Tax Break for Nonprofit Groups Upheld

WASHINGTON — The Supreme Court on Monday shielded private colleges, charities, research institutions and other nonprofit groups from losing their state tax exemptions because they serve a national clientele.

On a 5-4 vote, the court struck down a Maine law that denied the usual property-tax exemption to schools and charities that serve children mostly from outside the state.

While the case involved a small summer camp for children of the Christian Science faith, it raised a novel tax question that drew wide attention in the nation’s huge nonprofit sector, which owns more than $300 billion in tax-exempt property.

The Constitution’s “barrier against protectionism” stands against not only higher taxes on out-of-state products, the court said, but also unequal tax treatment of nonprofit institutions just because they serve mostly those from outside the state.

Taking the nationalist view of the Constitution, Justice John Paul Stevens quoted a New Deal-era opinion saying that the states “must sink or swim together because in the long run prosperity and salvation are in union and not division.”

It would have “radical and unacceptable results” to allow tax exemptions to turn on whether institutions serve local people or the national market, said Stevens.

In dissent, Justice Antonin Scalia took the states’ rights view, arguing that states and counties should be permitted to apply “the principle that charity begins at home. States have no legitimate interest in protecting nonresidents,” he said.

Monday’s decision basically preserves the status quo. Had the ruling gone the other way, it could have had had broad impact on taxing policies, legal experts said.

“I think it’s fair to say these laws would have popped up all over the place,” said Washington attorney Carter G. Phillips, who filed a friend-of-the-court brief on behalf of the American Council on Education and a series of private, nonprofit groups. “The political pressure would have been to put the tax onus on the out-of-state guys,” he said.

Tax experts said that they did not know of similar laws in California or other states but predicted that would have changed if the court had endorsed such policies.

“If you could do this in California, I would think schools like Stanford and Caltech could have been vulnerable” to losing their tax exemptions, said Ferdinand Schoettle, a University of Minnesota law professor.

A 1992 study presented to the court found that private nonprofit groups in education, health care, research, religion, the arts and social services contribute $389 billion per year to the nation’s economy, or 7% of the total output. A 1985 study concluded that these institutions held more than $300 billion in property that is exempt from state and local taxes.

Maine’s law includes the traditional tax exemption for “benevolent and charitable institutions incorporated by this state.” The law disqualifies, however, an “institution that is in fact conducted or operated principally for the benefit of persons who are not residents of Maine.”

Camp Newfound, located on a lake 40 miles northwest of Portland, drew summer campers mostly from outside of Maine. It paid $20,000 in taxes under protest to the town of Harrison, but filed a lawsuit contending that the taxation was unconstitutional. Maine’s highest court upheld the law and rejected the camp’s claim.

For at least 125 years, the U.S. Supreme Court has taken the view that states cannot put discriminatory taxes or tariffs on out-of-state products but it had never ruled on whether the same principle applied to tax exemptions for charitable and nonprofit groups.

The outcome stood in doubt because the justices are sharply divided on the meaning of one of the Constitution’s bedrock provisions, the so-called commerce clause. It says: “The Congress shall have the power . . . to regulate commerce with foreign nations and among the several states.”

Scalia, a literalist, maintains that the clause means simply that Congress can invalidate discriminatory state laws. He has questioned, however, whether the Supreme Court is authorized to strike down state laws on the theory that they discriminate against interstate commerce.

“In our zeal to advance the policy [of a national marketplace], we must take care not to overstep our mandate . . . and needlessly intrude upon the states’ powers,” he wrote in dissent. Chief Justice William H. Rehnquist and Justices Clarence Thomas and Ruth Bader Ginsburg joined Scalia.

But the 77-year-old Stevens spoke for the more traditional view that the Supreme Court can enforce the Constitution’s protection for the free flow of interstate commerce. His opinion (Camp Newfound vs. the town of Harrison, 94-1088), was joined by Justices Sandra Day O’Connor, Anthony M. Kennedy, David H. Souter and Stephen G. Breyer.