For not-for-profit entities (NFPs), payments in lieu of taxes (PILOT) are amounts paid to a state or local government in place of taxes, most commonly property taxes. At issue are the vast amounts of land owned by universities, hospitals, churches, and other NFPs. The tax-exempt status granted to these entities by the IRS means that property taxes that would have been paid to municipalities had this land been owned by private individuals or companies are not collected. Municipalities use PILOT to compensate for some or all of the lost tax revenues. PILOT are voluntary for NFPs.
PILOT payments can arise in several different ways. In some cases, the NFP may be asked to make a direct payment to the local government to help the local government offset the costs of providing services to the institution. In other cases, the NFP recognizes the value provided by the municipality and, to generate goodwill, negotiates a voluntary PILOT. Similarly, when an NFP may be exempt from equipment taxes and sales taxes, its mission may permit payment of PILOT to offset the impact on local services funded by town residents. In the specific case of colleges and universities in states where their real estate holdings are not subject to local property taxes, some state governments will actually reimburse the local
government for part of the tax revenue it would otherwise have collected had the property been held by an individual or a for-profit entity.
Because of financial pressures on state and local governments, some municipalities are hoping to change the voluntary nature of PILOT, and requests for PILOT are becoming more commonplace. According to a survey conducted by Grant Thornton LLP in fall 2011, NFPs throughout the United States are receiving requests from various municipalities to pay taxes, make PILOT, or pay fees to cover government services (such as water and sewer service and police and fire protection) that were previously provided at no charge. Of the NFPs responding to this survey, 33 percent are paying service fees to their local government, 8 percent are making PILOT, 31 percent are paying taxes outright, and 6 percent anticipate
that they will be approached to make payments sometime in the future.
Reactions to requests for PILOT or other compensative can vary widely. For example, the leaders of one university acknowledged that there is no requirement to pay any amounts to the city but believed that paying nothing is not the appropriate position for them to take. They chose to address each of the city’s requests individually, focusing on making a positive impact on the city and being creative in doing so. In one such case, the university provided a police squad car to the city after benefitting from a water line repair made by the city.
Not all NFPs opt to make payments, though. For example, when approached by their city for PILOT, two neighboring universities teamed up to hire a consultant to perform an economic impact study on the benefits the city received from having the universities as residents. The results of the study showed that the revenue generated and the overall positive economic impact of the universities on the city far outweighed the costs of the services provided by the city. The study concluded that the universities provided a greater benefit to, rather than a burden on, the city.
Due to the increase in, and prevalence of, PILOT, it is important for all NFPs to be aware of these payments and to be prepared for the possibility that a municipality might request PILOT.