1999 Montana Legislature

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HOUSE BILL NO. 516

INTRODUCED BY L. GRINDE, C. SWYSGOOD, J. BARNETT, T. BECK, P. BERGSAGEL, A. BISHOP, M. BRAINARD, R. BROWN, J. COBB, M. COLE, B. DEPRATU, G. DEVLIN, S. FISHER, D. FUCHS, D. GRIMES, M. HANSON, D. HARGROVE, J. HARP, D. HEDGES, J. HERTEL, D. MOOD, P. SLITER, M. SPRAGUE, B. TASH, M. TAYLOR, B. THOMAS, J. WITT



A BILL FOR AN ACT ENTITLED: "AN ACT REQUESTING AN INTERIM STUDY OF THE ADVISABILITY OF RETAINING OR ELIMINATING TAX-EXEMPT STATUS FOR PROPERTY OR INCOME OF NONPROFIT CORPORATIONS OR PURELY PUBLIC CHARITIES THAT IS USED IN OR GENERATED BY A COMMERCIAL ENTERPRISE; AND AMENDING SECTIONS 15-6-201, 15-31-102, AND 35-2-118, MCA; AND PROVIDING AN IMMEDIATE EFFECTIVE DATE AND AN APPLICABILITY DATE."



     WHEREAS, THERE HAVE BEEN ALLOWED, AS A MATTER OF PUBLIC POLICY, CERTAIN TAX EXEMPTIONS TO A VARIETY OF NONPROFIT AND CHARITABLE ENTITIES; AND

     WHEREAS, IT APPEARS TO BE AN INCREASINGLY FREQUENT PHENOMENON THAT THERE MAY BE SOME TAX-EXEMPT NONPROFIT AND CHARITABLE ENTITIES THAT ARE BECOMING ENGAGED IN COMMERCIAL ACTIVITIES THAT ARE IN DIRECT OR INDIRECT COMPETITION WITH ENTITIES THAT ARE NOT EXEMPT FROM TAXATION; AND.

     WHEREAS, THE ORIGINAL AND PHILOSOPHICAL REASONS FOR ALLOWING CERTAIN TAX EXEMPTIONS TO CERTAIN NONPROFIT AND CHARITABLE ENTITIES MAY NO LONGER EXIST OR MAY HAVE BEEN AMPLIFIED OVER TIME; AND

     WHEREAS, AT A MINIMUM, PUBLIC POLICY REASONS FOR ALLOWING CERTAIN TAX EXEMPTIONS TO CERTAIN TAX-EXEMPT NONPROFIT AND CHARITABLE ENTITIES SHOULD BE REVISITED BY STATE POLICYMAKERS; AND

     WHEREAS, SECTION 15-31-102(3), MCA, PROVIDES THAT TAX- EXEMPT ENTITIES MUST BE TAXED UPON ANY "UNRELATED BUSINESS TAXABLE INCOME" AS DEFINED BY SECTION 512 OF THE INTERNAL REVENUE CODE OF 1954; AND

     WHEREAS, THE STATE OF MONTANA HAS RELIED UPON THE FEDERAL RULINGS, REGULATIONS, AND STATUTES DEFINING "UNRELATED BUSINESS TAXABLE INCOME" FOR PURPOSES OF DETERMINING THE TAX LIABILITY OF NONPROFIT ORGANIZATIONS IN MONTANA; AND

     WHEREAS, THE LEGISLATURE HAS NOT RECENTLY REVIEWED THE STATUS OF THE STATE'S RELIANCE UPON THE FEDERAL DETERMINATION OF "UNRELATED BUSINESS TAXABLE INCOME"; AND

     WHEREAS, THE LEGISLATURE RECOGNIZES THAT MANY MONTANA NONPROFIT ORGANIZATIONS THAT ENGAGE IN COMMERCIAL ACTIVITIES PRODUCING "UNRELATED BUSINESS TAXABLE INCOME" FOR FEDERAL TAX PURPOSES ARE PAYING TAX TO THE STATE OF MONTANA WITH REGARD TO THIS INCOME; AND

