Moratorium on the Rainbow ruling

A recent court ruling has put some nonprofits in jeopardy of losing their tax exempt status, said Marcia Avner, public policy director for the Minnesota Council of Nonprofits.

The Minnesota Supreme Court ruled last year that Under the Rainbow Child Care Center Inc. should lose its property tax exempt status because the center charged full-price for all its services. The court said the center should offer free or reduced rates in order to qualify as a nonprofit.

Avner told the House Property Tax Relief and Local Sales Tax Division March 14 that if the ruling is enforced by assessors, it will make Minnesota a “dangerously restrictive state” when it comes to applying for nonprofit status. Many organizations could lose their property tax exemption, which could lead them to lose sales tax exemption, too. The bill was laid over for possible inclusion in the division’s omnibus bill.

Some community and children’s mental health centers have already been approached by assessors questioning their nonprofit status, Avner said.

“Some of the very organizations that, I think many Minnesotans would agree, are providing a public benefit, really need the protection of a somewhat broader look at the criteria,” she said.

HF3386, sponsored by Division Chairman Rep. Paul Marquart (DFL-Dilworth), would place a one-year moratorium on enforcing the ruling, giving the nonprofit community a chance to discuss possible legislative solutions. A companion bill, SF2841, sponsored by Sen. Tarryl Clark (DFL-St. Cloud), awaits action by the Senate Taxes Committee.

Currently, organizations are judged on six criteria, called the North Star Test, to determine tax exemption eligibility. The ruling put emphasis on the third test — whether participants are required to pay. The other tests include criteria such as whether the charity is helpful to the others without material reward, if it’s supported by gifts and whether donations generate a profit.