Hardesty v. North Arkansas Medical Services, Inc.

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          APPEAL FROM THE BOONE COUNTY CIRCUIT COURT [NO. 05CV-17-275], HONORABLE RUSSELL ROGERS, JUDGE

         Ronald P. Kincade, Mountain Home, for appellant.

         Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., Little Rock, by: John Keeling Baker, Megan D. Hargraves, and Devin R. Bates, for appellees.

         OPINION

         N. MARK KLAPPENBACH, Judge

          Appellant Karen Hardesty, in her official capacity as Boone County Assessor, appeals from the circuit court’s order that granted a tax exemption to appellees North Arkansas Medical Services, Inc., and North Arkansas Regional Medical Center, Inc. (collectively "the hospital").^[1] The hospital sought tax-exempt status for its seven parcels^[2] of land in Harrison, Arkansas, for the 2016 and 2017 tax years, relying on the public-charity tax exemption provided by article 16, section 5(b) of the Arkansas Constitution, which provides that "buildings and grounds and materials used exclusively for public charity" are exempt from taxation. Following a bench trial, the circuit court found that the hospital had carried its burden of proof,^[3] entitling

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it to the tax exemption, and County Assessor Hardesty appeals. We affirm the circuit court’s order.

          In civil bench trials, the standard of review on appeal is whether the circuit court’s findings were clearly erroneous or clearly against a preponderance of the evidence. Tadlock v. Moncus, 2013 Ark.App. 363, 428 S.W.3d 526. A finding is clearly erroneous when, although there is evidence to support it, the reviewing court, on the entire evidence, is left with a firm conviction that a mistake has been made. Id. Due regard shall be given to the opportunity of the circuit court to judge the credibility of the witnesses. Ark. R. Civ. P. 52(a)(1) (2018).

          We begin with some basic taxation principles. Taxation is the rule, and exemption is the exception. City of Fayetteville v. Phillips, 306 Ark. 87, 811 S.W.2d 308 (1991). Exemptions from taxation must always be strictly construed, regardless of merit, in favor of taxation and against exemption. Id. On appeal, we review tax cases de novo, setting aside the findings of fact by the circuit court only if clearly erroneous. Ark. Teacher Ret. Sys. v. Short, 2011 Ark. 263, 381 S.W.3d 834.

         In analyzing the hospital’s tax-exemption request, we are guided by Arkansas Supreme Court case law. Tax-exempt status for charitable hospitals has been recognized in Arkansas for over one hundred years. See Hot Springs Sch. Dist. v. Sisters of Mercy, 84 Ark. 497, 106 S.W. 954 (1907). More recently, our supreme court interpreted article 16, section 5(b) in the context of charitable hospitals in Burgess v. Four States Memorial Hospital, 250 Ark. 485, 465 S.W.2d 693 (1971), holding that "a benevolent and charitable organization’s property used as a hospital may be constitutionally exempt from taxation (1) if it is open to the general public, (2) if no one may be refused services on account of inability to pay, and (3) if all profits from paying patients are applied to maintaining the hospital and extending and enlarging its charity." Burgess, 250 Ark. at 491, 465 S.W.2d at 697. The entity seeking the tax exemption must show that it is a charitable organization and that the property claimed exempt is used exclusively for charitable purposes. Sebastian Cty. Equalization Bd. v. W. Ark. Counseling & Guidance Ctr., Inc., 296 Ark. 207, 752 S.W.2d 755 (1988).

         There is no dispute that the hospital is technically a charitable organization, that the hospital and its clinics are open to the general public, and that no one is refused services due to inability to pay. Hardesty does not take issue with the first two Burgess factors. In fact, Hardesty argues that the characterization of the taxpayer is irrelevant. She does not argue that generating revenue necessarily requires disqualification. Hardesty’s argument is that the hospital and its clinics are operated or "used" to provide medical care in exchange for money, like any other medical clinic. Hardesty argues that the hospital operates with an expectation of payment for the services it provides, that it generates millions of dollars of annual revenue, that its free services and patient debts that are written off are a very small percentage of the overall income received, and that the free services and patient-debt write-offs within the clinics are an even smaller percentage of the income generated by the clinics. Hardesty contends that this means

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the hospital’s property is "not used exclusively as a public ...