If a medical clinic bought equipment with federal grant money, is it exempt from Arkansas business personal property tax? And does sending unpaid patient bills to collections cost it any tax exemption?
Plain-English summary
A medical clinic in Representative McClure's district was claiming business-personal-property tax exemption on the theory that the equipment had been purchased with federal grant money. The clinic was also billing patients and turning unpaid accounts over to collection agencies. McClure asked the AG (1) whether the federal-funding theory works, and (2) whether the billing-and-collections practice would jeopardize tax-exempt status.
Attorney General Tim Griffin's two answers:
Question 1: Federal grant funds alone don't exempt a private clinic.
Under the Supremacy Clause the federal government itself is immune from state taxation, but that immunity doesn't extend to private parties that receive federal funding. South Carolina v. Baker, 485 U.S. 505 (1988). A private medical clinic that buys equipment with grant dollars is just a private clinic; the equipment is taxable.
The relevant exemption isn't the federal-funding hook; it's the public charity exemption in Article 16, Section 5(b) of the Arkansas Constitution. To qualify, the clinic must:
- Be open to the public.
- Provide services regardless of a patient's ability to pay.
- Use any profits from paying patients solely to maintain or expand the charitable mission.
(Hardesty v. N. Arkansas Med. Servs., Inc., 2019 Ark. App. 410.) If all three are met, the clinic may qualify. The decision is made by the local county assessor, not the AG; assessor decisions are appealable.
The AG also flagged the strict-construction rule: tax exemptions are strictly construed against the taxpayer, and the burden is on the taxpayer to show entitlement. Tech. Servs. of Arkansas, Inc. v. Pledger, 320 Ark. 333. Any ambiguity defeats the exemption.
Question 2: Billing patients and using collections don't disqualify the public-charity exemption.
A charitable medical clinic doesn't lose its exemption just because it bills patients who can pay or refers delinquent accounts to collections, as long as (a) the patients turned over to collections actually have ability to pay, and (b) any net income from paying patients is used to support or expand the charitable mission. Sebastian Cnty. Equalization Bd. v. W. Ark. Counseling & Guidance Ctr., Inc., 296 Ark. 207 (1988), confirmed that charitable hospitals and clinics may serve paying patients without losing exempt status.
What this means for you
If you run an Arkansas medical clinic and want exempt status
Federal grants are not the answer. The path is the public-charity exemption. Practical steps:
- Document open-public access. Publish a written policy that the clinic accepts walk-in patients and does not turn anyone away based on inability to pay (a "sliding fee scale" with documented zero-pay tier is the standard structure).
- Document the charity-care policy. Annual reports to the county assessor showing actual uncompensated care, sliding-scale write-offs, and excluded revenue.
- Document the use of net income. Audited financials showing excess revenues are reinvested in clinic operations, equipment, training, or expansion. Distributions to private parties (owners, officers, related entities) defeat the exemption.
- Be ready for the strict construction. The assessor will resolve any ambiguity against you. Bring your documentation, and don't rely on informal practices.
If you're a county assessor
Three checks against any public-charity exemption claim:
- Open to the public, does the clinic actually accept walk-ins?
- Services regardless of ability to pay, is there a documented sliding-scale policy with a zero-pay tier?
- Charitable use of profits: are excess revenues reinvested, or distributed to insiders?
If the answer to all three is yes, the exemption likely applies. If any is no, the exemption likely fails.
Federal-grant funding is not on the test. A clinic claiming exemption purely on grant-funded purchases is making the wrong argument; you can deny without further analysis.
If you're an appeal counsel for a denied exemption
The appeal process under A.C.A. §§ 26-27-317 to -318 goes through the county equalization board first, then the courts. Hardesty v. N. Arkansas Med. Servs., Inc. is the controlling Arkansas Court of Appeals case for medical-clinic public-charity exemptions. Sebastian County Equalization Board v. W. Ark. Counseling & Guidance Center, Inc. is the foundational Supreme Court case; learn it.
If you're a nonprofit healthcare attorney
Note the AG's framing: AEDC and § 15-4-209 don't apply to clinics. Federal funding doesn't trigger immunity. The constitutional exemption is the only path, and it has clear, fact-driven elements. Build documentation on each element from the day the clinic opens.
