Alaska Supreme Court sides with NSHC about property tax exemption for apartment building

The Supreme Court last week handed down a 24-page opinion of statewide interest, which confirmed that a Norton Sound Health Corporation property used to house employees and others is exempt from City of Nome property taxation. The property in question is identified as Property 1, an apartment building NSHC owns on First Avenue in Nome.
The Supreme Court opinion, released on August 6, comes after years of dispute between NSHC and the City of Nome, centering on the question if NSHC properties that are used to house medical staff, and not used to directly provide medical services, qualify for tax exemption under state and federal laws. In 2023, Superior Court Judge Paul Roetman fund yes, they do. But that decision was appealed by the City and has now been decided by the highest court in the state, which upheld Roetman’s decision.
The ruling only applies to one property, a seven-plex used to house medical staff.

Genesis of the dispute
In January 2022, NSHC applied for property tax exemptions for several properties and was denied by the city clerk and by the city’s property assessor. The health corporation filed an appeal and went before the Nome Common Council, sitting as the Nome Board of Equalization, and was denied again. NSHC then took matters to court in June 2022. After oral arguments were heard and a supplemental briefing, the court issued its decision, that yes, the properties should be exempt.
Applying state law, NSHC lawyers argued at the board of equalization hearings that the properties are exclusively used for nonprofit, charitable or hospital purposes. Citing federal law, the lawyers said the properties should not be taxed under the federal preemption doctrine and should be barred from taxation under tribal sovereign immunity. NSHC is a tribally owned nonprofit health care organization. The federal preemption doctrine means that properties used to carry out federal programs are exempt from taxation if they are subject to comprehensive federal oversight.
In the July 18, 2023 ruling, Superior Court Judge Paul Roetman granted NSHC’s appeal to seek tax exemptions for four properties. In his decision he wrote that the board of equalization failed to consider if NSHC properties qualify under the charitable purposes exemption. “The Board of Equalization simply did nothing with this argument when deciding Norton Sound’s appeal,” the judge wrote. Second, the board did not correctly consider the federal preemption doctrine “despite Norton Sound presenting the correct legal standard and case citation both in writing and orally at two hearings,” the judge wrote. “By doing so, it overlooked federal law.” The judge also wrote that the board of equalization didn’t dispute the description of the properties and how they are used or if NSHC is a nonprofit.
He found that the board construed the meaning of hospital too narrowly to only test if properties were used as a hospital, meaning treating sick people, and not for hospital purposes. The judge found that properties 1 through 4 —except for the empty old BIA building and the BHS building— qualify for exemption as property used exclusively for hospital purposes. “There is no evidence the properties are used other than exclusively for this purpose,” the judge wrote. The purpose of each property, the “end to be attained”, being to allow Norton Sound to deliver health care services to the region’s residents.
The city disagreed with the judge’s decision for one particular property in dispute and filed an appeal with the Supreme Court. The property at dispute is identified as Property 1. It refers to the former Lawyers Apartments, a seven-unit apartment complex on First Avenue, now owned by NSHC.

Supreme Court upholds tax exemption ruling
In the August 7 ruling, the Alaska Supreme Court upheld the Superior Court decision that the building is exempt from taxation. The court found that while the apartment building is not used exclusively for hospital purposes since it also serves private residential needs, it is exempt from taxation because its use is directly incidental to and vitally necessary for hospital operations.
NSHC said 98 percent of occupancy is medical staff, doctors who work one month on, one month off, and traveling nurses. These employees are not charged rent. The remaining two percent of occupancy is housing for permanently hired staff of the hospital, who are housed there rent free for the first month and then charged “nominal rent.”
City’s assessor denied the exemption because he narrowly construed the tax exemption and ruled that Property 1 is not used exclusively to provide medical treatment to sick or injured people. This is where the judges disagreed with the city as they focused on the purpose – housing doctors and medical staff so that the hospital can fulfill its mission.  
“The apartment is used by NSHC to facilitate its hospital operations by keeping medical staff close by in case of emergency,” says the ruling. However, it goes on, the apartment is not used exclusively for hospital purposes because it is used for private residential purposes as well. “Nevertheless, we have long recognized that property is exempt from taxation if it is directly incidental to and vitally necessary to the exempt use of other property. The apartment building is directly incidental to and vitally necessary to NSHC’s hospital because it is used to house medical staff recruited from outside the Bering Strait region who must quickly respond to medical emergencies on short notice, and there is a dearth of short-term rental housing in Nome that can meet this need,” reads the decision. 
The Supreme Court found NSHC’s argument “more persuasive” and says, “The plain meaning of property used for “hospital purposes includes not only properties where medical or surgical care is performed, but also properties used to support such work.”
The court found that Nome’s rural location necessitates importing qualified medical staff and in combination with a severe housing shortage, the apartment building meets the requirements for tax exemption.
The city raised a new argument with the Supreme Court, namely that NSHC charges rent, which it said, makes the property ineligible for tax exemption. The court found that no record exists that would establish that the rent collection is disqualifying. The city lost that argument because the Board of Equalization was not asked to make findings on whether the rents charged –$103,000 in 2021—disqualify the apartments from taxation. The court “could not affirm the board’s denial of tax exemption on the alternative ground of rent received.”
NSHC, contacted by phone and email, did not respond to the Nugget’s requests for comment.
City Manager Lee Smith acknowledged the request by the Nugget for comment and clarification but requested to defer comment until he could consult with the city’s attorneys on the Supreme Court’s decision.
In a previous interview with city leadership in 2023, the property in question was valued at $1 million, with an annual tax value of $10,700.
A similar situation played out in Kodiak, where a Superior Court decision affirmed the Kodiak Area Native Association’s property tax exempt status for most of its Kodiak properties, reported the Kodiak Daily Mirror. Listed under appearances before the Supreme Court were attorneys not only for the City of Nome and NSHC, but also lawyers representing Ketchikan Gateway Borough, Kodiak Island Borough, the Attorney General for the State of Alaska; Bristol Bay Area Health Corporation, Alaska Tribal Health Organizations, the federal attorney general’s office and the U.S. Attorney’s office in Anchorage.