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MN Supreme Court sides with Perham Health in battle over tax status of its clinics

Perham Health has prevailed in its legal battle with Otter Tail County over whether it has to pay property taxes on its clinics in Perham, Ottertail and New York Mills. Perham Health says the county must now refund them about $800,000 in taxes paid.

Perham Health 2020.jpg
Perham Health was formed in 1976 as a public, nonprofit healthcare organization to provide health care to Perham and rural communities near Perham. The new Perham Health hospital and clinic was opened in 2012. (Perham Focus File Photo)
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The case went all the way to the Minnesota Supreme Court, but Perham Health has prevailed in its legal battle with Otter Tail County over whether it has to pay property taxes on its clinics in Perham, Ottertail and New York Mills.

According to an estimate provided by Perham Health, the county must now refund them about $800,000 in taxes paid.

Otter Tail County classified the clinics as commercial, and assessed property taxes on them from 2014 to 2018, after determining that the state tax exemption for hospital districts is available only to hospitals and not to clinics.

“The Minnesota Supreme Court issued its decision in Perham Hospital District vs. Otter Tail County last week," Otter Tail County Attorney Michele Eldien said in an email. "The case involved three property tax exemptions and their application to three medical clinics operated by the (Hospital) District. The parties disagreed as to the scope of each exemption."

She added that "the court clarified Minn. Stat. 447.31, subd. 6 and determined all three clinics meet criteria for exemption because of their relationship to the district. The court did not analyze the other exemptions. The county is in the process of refunding taxes the (hospital) district previously paid. The impact this decision will have on local governments and individual taxpayers is difficult to determine. Whether taxpayers will see a property tax increase will depend on market conditions and the financial circumstances of each government unit involved.”

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The Perham Health Hospital District, which includes a hospital in Perham and the three clinics, first successfully argued in tax court that its clinics are tax-exempt under state law.

The county then asked the state Supreme Court to review the tax court’s decision.

On Jan. 24, the state Supreme Court sided with Perham Health, agreeing with the tax court that the hospital district uses the clinics “to improve and run Perham Hospital,” and that it operates the clinics as part of its hospital, as required by state tax law.

"Perham Health is pleased that the Minnesota Supreme Court affirmed the Minnesota Tax Court ruling," the healthcare organization said in a written statement provided to the newspaper. "Perham Health and Otter Tail County maintain a good working relationship. The disparity resulted as a difference in interpretation of Minnesota law... Perham Health is happy to have a resolution and to have this issue behind us."

Perham Health was formed in 1976 as a public, nonprofit healthcare organization to provide health care to Perham and rural communities near Perham. It started then with just the hospital, and purchased the three clinics in 2011 as part of its Hospital District.

In 2012, the district opened a new hospital in Perham, and moved the Perham clinic inside.

The 25-bed, critical-access hospital provides a full continuum of care on an annual basis for more than 900 inpatients, 6,500 emergency room patients, and 40,000 clinic visits, according to court records.

The tax court found that the Perham Hospital District used the clinics to improve and run Perham Hospital, as required for tax-exempt status. And the Minnesota Supreme Court found that the tax court did not err in its findings.

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Otter Tail County, relying on dictionary definitions and the licensing requirements for hospitals, argued that hospitals and clinics are separate and distinct facilities, based on the different healthcare services those facilities provide. But the court rejected that argument.

“The tax court credited the testimony by the hospital’s CEO (Chuck Hofius), who explained that the clinics were essential to the hospital’s ability to attract and retain physicians to provide patient care and services, and to attract patients,” the Supreme Court said in its 17-page affirmation.

“The record establishes that the clinics were operated to improve and run Perham Hospital,” and thus should not be taxed, the court ruled.

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