If you're considering setting up a federally qualified health center (FQHC)
FQHCs in Arkansas can qualify under the public-charity test if they hit all three prongs. Most FQHCs do, because their federal funding requires sliding-scale fees and open-public access. But the federal designation alone doesn't grant the state exemption; you need to satisfy the Arkansas constitutional test independently.
Common questions
Q: My clinic is a 501(c)(3). Does that automatically exempt me from property tax?
A: No. Federal income-tax exemption (501(c)(3)) and Arkansas property-tax exemption are separate inquiries. The Arkansas Constitution requires a use-based test, not just a federal-tax-status test.
Q: What if I'm a critical-access hospital getting federal subsidies?
A: Same analysis. Federal subsidies don't create immunity. Use-based public-charity test still applies.
Q: Can a clinic bill insurance and still qualify?
A: Yes. Billing insurance is fine. The test is what happens with the net income (charitable use), and whether the clinic still serves uninsured patients regardless of ability to pay.
Q: My clinic mostly serves Medicaid patients. Am I a public charity?
A: Probably yes if you meet the three prongs. Medicaid does not pay full cost of care; the gap to actual cost typically gets covered by uncompensated-care policies, grants, or other sources. As long as the clinic doesn't turn away non-Medicaid uninsured patients, the open-public-access prong is satisfied.
Q: What happens to my exemption if I distribute excess revenue to officers as bonuses?
A: That defeats the exemption. Excess revenue must be used to support or expand the charitable mission. Reasonable salaries are fine; bonuses or distributions to private parties beyond reasonable compensation are not.
Q: Is "ability to pay" measured at the patient or population level?
A: At the patient level. Each patient's bill must be assessed; collections is appropriate when the specific patient has the ability to pay but refuses. Sending a patient who has no ability to pay to collections defeats the second prong of the exemption.
Background and statutory framework
Arkansas's Article 16, Section 5(a), establishes the general rule: all property is subject to ad valorem taxation. Section 5(b) lists the categorical exemptions, including "buildings and grounds and materials used exclusively for public charity." Section 6 limits the General Assembly: it can authorize only those exemptions specifically provided in the Constitution.
The Arkansas Supreme Court in Tech. Servs. of Arkansas, Inc. v. Pledger established the strict-construction rule. The Court of Appeals in Hardesty v. N. Arkansas Med. Servs., Inc. set the three-prong test for medical clinics. Sebastian County Equalization Board v. W. Ark. Counseling & Guidance Center, Inc. established that paying patients are fine if profits go back to the charity.
The Assessment Coordination Division of the Arkansas Department of Finance and Administration supervises county assessors and equalization boards under A.C.A. §§ 26-24-101 et seq. and 26-26-1901 et seq. Utility and carrier property is assessed separately by the Public Service Commission's Tax Division (§ 26-26-1606). The county assessor is the front-line decisionmaker for exemption claims under §§ 26-26-1001 and 26-3-301; appeals go through §§ 26-27-317 to -318.
Citations and references
Constitutional and statutory:
- Ark. Const. art. 16, §§ 5, 6
- A.C.A. §§ 26-3-201, 26-3-301, 26-24-101, 26-26-1001, 26-26-1606, 26-26-1901, 26-27-317, 26-27-318
Cases:
- South Carolina v. Baker, 485 U.S. 505 (1988)
- Ark. Teacher Retirement Sys. v. Short, 2011 Ark. 263, 381 S.W.3d 834 (2011)
- Tech. Servs. of Arkansas, Inc. v. Pledger, 320 Ark. 333, 896 S.W.2d 433 (1995)
- Hardesty v. N. Arkansas Med. Servs., Inc., 2019 Ark. App. 410, 585 S.W.3d 177 (2019)
- Sebastian Cnty. Equalization Bd. v. W. Ark. Counseling & Guidance Ctr., Inc., 296 Ark. 207, 752 S.W.2d 755 (1988)
Related AG opinion:
- Op. 2015-118 (county assessors apply ACD rules)
Source
Original opinion text
BOB R. BROOKS JR. JUSTICE BUILDING
101 WEST CAPITOL AVENUE
LITTLE ROCK, ARKANSAS 72201
Opinion No. 2025-077
December 18, 2025
The Honorable Rick McClure
State Representative
2424 Sulphur Springs Road
Malvern, Arkansas 72104
Dear Representative McClure:
I am writing in response to your request for an opinion regarding the business personal property tax exemption claimed by an unidentified medical clinic. You indicate that this clinic asserts tax-exempt status based on its use of federal grant funds to purchase and operate medical equipment. You also note that this clinic bills its patients and refers unpaid accounts to collection agencies.
