as a summer camp’s rental of its property to the organization’s officers.
The court found that Hebron Academy’s rental of its property to outside users was de minimis because revenues approximated just one percent of its operating budget, and the outside use did not otherwise interfere with its tax-exempt purpose.
In this difficult economy, many tax-exempt organizations have sought outside sources of revenue to support their charitable and educational programs, including by renting out their facilities. These organizations have rightfully been concerned that the rental would jeopardize their property tax exemption. Hebron Academy has made it clear that rentals which are de minimis and that do not interfere with their primary purpose will be allowed.