     WHEREAS, THE LEGISLATURE ALSO RECOGNIZES THAT CERTAIN TAX-EXEMPT ENTITIES MAY NOT FULLY UNDERSTAND THE EXTENT TO WHICH "UNRELATED BUSINESS TAXABLE INCOME" IS COMPUTED FOR FEDERAL TAX PURPOSES AND, THEREFORE, MAY BE FAILING TO PAY THE UNRELATED BUSINESS INCOME TAX AS REQUIRED BY SECTION 15-31-102(3), MCA; AND

     WHEREAS, THE LEGISLATURE BELIEVES THAT IT IS IN THE BEST INTEREST OF THE CITIZENS OF THE STATE OF MONTANA, INCLUDING TAX-EXEMPT, NONPROFIT, AND CHARITABLE ENTITIES, TO INVESTIGATE AND DEVELOP A SOUND UNDERSTANDING BY THE LEGISLATURE OF THE EFFECT AND LEVEL OF COMPLIANCE WITH THE PRESENT LAW AND TO DETERMINE WHETHER ANY SPECIFIC STATUTORY PROVISIONS THAT DIFFER FROM THE FEDERAL TREATMENT OF UNRELATED BUSINESS TAXABLE INCOME SHOULD BE IMPLEMENTED WITHIN THE STATE.

     WHEREAS, CONVERSION OF PORTIONS OF MATERIAL ASSETS OF NONPROFIT HEALTH SYSTEMS INTO FOR-PROFIT HEALTH SYSTEMS IS A PUBLIC POLICY ISSUE THAT WARRANTS EXAMINATION IN AN INTERIM STUDY.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MONTANA:



     NEW SECTION.  Section 1.  Nonprofit STUDY OF TAX-EXEMPT STATUS OF NONPROFIT corporations and purely public charities -- forfeiture of tax-exempt status. (1) A THE LEGISLATIVE COUNCIL IS REQUESTED TO ASSIGN TO THE REVENUE AND TAXATION AN APPROPRIATE INTERIM COMMITTEE A STUDY OF THE ADVISABILITY OF DIVERGING FROM THE PRESENT TREATMENT OF TAXING THE UNRELATED BUSINESS TAXABLE INCOME OF nonprofit corporation CORPORATIONS or an institution INSTITUTIONS of purely public charity, as defined in 15-6-201, that engages ENGAGE in a commercial enterprise. may forfeit THE tax-exempt status as TO BE EXAMINED ARE THE EXEMPTIONS provided in 15-6-201(1)(B) THROUGH (1)(E), (1)(G), (1)(O), AND (1)(Q) and 15-31-102(1)(A), (1)(B), (1)(D) THROUGH (1)(G), AND (1)(J). for any income generated by that commercial enterprise and for any real or personal property or portion of real or personal property used in conducting the commercial enterprise AS ONE ELEMENT ONLY, THE STUDY MUST FOCUS ON THE EFFECTIVENESS OF THE STATE'S CURRENT RELIANCE UPON 15-31-102(3) IN ORDER TO TAX THE INCOME GENERATED BY A TAX-EXEMPT ENTITY'S COMMERCIAL ENTERPRISE AND FOR ANY REAL OR PERSONAL PROPERTY OR PORTION OF REAL OR PERSONAL PROPERTY USED BY A TAX-EXEMPT ENTITY IN CONDUCTING THE COMMERCIAL ENTERPRISE GENERATING THE UNRELATED BUSINESS TAXABLE INCOME.

     (2) For the purposes of this section THE STUDY, "commercial enterprise" means providing products, services, or use of equipment or facilities to the general public:

     (a) for payment of a price, fee, or periodic dues;

     (b) in direct competition with for-profit businesses;

     (c) in a manner that bases prices on pricing formulas commonly used by for-profit businesses;

     (d) using common promotional materials and commercial catch phrases to promote sales;

     (e) by advertising goods or services;

     (f) during the same hours as for-profit businesses; and

     (g) using paid staff rather than volunteers.

