New Jersey lawmakers are advancing legislation to preserve nonprofit hospitals' exemption from paying property taxes, six months after a tax court ruling set off a panic among hospitals that municipalities might start challenging that legal protection.

The legislation (S3299/A4903) would preserve property-tax exemptions for nonprofit hospitals, including those with on-site for-profit medical providers.

It would also require the hospitals, with some possible exceptions, to pay an annual community service fee to the municipality in which they are located to cover public safety costs, such as police and firefighter transport.

Nonprofit hospitals in South Jersey include Cooper University Hospital in Camden, Marlton-based Virtua Health System, and Woodbury-based Inspira Medical Center.

The bill comes in response to a June tax court ruling that found that Morristown Medical Center in Morris County failed to qualify for the exemption from tax years 2006 to 2008.

The court found that the nonprofit hospital "operated and used its property for a profit-making purpose," violating a legal standard used to determine whether it owed property taxes.

For example, in addition to employing its own physicians, Morristown Medical Center contracted with for-profit doctors that used the hospital's facilities and who directly charged patients. The court said it was impossible to delineate between the hospital's nonprofit and for-profit operations.

Tax Court Judge Vito L. Bianco warned that the case could have far-reaching consequences throughout the state.

"If it is true that all nonprofit hospitals operate like the hospital in this case, as was the testimony here, then for purposes of the property tax exemption, modern nonprofit hospitals are essentially legal fictions," he wrote.

"Accordingly, if the property tax exemption for modern nonprofit hospitals is to exist at all in New Jersey going forward, then it is a function of the Legislature and not the courts to promulgate what the terms and conditions will be. Clearly, the operation and function of modern nonprofit hospitals do not meet the current criteria for property tax exemption" under the law.

The case itself did not have binding precedent statewide, but it "created so much uncertainty," said Kerry McKean Kelly, a spokeswoman for the New Jersey Hospital Association, which supports the legislation.

"With that tax court decision, you could see any municipality in the state litigate against a local nonprofit hospital for property taxes," she said.

The tax court decision drew attention to the evolution of nonprofit hospitals from primarily charitable organizations built to treat the poor into "sophisticated centers of medical care" and education, as well as "labyrinthine corporate structures."

The legislation advancing in Trenton would ensure these new nonprofit hospitals retain their exemption. In addition, they'd also pay an annual community fee, most of which would go to municipalities and 5 percent to counties. Acute care hospitals would pay $2.50 per day for each licensed bed, while satellite emergency care facilities would pay $250 per day.

Virtua Health operates one such satellite facility in Camden.

The community service contributions could raise as much as $21 million for municipalities and counties, according to the nonpartisan Office of Legislative Services. The bill says the revenue would be used exclusively for public safety or to reduce municipal and county property taxes.

"We don't want to hurt hospitals; hospitals are large employers," said Senate President Stephen Sweeney (D., Gloucester), a bill sponsor. But, he added, "Their operations have changed. They should be participating in helping the communities where they work, where they operate."

The bill passed the Senate Budget Committee on a 10-1 vote on Dec. 21 and, in the Assembly, has been referred to that chamber's State and Local Government Committee.

Sponsors and interest groups are hoping the bill clears a full vote of the Legislature by the last day of the current session, Jan. 11. But it has not been scheduled for consideration in the Assembly.

However, not all interest groups are on board. "We need to take a step back and look at what is the norm for the industry," said Michael F. Cerra, assistant executive director for the state League of Municipalities.

"Is the Morristown hospital an anomaly? Or is it the new normal in the industry?" Cerra said in an interview. "That's not something we really have our hands around."

He also questioned whether the community service fee was sufficient and wondered how legislators arrived at those figures.

Under the bill, hospitals could apply for an exemption from the community service fee if they are financially distressed.

aseidman@phillynews.com

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@AndrewSeidman