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Volume 1 - Opinions of Counsel SBEA No. 99

Opinions of Counsel index

Nonprofit organizations, exemption (sales shop of organization for the training and rehabilitation of handicapped persons) - Real Property Tax Law, § 420:

Where a sales shop operated by an organization for the training and rehabilitation of handicapped persons is an integral part of such operation it is entitled to an exemption but the organization must submit a financial statement of its operations, if requested.

Our opinion has been requested as to the taxable status of a sales shop owned and operated by an organization known as Camphill Village, U.S.A. Inc., which trains and rehabilitates handicapped persons.

In an earlier opinion of this Board it was concluded that Camphill appeared to satisfy the requirements of section 420 of the Real Property Tax Law, and was, therefore, entitled to an exemption from the real property taxation.

Three questions are now raised in regard to the presence of an income producing sales shop on the premises:

1. Does the shop take the entire parcel out of the scope of section 420?

2. Should the shop itself be placed on the assessment roll?

3. May the assessor deny the exemption because the corporation refuses to produce a financial statement?

In order to facilitate the task of answering these questions we will assume that Camphill satisfies all the requirements of section 420 except for the existence of the sales shop, and that the shop is, therefore, the sole issue. With this qualification, the questions are answered in the order set forth above.

1. As to whether the presence of the sales shop is sufficient basis for a denial of the entire exemption, the primary consideration is an interpretation of the meaning of the second requirement of section 420, namely that the exempt organization’s property must be used exclusively for one or more of the purposes set forth within section 420.

On its face, the selling of products produced by the organization appears to be an activity which is not among those set forth in the statute. However, judicial interpretation has annexed to this requirement the qualification that the exemption should not be impaired so long as the property is primarily devoted to exempt purposes and despite the fact that some income is incidentally derived therefrom (People ex. rel. Watchtower Bible and Tract Society v. Haring, 8 N.Y. 2d 350, 207 N.Y.S. 2d 673). The determination to be made is whether the sales shop is operated because it is necessary and and reasonably incidental to the exempt activity carried on by the organization, or whether the shop is operated primarily to produce items for sale (i.e., to produce revenue in the manner of a commercial business).

Where real property of an exempt corporation is being used for income producing purposes or as an investment, such property is not entitled to exemption even though such income is used for the corporate purposes (People ex. rel. Catholic Union of City of Albany v. Sayles, 32 App. Div. 203, 53 N.Y.S. 65, aff’d 157 N.Y. 679; People ex. rel. Adelphi College v. Wells, 97 App. Div. 312, 89 N.Y.S. 957, aff’d 180 N.Y. 534; YWCA of New York City v. City of New York, 217 App. Div. 406, 216 N.Y.S. 248, aff’d 245 N.Y. 562, 157 N.E. 858, 247 N.Y. 591, 161 N.E. 194).

However, it has been held that real property owned by an exempt corporation which is used for purposes which are “fairly incidental” to the carrying out of the objects for which the corporation was organized is entitled to exemption (People ex. rel. Blackburn v. Barton, 63 App. Div. 581, 71 N.Y.S. 933; People ex. rel. Academy of the Sacred Heart v. Commissioner of Taxes and Assessments, 6 Hun 109, aff’d 64 N.Y. 656; People ex. rel. New York Hospital v. Purdy, 58 Hun 386, 12 N.Y.S. 307; aff’d 126 N.Y. 679, 28 N.E. 249). The courts in these cases have indicated that by “fairly incidental” it is meant that the particular use or activity is so directly related to the major purposes as to constitute an integral part of the overall corporate purposes. It is our opinion that a shop used for the sale (i.e., disposal) of products produced by the trainees of Camphill is a use of the organization’s real property which is reasonably incidental to the purposes and operation of the facility.

2. The second question, concerning the taxable status of the income producing shop itself, is actually an expansion of the first question. Section 420, subdivision 2, provides that “if any portion of such real property is not so used exclusively to carry out thereupon one or more of such purposes . . . such a portion shall be subject to taxation and the remaining portion shall be exempt [subject to certain exceptions]”. The second question is actually whether or not this subdivision should be applied to the sales shop operated by Camphill, thereby making the shop taxable. And the determination which must be made is whether the use of the real property as a sales shop is an exempt purpose under section 420. Again, on its face such use would appear to be outside the scope of the statute.

However, in organizations such as Camphill we are dealing with a relatively unique concept. These organizations are created for the purpose of training handicapped persons who would otherwise be unemployed because of their lack of skill and the prohibitive economic implications of training within a private enterprise. And an integral part of any training program must be the recognizable production of products which are saleable commodities on the open market. The production of commodities which are given away or thrown away would obviously not be conducive to the development of a worker who will be able to take his place mechanically and psychologically in a competitive production situation. The knowledge that items which he has produced can be sold on the open market is the final and essential step in the training of any handicapped person.

For this reason, it is our opinion that a sales shop operated by an organization such as Camphill is not only reasonably incidental to the operation of the organization, but that it is actually an integral part of that operation. And, therefore, it naturally follows that such sales shop should be considered as an exempt use of property, and it should be included on the exempt portion of the roll.

The law on the subject is admittedly sparse, but the aforementioned cases appear to support this conclusion. And, in conclusion, it must be recognized that the law concerned with this subject emphasizes two principle factors: The first is that cases can arise in which an activity which ordinarily is outside the scope of section 420 is so integrally related to the exempt purposes and activities of the organization that the exemption will be granted (Schloendorff v. Society of New York Hospital, 211 N.Y. 125, 105 N.E. 92; People ex. rel. New York Hospital v. Purdy, supra).

The second is that this is a unique type of organization with eleemosynary and benevolent characteristics of the highest order, and the operation of its sales shop is consistent with and essential to its goals (Missouri Goodwill Industries v. Gruner, 210 S.W.2d 38, S. Ct. Mo.; In re YMCA of Pittsburgh, 383 Pa. 175, 117 A.2d 743) . Unless the sales shop evolves into an operation with the essential attributes of a commercial business, it should be considered as exempt real property.

3. As to the third question concerning the production of a financial statement, if the organization refuses to produce such statement, then the assessor has no basis for a determination as to the taxable status of the organization and the exemption must be denied. While there is no direct statutory reference to such requirement, this is the only workable interpretation of section 420.

February 1, 1971