     (3) If a person's primary relationship with a nonprofit corporation or institution of purely public charity is to receive products, services, the use of equipment, or the use of a facility in return for the person's paying a price, fee, or periodic dues, the person is a member of the general public with respect to the nonprofit corporation or institution of purely public charity for the purposes of this section.

     (4) This section does not apply to an association or corporation organized under Title 35, chapter 20 or 21. IN CONDUCTING THE STUDY, THE COMMITTEE SHALL REVIEW THE EFFECTS OF CERTAIN:

     (A) EXEMPTIONS FROM UNRELATED BUSINESS TAXABLE INCOME PROVIDED BY THE INTERNAL REVENUE CODE AND APPLICABLE STATE AND FEDERAL REGULATIONS;

     (B) THE USE OF 15-31-102(3) PROVISIONS RELATING TO TAXING THE INCOME GENERATED BY A TAX-EXEMPT ENTITY'S COMMERCIAL ENTERPRISE;

     (C) THE TAXABLE STATUS OF REAL OR PERSONAL PROPERTY OR PORTIONS OF REAL OR PERSONAL PROPERTY USED BY A TAX-EXEMPT ENTITY IN CONDUCTING COMMERCIAL ENTERPRISES GENERATING UNRELATED BUSINESS TAXABLE INCOME; AND

     (D) OTHER RELATED ITEMS THAT THE COMMITTEE CONSIDERS APPROPRIATE.

     (5) This section does not apply to sales to the general public that are incidental or periodic rather than permanent and ongoing.

     (6) The provisions of this section may not be construed as prohibiting or limiting the ability of a public charity to fund, capitalize, guarantee the indebtedness of, or otherwise subsidize another institution that is an institution of purely public charity as defined in 15-6-201.

     (7) A public charity that invests in publicly traded stock, bonds, real estate, or other investments, whether directly or indirectly, is not in violation of the provisions of this section.

     (8) THE COMMITTEE:

     (A) MAY REQUEST ASSISTANCE FROM THE STAFF OF ANY DIVISION OF THE LEGISLATIVE BRANCH OR FROM ANY AGENCY OF STATE GOVERNMENT;

     (B) MAY INVITE DIALOGUE REGARDING THE ADVISABILITY OF EXEMPTION FROM CERTAIN TAXES WITH:

     (I) TAX-EXEMPT NONPROFIT AND CHARITABLE ENTITIES;

     (II) FOR-PROFIT ENTITIES THAT ARE NOT TAX EXEMPT;

     (III) LOCAL GOVERNMENT OFFICIALS; OR

     (IV) ANY OTHER PERSON, GROUP, OR ENTITY BELIEVED TO HAVE USEFUL INFORMATION OR INSIGHTS ON THE SUBJECTS WITHIN THE PURVIEW OF THE COMMITTEE; AND

     (C) SHALL COMPILE ITS FINDINGS AND CONCLUSIONS IN A REPORT TO THE 57TH LEGISLATURE, AS PROVIDED IN 5-11-210. THE REPORT MAY IDENTIFY OPTIONS FOR FURTHER LEGISLATIVE CONSIDERATION AND MAY CONTAIN RECOMMENDATIONS, INCLUDING DRAFT LEGISLATION, IF CONSIDERED ADVISABLE BY THE COMMITTEE. THE REPORT MUST BE PREPARED AND AVAILABLE FOR DISTRIBUTION PRIOR TO NOVEMBER 1, 2000.