Against this background, you ask the following questions:
- Can a medical clinic claim business personal property tax exemption status by stating the underlying property was purchased with federal grant money?
Brief response: No, a medical clinic cannot claim a business personal property tax exemption solely because the property was purchased with federal grant funds. But it may qualify for the public charity exemption provided by the Arkansas Constitution.
- Does a medical clinic lose or jeopardize its tax-exempt status if it bills for its services rendered and turns delinquent accounts over to collection agents?
Brief response: No, a medical clinic does not lose or jeopardize its tax-exempt status simply by billing patients or referring delinquent accounts to collection agencies, provided that those patients have the ability to pay and any profits are used to support or expand the clinic's charitable mission.
DISCUSSION
Question 1: Can a medical clinic claim business personal property tax exemption status by stating the underlying property was purchased with federal grant money?
A medical clinic cannot claim an exemption from business personal property taxes solely because the property was purchased using federal grant funds. But it may qualify for the "public charity" exemption provided by the Arkansas Constitution.
In Arkansas, all real and personal property is subject to ad valorem taxation unless specifically exempted by law. While the federal government is generally immune from state taxation under the Supremacy Clause of the federal constitution, this immunity does not extend to private entities that receive federal funding. For purposes of this opinion, I assume the medical clinic is privately owned and operated, and not a federal entity.
The Assessment Coordination Division (ACD) of the Arkansas Department of Finance and Administration oversees the valuation, assessment, and equalization of nearly all property subject to ad valorem taxation in Arkansas. In addition, the ACD supervises county assessors, equalization boards, and tax collectors to ensure property assessments are carried out in substantial compliance with Arkansas law. County assessors determine whether a property qualifies for an exemption or if the property is owned by an instrumentality of the federal or state government and thus is immune from taxation. That decision is appealable. The primary and predominant factor assessors consider when determining if an exemption is proper is the actual use of the property.
There is a strong presumption in favor of the government's taxing authority, and the burden rests on the taxpayer to demonstrate entitlement to an exemption. Arkansas courts strictly construe tax exemptions against the taxpayer. Any ambiguity regarding whether an exemption applies will result in the denial of that exemption. Moreover, the General Assembly may authorize only those exemptions that are specifically provided for in the Arkansas Constitution.
In this instance, the only relevant exemption is the public charity exemption, which applies to buildings, grounds, and materials used exclusively for charitable purposes. For a medical clinic to qualify, it must (1) be open to the public; (2) provide services regardless of a patient's ability to pay; and (3) use any profits from paying patients solely to maintain or expand its charitable operations. If the clinic satisfies these criteria, it may qualify for the public charity exemption.
The authority to approve or deny a particular tax exemption has not been vested in this office. That decision rests with the local county assessor, who must follow the rules established by the ACD for assessing property subject to ad valorem taxation. Thereafter, the matter may proceed through the judicial process.
Question 2: Does a medical clinic lose or jeopardize its tax-exempt status if it bills for its services rendered and turns delinquent accounts over to collection agents?
A medical clinic does not lose its public charity exemption simply because it bills patients or refers delinquent accounts to collection agencies. Charitable hospitals and medical clinics are permitted to serve paying patients, provided that any excess income is used to support and expand the charitable mission. Referring delinquent accounts to collections may reflect a reasonable effort to recover costs from patients who are able, but unwilling, to pay.
Assistant Attorney General Justin Hughes prepared this opinion, which I hereby approve.
Sincerely,
TIM GRIFFIN
Attorney General