N. Carolina bill would require hospitals to collect sales taxes

Large nonprofits in North Carolina — including many hospitals — would for the first time in decades be required to pay some sales taxes under a Senate bill introduced Thursday.

State and local governments now pay more than $400 million in annual sales tax refunds to nonprofits. Most of that money goes to hospitals.

Under the bill co-sponsored by Sen. Bob Rucho, sales tax refunds would be capped at $100,000 per year starting in 2016. That would affect only about 250 of the state’s 9,500 nonprofits, Rucho said.

But it would help lower taxes for everyone else by dramatically reducing the amount of sales tax refunds paid out each year, the Matthews Republican said.

The legislation’s prospects are uncertain. A House tax reform bill, also introduced on Thursday, would not require large nonprofits to pay sales taxes. And the state’s powerful hospital industry, which has successfully fought off similar proposals in recent years, is expected to lobby vigorously against the Senate bill.

Carolinas HealthCare System, the multibillion-dollar chain that owns Carolinas Medical Center and other hospitals in the Charlotte region, said it opposes any reduction in refunds, contending that such changes could make it harder to give free care to needy patients. The nonprofit system said it provided $284 million in financial assistance and discounts to uninsured patients last year.

“Access to these types of services could be negatively affected should more cuts continue,” the system said in a statement.

Most North Carolina hospitals are nonprofits, a status that exempts them from paying sales, property and income taxes.

But a 2012 investigation by the Observer and the (Raleigh) News & Observer found that while these hospitals were created with charitable missions, many no longer act like nonprofits. Large urban hospitals have amassed billions of dollars in reserves, paid their executives millions and generated large profits partly by inflating prices on drugs and procedures, the newspapers found.

Carolinas HealthCare posted total profits of more than $500 million last year while awarding CEO Michael Tarwater $4.76 million in total compensation.

“The average person who’s paying taxes looks at this and says, ‘Wait a minute. How fair is this?’ ” Rucho said Thursday. “… At the moment, (hospitals) seem to be very flush in cash.”

Some hospital officials say they more than earn their tax breaks by providing valuable charitable services. Novant Health, which owns medical centers in Charlotte, Matthews and Huntersville, said it received a sales tax refund of about $21 million in 2012, but spent $123 million in charity care for the poor and uninsured.

“The tax refund we receive in North Carolina helps Novant Health continue its mission to provide critical services to our communities — all without concern for a patient’s ability to pay,” the system said in a statement.

Despite their status as nonprofits, many charitable hospitals make more money than they spend in a typical year. But unlike for-profit companies, which pay dividends to stockholders, nonprofit hospitals must plow extra revenue back into their organizations.

‘Special carve-outs’

In addition to hospitals, the proposed cap on refunds would likely affect any nonprofit that makes taxable purchases of more than about $2.1 million per year. Experts say that could include colleges, large churches, food banks and other nonprofit medical facilities.

The plan would be phased in over three years. Starting in July 2014, refunds would be capped at $5 million — a level that Rucho says would affect only about nine nonprofits. The cap would drop to $1 million in 2015 and to $100,000 in subsequent years.

While the large charities that would ultimately be affected by the cap make up only a small percentage of nonprofits, they received nearly 90 percent of the sales tax refunds paid out in 2011, according to a N.C. Department of Revenue report.

The Rucho plan would use the additional tax revenue to help reduce the overall rates for sales taxes, personal income taxes and corporate income taxes. In most counties, the combined state and local sales tax rate is 6.75 percent.

The bill has been referred to the Senate Finance Committee, a panel chaired by the bill’s sponsors — Rucho and Bill Rabon, a Brunswick County Republican.

At a finance committee meeting Thursday, Rucho issued a warning about lobbyists — particularly the hospital association — trying to kill the tax plan. “The people they represent in many cases are concerned more about the fact that they maintain their loopholes and their special carve-outs,” he said.

Rucho targeted the state hospital association for its opposition to the bill, mentioning a TV ad he recently saw.

The N.C. Hospital Association did not respond to a request for comment about the legislation.

The newspapers’ investigation found that hospitals form one of the most influential lobbying groups in Raleigh. Former state Rep. Dale Folwell said hospitals killed his 2011 proposal to limit sales tax refunds to some of the state’s largest and most profitable hospitals. The bill was never discussed in committee.

Will services be cut?

The latest Senate bill might also affect large churches when they undertake building projects. Ed Holland, church administrator at Friendship Missionary Baptist Church, said the Charlotte church counted on — and received — a sizable sales tax refund when it was constructing the building that houses its main sanctuary between 2004 and 2006.

Among churches in the Charlotte area that could be affected: fast-growing Elevation Church, which has one of the region’s most expensive building plans. It expects to spend close to $10 million for a Lake Norman facility that will open early next year. And it hopes to build a facility in Ballantyne by early 2015 that would cost more than $10 million.

Doug Benson, a vice president at Foundation For The Carolinas, said that capping the sales tax refund would “reduce the assets nonprofits are able to devote to the core services they provide to the community.” With assets of more than $1 billion, the foundation is one of Charlotte’s largest nonprofits.

David Heinen, a lobbyist for the N.C. Center for Nonprofits, a group with more than 1,600 charitable members, said the Rucho plan could force some large nonprofits to trim services. Heinen said he’s also concerned that any cap approved might one day be lowered.

“It would really jeopardize the existence of a lot of nonprofits if it would go down to zero,” he said. Observer reporter Tim Funk and News & Observer reporters John Frank and Joseph Neff contributed.

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