     Section 2.  Section 15-6-201, MCA, is amended to read:

     "15-6-201.  Exempt categories. (1) The following categories of property are exempt from taxation:

     (a)  except as provided in 15-24-1203, the property of:

     (i)  the United States, except:

     (A)  if congress passes legislation that allows the state to tax property owned by the federal government or an agency created by congress; or

     (B)  as provided in 15-24-1103;

     (ii) the state, counties, cities, towns, and school districts;

     (iii) irrigation districts organized under the laws of Montana and not operating for profit;

     (iv) municipal corporations;

     (v)  public libraries; and

     (vi) rural fire districts and other entities providing fire protection under Title 7, chapter 33;

     (b)  buildings, with land that they occupy and furnishings in the buildings, that are owned by a church and used for actual religious worship or for residences of the clergy, together with adjacent land reasonably necessary for convenient use of the buildings;

     (c)  property used exclusively for agricultural and horticultural societies, for educational purposes, and for nonprofit health care facilities, as defined in 50-5-101, licensed by the department of public health and human services and organized under Title 35, chapter 2 or 3. A health care facility that is not licensed by the department of public health and human services and organized under Title 35, chapter 2 or 3, is not exempt.

     (d) property that is:

     (i)  owned and held by an association or corporation organized under Title 35, chapter 2, subject to the provisions of [section 1] pertaining to engaging in a commercial enterprise, or organized under Title 35, chapter 3, 20, or 21;

     (ii) devoted exclusively to use in connection with a cemetery or cemeteries for which a permanent care and improvement fund has been established as provided for in Title 35, chapter 20, part 3; and

     (iii) not maintained and operated for private or corporate profit;

     (e) (i)  property that is owned or property that is leased from a federal, state, or local governmental entity by institutions of purely public charity if the property is directly used for purely public charitable purposes;.

     (ii) Property that is used for a commercial enterprise as defined in [section 1] is not being used for a purely public charitable purpose.

     (f)  evidence of debt secured by mortgages of record upon real or personal property in the state of Montana;

     (g)  public museums, art galleries, zoos, and observatories that are not used or held for private or corporate profit;

     (h)  all household goods and furniture, including but not limited to clocks, musical instruments, sewing machines, and wearing apparel of members of the family, used by the owner for personal and domestic purposes or for furnishing or equipping the family residence;

     (i)  truck canopy covers or toppers and campers;

     (j)  a bicycle, as defined in 61-1-123, used by the owner for personal transportation purposes;

     (k)  motor homes;

     (l)  all watercraft;

     (m)  motor vehicles, land, fixtures, buildings, and improvements owned by a cooperative association or nonprofit corporation organized to furnish potable water to its members or customers for uses other than the irrigation of agricultural land;

     (n)  the right of entry that is a property right reserved in land or received by mesne conveyance (exclusive of leasehold interests), devise, or succession to enter land with a surface title that is held by another to explore, prospect, or dig for oil, gas, coal, or minerals;

     (o)  (i) property that is owned and used by a corporation or association organized and operated exclusively for the care of persons with developmental disabilities, persons with mental illness, or persons with physical or mental impairments that constitute or result in substantial impediments to employment and that is not operated for gain or profit; and

     (ii) property that is owned and used by an organization owning and operating facilities that are for the care of the retired, aged, or chronically ill and that are not operated for gain or profit;

     (p)  all farm buildings with a market value of less than $500 and all agricultural implements and machinery with a market value of less than $100;

     (q)  property owned by a nonprofit corporation that is organized to provide facilities primarily for training and practice for or competition in international sports and athletic events and that is not held or used for private or corporate gain or profit. For purposes of this subsection (1)(q), "nonprofit corporation" means an organization that is exempt from taxation under section 501(c) of the Internal Revenue Code and incorporated and admitted under the Montana Nonprofit Corporation Act.

     (r)  the first $15,000 or less of market value of tools owned by the taxpayer that are customarily hand-held and that are used to:

     (i)  construct, repair, and maintain improvements to real property; or

     (ii) repair and maintain machinery, equipment, appliances, or other personal property;

     (s)  harness, saddlery, and other tack equipment;

     (t)  a title plant owned by a title insurer or a title insurance producer, as those terms are defined in 33-25-105;

     (u)  timber as defined in 15-44-102;

     (v)  all trailers as defined in 61-1-111, semitrailers as defined in 61-1-112, pole trailers as defined in 61-1-114, and travel trailers as defined in 61-1-131;

     (w)  all vehicles registered under 61-3-456;

     (x)  (i) buses, trucks having a manufacturer's rated capacity of more than 1 ton, and truck tractors, including buses, trucks, and truck tractors apportioned under Title 61, chapter 3, part 7; and

     (ii) personal property that is attached to a bus, truck, or truck tractor that is exempt under subsection (1)(x)(i); and

     (y)  motorcycles and quadricycles.

