For-profit daycare centers have a history of being denied property tax exemptions by the Illinois Department of Revenue. A recent decision from the Illinois Appellate Court upholds another such denial and extends the precedent to include for-profit daycare centers that fulfill the educational mission of a school.
In University of Chicago and Bright Horizons Children’s Centers, LLC v. Illinois Department of Revenue, the Court was presented with two questions. First, is the daycare center reasonably necessary to fulfill the University’s educational mission? Second, does the daycare center generating a profit for itself require denial of the property tax exemption? Even though the Court found the daycare center necessary to fulfill the University’s educational mission, the Court upheld the denial of the exemption because the daycare profits from the use of the property.
The key phrase in the Property Tax Code is the same for public school districts, private schools, and private universities. In order to qualify for a property tax exemption, the property must be owned by the school and not be “leased or otherwise used with a view to profit.” In the words of the Illinois Department of Revenue, a property that meets these criteria is exempt in both ownership and use.
The facts seemed to establish a solid basis for the exemption. The testimony showed the University’s employees need the onsite childcare so that its employees could be fully dedicated to their jobs. To address this need, the University built two daycare facilities on campus and outsourced the operation of the facilities to Bright Horizons. Bright Horizons pays for snow removal and grass cutting but does not pay any rent. As a result, the University does not profit from the use of the property. Approximately 84% of the children at the daycare facilities are children of University employees. However, the daycare facilities generated a profit of approximately $940,000 for Bright Horizons during the year for which the exemption was sought.
Despite finding the daycares necessary to fulfill the University’s educational mission, the Court upheld the denial of the exemption. The University contended an exemption was warranted because it did not profit from the daycare centers. The Court concluded the statute must be narrowly and strictly construed in favor of taxation. Because there is nothing in the statute that says that the owner of the property must be the entity that profits, the Court decided the exemption was properly denied by the Department of Revenue. In other words, neither the owner nor the user may profit from a school-owned property.
This decision has implications beyond just daycare centers or schools seeking property tax exemptions. The language of the opinion is broad enough to include any for-profit use of exempt properties, not just daycare centers. And, although rare, property tax exemptions can be revoked unless a school continues to meet the criteria for an exemption after the exemption is granted. School districts, private schools and universities concerned about how their exempt properties are being used should contact their legal counsel.
