North Carolina law provides that tax-exempt organizations don’t have to pay property tax on buildings they own if they are used for a “charitable purpose.” What constitutes a “charitable purpose” was at issue in the case recently heard by the state’s second-highest court, in which a nonprofit daycare challenged Beaufort County determination that it did not qualify for the tax exemption.
The N.C. Court of Appeals held in a recent decision that the daycare center does in fact qualify. Totsland Preschool, Inc., is a nonprofit corporation that has held federal section 501(c)(3) tax-exempt status since 1983. It provides low-cost daycare services to needy families in Bellview in Beaufort County.
For many years, Totsland operated in a rented, flood-prone building. In 2001, things started to look up though. It got funding from the federal Rural Development agency and the nonprofit Z. Smith Reynolds Foundation to build its own facility, which would be larger that its previous space.
The new building was completed in November 2002. That, however, was not the end of the building-related issues for Totsland. Beaufort County denied the nonprofit’s application for an exemption from property taxes for the new facility.
Totsland appealed the ruling, which eventually came before the N.C Court of Appeals. Though the daycare had prevailed before the Property Tax Commission, the county challenged the commission’s determination before the appeals court.
Before the Court of Appeals, the county argued that though Totsland was a nonprofit charitable organization, operating a daycare does not constitute a charitable purpose as defined by state law. Nor is there any North Carolina case law, the county pointed out, defining the operation of day care as a charitable purpose.
The Court of Appeals, however, was not swayed by Beaufort County’s arguments.
North Carolina General Statutes, section 105-278.7 provides in part that: “(a) Buildings, the land they actually occupy, and additional adjacent land necessary for the convenient use of any such building shall be exempted from taxation if wholly owned by an agency listed in subsection (c), below, and if: (1) Wholly and exclusively used by its owner for nonprofit educational, scientific, literary, or charitable purposes as defined in subsection (f), below[.]”
“Based upon the evidence presented to the Commission, we hold the activities conducted by Totsland are provided for the benefit of the community at large, and are done so without expectation of pecuniary profit or reward,” wrote Judge Barbara Jackson for the appeals court.
“Therefore, we hold, based on the facts specific to the instant case, Totsland satisfied its burden of showing that the activities conducted in the subject property were for charitable purpose as defined in section 105-278.7.”
While North Carolina appellate courts indeed hadn’t previously addressed the issue in the context of a daycare center, the Court of Appeals analogized to its 2004 decision In re Appeal of Pavillon Int’l finding that a nonprofit residential treatment facility qualified for the property tax exemption. In that case, Pavillon provided a large amount of free care, was found to benefit the community as a whole, and continued to exist only because of charitable contributions.
Likewise, the appeals court noted, Totsland provides daycare services to the children of low-income individuals, all of whom qualified for government assistance. Parents’ fees covered only 10 percent of the center’s cost, with most of the rest coming from government sources. The center provided a number of other services, all cost free, to the community at large besides being a daycare. And it relied in part upon volunteers and donations to continue operating.
To Beaufort County, Totsland’s heavy reliance on government funding was an indication that it was not really engaged in a charitable purpose. The Court of Appeals disagreed.
“We do not find this fact to be controlling as to whether or not Totsland’s activities constitute a charitable purpose, as it has long been the use to which the subject property is dedicated that ultimately controls whether the property would be entitled to an exemption from taxation,” wrote Judge Jackson.
“Where, as in the present case, a nonprofit corporation receives government funding, which it in turn uses for a charitable purpose, we hold the purpose of the activities and the actual use of the funds to be the controlling factors, rather than the source of the funds.”
N.C. Court of Appeal rulings are controlling interpretations of state law, unless overruled by the N.C. Supreme Court. Because the ruling of the three-judge panel of the appeals court was unanimous, the high court is not required to hear the case even should Beaufort further appeal.
The case is In re Appeal of Totsland Preschool, Inc., (05-1663).
Michael Lowrey is an associate editor of Carolina Journal.