     (2)  (a) For the purposes of subsection (1)(e), the term "institutions of purely public charity" includes any organization that meets the following requirements:

     (i)  The organization qualifies as a tax-exempt organization under the provisions of section 501(c)(3), Internal Revenue Code, as amended.

     (ii) The organization accomplishes its activities through absolute gratuity or grants. However, the organization may solicit or raise funds by the sale of merchandise, memberships, or tickets to public performances or entertainment or by other similar types of fundraising activities.

     (b)  For the purposes of subsection (1)(g), the term "public museums, art galleries, zoos, and observatories" means governmental entities or nonprofit organizations whose principal purpose is to hold property for public display or for use as a museum, art gallery, zoo, or observatory. The exempt property includes all real and personal property reasonably necessary for use in connection with the public display or observatory use. Unless the property is leased for a profit to a governmental entity or nonprofit organization by an individual or for-profit organization, real and personal property owned by other persons is exempt if it is:

     (i)  actually used by the governmental entity or nonprofit organization as a part of its public display;

     (ii) held for future display; or

     (iii) used to house or store a public display.

     (3)  The following portions of the appraised value of a capital investment in a recognized nonfossil form of energy generation or low emission wood or biomass combustion devices, as defined in 15-32-102, are exempt from taxation for a period of 10 years following installation of the property:

     (a)  $20,000 in the case of a single-family residential dwelling;

     (b)  $100,000 in the case of a multifamily residential dwelling or a nonresidential structure."



     Section 3.  Section 15-31-102, MCA, is amended to read:

     "15-31-102.  Organizations exempt from tax -- unrelated business income not exempt. (1) Except as provided in subsection (3), there may not be taxed under this title any income received by any:

     (a)  labor, agricultural, or horticultural organization;

     (b)  fraternal beneficiary, society, order, or association operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for the payment of life, sick, accident, or other benefits to the members of the society, order, or association or their dependents;

     (c)  cemetery company owned and operated exclusively for the benefit of its members;

     (d) except as provided in [section 1] pertaining to engaging in a commercial enterprise, corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual;

     (e)  business league, chamber of commerce, or board of trade not organized for profit, no part of the net income of which inures to the benefit of any private stockholder or individual;

     (f)  civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

     (g)  club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net income of which inures to the benefit of any private stockholder or members;

     (h)  farmers' or other mutual hail, cyclone, or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or similar organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses;

     (i)  cooperative association or corporation engaged in the business of operating a rural electrification system or systems for the transmission or distribution of electrical energy on a cooperative basis;

     (j)  corporations or associations organized for the exclusive purpose of holding title to property, collecting income from the property, and turning over the entire amount of the income, less expenses, to an organization that itself is exempt from the tax imposed by this title;

     (k)  wool and sheep pool, which is an association owned and operated by agricultural producers organized to market association members' wool and sheep, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses. Income, for this purpose, does not include expenses and money distributed to members contributing wool and sheep.

     (l)  corporation that qualifies as a domestic international sales corporation (DISC) under the provisions of section 991, et seq., of the Internal Revenue Code (26 U.S.C. 991, et seq.) and that has in effect for the entire taxable year a valid election under federal law to be treated as a DISC. If a corporation makes that election under federal law, each person who at any time is a shareholder of the corporation is subject to taxation under Title 15, chapter 30, on the earnings and profits of this DISC in the same manner as provided by federal law for all periods for which the election is effective.

     (m)  farmers' market association not organized for profit, no part of the net income of which inures to the benefit of any member, but that is organized for the sole purpose of providing for retail distribution of homegrown vegetables, handicrafts, and other products either grown or manufactured by the seller;

     (n)  common trust fund as defined in 26 U.S.C. 584(a);

     (o)  foreign capital depository chartered under the provisions of 32-8-104, 32-8-201, and 32-8-202.

