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In re Application of Mercy Health System of Kansas6/29/2001
Appeal from Board of Tax Appeals.
Reversed.
Mercy Health System of Kansas, Inc., (Mercy) appeals the ruling of the Board of Tax Appeals (BOTA) denying it an exemption from ad valorem taxation for a rehabilitation center. To resolve the appeal, we must evaluate BOTA's interpretation and application of K.S.A. 2000 Supp. 79-201 Ninth, which provides a tax exemption for property used in the delivery of certain humanitarian services.
Mercy, a nonprofit corporation, applied for an exemption for its free-standing rehabilitation center, which it had moved from its hospital in Fort Scott to a downtown building with additional space and improved accessibility. The center employs, among others, an exercise physiologist, a physical therapist, a massage therapist, an occupational health physician who treats workers compensation injuries, an osteopath who delivers manipulative therapy, and a physician who does cardiac rehabilitation.
The center also provides a "Fitness Zone," essentially a fee-based health club for members of the public who are permitted to use the center's fitness equipment before and after office hours. The membership fee is $30 per month for a family. At the time of the hearing, there were 82 memberships, and 30 of them were held by hospital employees. Some of the remaining 52 were held by former rehabilitation outpatients of the center who wanted to follow up on their therapy. Because of space and time limitations, the Fitness Zone can increase its total membership only by 10 percent. Each member of the Fitness Zone is required to undergo a health evaluation before exercising, and a physical therapist is present at all times when members are using the equipment.
The massage therapist at the center offers massages and various body wraps. Although these are not the types of services that a physician would prescribe, Dr. David Phelps testified that they are forms of alternative medicine requested by the community. Dr. Phelps was aware of one other business that offered massage services in the downtown area, and Mercy's counsel acknowledged that there were two other health clubs in the market.
Fitness Zone memberships account for 2.34 percent and massage therapy for 1.61 percent of the total gross revenue of the center, which was $798,037 in the fiscal year reviewed. Those figures reflected only 9 months of operation for the massage therapist.
BOTA made the following findings in denying Mercy's application:
"9. The applicant asserts the Rehabilitation Center offers the public an alternative to the free weights found at a typical health center. The applicant further asserts any revenues derived or use of the property by the general public is minimal in scope and insubstantial in nature. The applicant requests the exemption be granted pursuant to K.S.A. 79-201 Ninth, and amendments thereto.
"10. [Bourbon] County recommends the request for an exemption be denied. The County asserts the applicant offers services that are no different than those offered by a private, for-profit health club or fitness center. The County notes that the applicant is unable to demonstrate that the fitness center memberships, the massages, and body wraps somehow aided the applicant in providing rehabilitation services to its patients. The County also notes that [Dr.] Phelps testified that an individual was hired to perform the massages and body wraps. However, this person is not involved in any other way in performing physical therapy.
"11. The Board finds that the applicant's request for an exemption for the Rehabilitation Center must be denied. Although the applicant may use the Rehabilitation Center
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