By Gary Chester, Senior Writer
The Utah Constitution provides that property owned by a nonprofit entity is exempt from property tax if it is used exclusively for charitable purposes. Would the tax exemption apply to a laboratory that tests blood and urine samples for government agencies and charitable organizations for free or at a deep discount but charges market rates for professional sports leagues? The Supreme Court of Utah considered the issue in Sports Medicine Research and Testing Laboratory v. Board of Equalization of Salt Lake County, 2024 Utah LEXIS 91 (August 8, 2024).
Founded as a nonprofit organization in 2003, the plaintiff (“Sports Medicine”) conducts drug testing to deter athletes from using performance enhancing drugs; it also conducts research to improve drug testing procedures. In addition to performing free or discounted testing to government agencies and nonprofit organizations, Sports Medicine performs testing for professional sports organizations. These include the National Football League, Major League Baseball, and the United States Anti-Doping Agency. Annual revenues from testing have ranged from $9 million to $12 million.
Sports Medicine uses data taken from its testing for research purposes and makes its research publicly accessible at no charge. This is required by the World Anti-Doping Agency, which is the international testing organization that accredits Sports Medicine. The company conducts research and publishes papers relating to sports and public safety. For example, Sports Medicine has published papers on the methods used to detect novel forms of performance-enhancing drugs as well as the medical effects of blood transfusions.
In 2019, Sports Medicine constructed a facility in South Jordan, Utah and requested an exemption from county property taxes. The Salt Lake County Board of Equalization rejected Sports Medicine’s request for an exemption because the property was not used exclusively for charitable purposes. On appeal, the Utah Tax Commission considered briefs, held a hearing, and in 2022 affirmed the Board’s decision. Sports Medicine then filed a legal action in Utah’s highest court.
Sports Medicine argued that it needs to perform tests on professional athletes to sustain its philanthropic mission, and that a vacant portion of its property warrants an exemption because it will be used for charitable purposes in the future.
The Court Applies State Tax Law
The court noted that Utah’s property tax is based on the state constitution, which originally provided for a tax exemption for property used exclusively for charitable purposes. A 1982 amendment added that the property must be “owned by a nonprofit entity.” Under the case law interpreting this constitutional provision, courts must assess the following: (1) how the nonprofit entity uses the property; (2) whether any of the uses of the property serve a charitable purpose; and (3) whether the non-charitable uses of the property represent more than a de minimis share of the property’s overall usage.
The Tax Commission’s unchallenged findings were that Sports Medicine used the property for charitable and government testing and for testing professional athletes, and that part of the property is vacant. The plaintiff argued that charging market rates to test professionals is “substantially related” to its charitable testing because it offsets the losses on free or discounted testing. The court rejected Sports Medicine’s position based on a precedent case which held that charging market rates to subsidize nonprofit services does not serve a charitable purpose.
A closer call was Sports Medicine’s contention that its nonprofit testing provides insufficient data for its research and for the education of its employees; additional testing is necessary to generate more data relating to its charitable mission. The court rejected this argument because even if the company needs to perform additional testing, the need for data “doesn’t explain why Sports Medicine charges market rates for those tests.” The decision to charge market rates for testing of professional athletes is motivated by the desire to produce profit, which is not a charitable use of property.
As to the proposed use of a vacant portion of the property, the court cited a case where a church sought a tax exemption based on future plans to construct a church on its property. The court held that the Tax Commission there had properly denied a tax exemption because a promise to use the property for an exempt purpose in the future was insufficient to qualify for an exemption in the present.
Sports Medicine tried to distinguish the case by noting that its building was completed, in contrast to the promise to build a church in the future. The court rejected this distinction because the unused portion of Sports Medicine’s property, although completed, is not currently used for charitable purposes.
Was Drug Testing of Pro Athletes a Minimal Use of the Property?
Finally, the court considered the third factor in the appropriate analysis: whether Sports Medicine’s non-charitable uses of its property are more than de minimis. The court answered in the negative because about half of the organization’s laboratory usage was for market-rate testing. “Because market-rate testing is not a charitable use, this portion of Sports Medicine’s property is not eligible for a property tax exemption,” the court wrote. “And because keeping the other portion of its building vacant likewise is not a charitable use, we do not need to ask whether any part of Sports Medicine’s property can be constructively severed from the whole.”
Since Sports Medicine did not use its property exclusively for charitable purposes, the Utah Supreme Court upheld the Tax Commission’s denial of a property tax exemption.
Takeaway: this case is a reminder that charitable organizations receive tax exempt status because they typically provide important services that local, state, and federal governments cannot or do not provide. Examples of charitable services include food kitchens, homeless shelters, and medical research. To obtain a property tax exemption, Sports Medicine could have charged discounted rates for professional sports drug testing and made up the difference through fundraising. Since market-rate testing was a substantial portion of its activities and revenue, the organization clearly did not qualify for an exemption.