     (2)  In determining the license fee to be paid under this part, there may not be included any earnings derived from any public utility managed or operated by any subdivision of the state or from the exercise of any governmental function.

     (3)  Any unrelated business taxable income, as defined by section 512 of the Internal Revenue Code of 1954 (26 U.S.C. 512), as amended, earned by any exempt corporation resulting in a federal unrelated business income tax liability of more than $100 must be taxed as other corporation income is taxed under this title. An exempt corporation subject to taxation on unrelated business income under this section shall file a copy of its federal exempt organization business income tax return on which it reports its unrelated business income with the department of revenue."



     Section 4.  Section 35-2-118, MCA, is amended to read:

     "35-2-118.  General powers. (1) Unless its articles of incorporation provide otherwise, a corporation has perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its affairs including, without limitation, power:

     (a)  to sue and be sued, complain, and defend in its corporate name;

     (b)  to have a corporate seal, which may be altered at will, and to use it or a facsimile of the seal by impressing, affixing, or in any other manner reproducing it;

     (c)  to make and amend bylaws, consistent with its articles of incorporation or with the laws of this state, for regulating and managing the affairs of the corporation;

     (d)  to purchase, receive, lease, or otherwise acquire and to own, hold, improve, use, and otherwise deal with real or personal property or any legal or equitable interest in property, wherever located;

     (e)  to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property;

     (f)  to purchase, receive, subscribe for, or otherwise acquire any other entity; to own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of any other entity; and to deal in and with shares or other interests in or obligations of any other entity;

     (g)  to make contracts and guaranties; to incur liabilities; to borrow money; to issue notes, bonds, and other obligations; and to secure any of its obligations by mortgage or pledge of any of its property, franchises, or income;

     (h)  to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment, except as limited by 35-2-435;

     (i)  to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity;

     (j)  to conduct its activities, locate offices, and exercise the powers granted by this chapter in the state or out of the state;

     (k)  to elect or appoint directors, officers, employees, and agents of the corporation; to define their duties; and to fix their compensation;

     (l)  to pay pensions and establish pension plans, pension trusts, and other benefit and incentive plans for any or all of its current or former directors, officers, employees, and agents;

     (m)  to make donations consistent with law for the public welfare or for charitable, religious, scientific, or educational purposes and for other purposes that further the corporate interest;

     (n)  to impose dues, assessments, admission, and transfer fees upon its members;

     (o)  to establish conditions for admission of members, admit members, and issue memberships;

     (p) to carry on a business, except as provided in [section 1]; or

     (q)  to do all things necessary or convenient consistent with law to further the activities and affairs of the corporation.

     (2)  A corporation may not have or issue shares of stock."



     NEW SECTION.  Section 5.  Codification instruction. [Section 1] is intended to be codified as an integral part of Title 35, chapter 2, and the provisions of Title 35, chapter 2, apply to [section 1].



     NEW SECTION.  Section 6.  Coordination instruction. (1) If [LC 1732] is submitted to a vote and is not approved by the electorate, then [section 2(1)(d)(i) of this act] is void.

     (2) If [LC 1733] is submitted to a vote and is not approved by the electorate, then [section 2(1)(e)(ii) of this act] is void.

     (3) If [LC 1734] is submitted to the electorate and is not approved by the electorate, then [section 3(1)(d) of this act] is void.

     (4) If [LC 1732], [LC 1733], and [LC 1734] are all submitted to the electorate and if all three are not approved by the electorate, then [this act] is void.



     NEW SECTION.  Section 2.  Effective date. [This act] is effective July 1, 1999 ON PASSAGE AND APPROVAL.



     NEW SECTION.  Section 8.  Applicability. [This act] applies to income taxes and property taxes for commercial enterprise activity engaged in by nonprofit corporations and purely public charities subject to [this act] commencing January 1, 2000.

- END -




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