PORT JEFFERSON HEALTH v. Wing

• Decision Date: 16 December 1999
• Citation: 704 N.Y.S.2d 897,726 N.E.2d 449,94 N.Y.2d 284
• Parties: PORT JEFFERSON HEALTH CARE FACILITY et al., Respondents, v. BRIAN WING, as Acting Commissioner of Social Services of the State of New York, et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

94 N.Y.2d 284

726 N.E.2d 449

704 N.Y.S.2d 897

PORT JEFFERSON HEALTH CARE FACILITY et al., Respondents, v. BRIAN WING, as Acting Commissioner of Social Services of the State of New York, et al., Appellants.

Court of Appeals of the State of New York.

Argued October 20, 1999.

Decided December 16, 1999.

Eliot Spitzer, Attorney General, Albany (Andrew D. Bing, Preeta D. Bansal and Peter H. Schiff of counsel), for appellants.

Hamburger, Maxson & Yaffe, L. L. P., Melville (Richard Hamburger, David N. Yaffe and Lane T. Maxson of counsel), for respondents.

Chief Judge KAYE and Judges BELLACOSA, SMITH, CIPARICK, Wesley and ROSENBLATT concur.

OPINION OF THE COURT

LEVINE, J.

Plaintiffs are 21 for-profit residential health care facilities (RHCFs) located in various parts of the State. They have brought this suit challenging the constitutional validity of assessments of 1.2% and 3.8% on RHCF gross receipts under a statutory scheme whereby those taxes on receipts for the care of Medicaid patients are reimbursed as a recoverable expense of care.

The State first assessed a tax on the gross receipts of RHCFs for the period January 1, 1991 to March 31, 1992, at the rate of .6%, with no reimbursement (L 1990, ch 938, § 28). The statute creating the assessment specifically provided that the tax was not a recoverable Medicaid expense (see, Public Health Law § 2807-d [10] [a]). Thus, in the original RHCF gross receipts legislation, the burden of the tax was imposed uniformly on all of the gross receipts of all RHCFs, regardless of source.¹ The .6% original assessment is not at issue on this appeal.

In 1992, the Legislature extended the original .6% assessment and imposed an "additional assessment" of 1.2% (L 1992, ch 41, § 5; Public Health Law § 2807-d [2] [b] [ii]). That enactment provided, however, that, contingent upon all Federal approvals necessary for Federal financial participation in the State's Medicaid program, the additional 1.2% assessment as applied to RHCF Medicaid receipts would be a reimbursable cost of care (id., § 11; Public Health Law § 2807-d [10] [b]). In 1995, the Legislature enacted a "further additional assessment" of 3.8% on RHCF gross receipts, and again provided that, contingent upon Federal approvals, that tax paid on Medicaid receipts would be a reimbursable expense (L 1995, ch 2, § 136; Public Health Law § 2807-d [2] [b] [iii]).²

Plaintiffs brought this action in 1995, seeking declaratory and injunctive relief, and a refund of gross receipt taxes paid.³ On this appeal, they rely entirely on the claim that their Fourteenth Amendment rights to equal protection of the law have been violated by the statutory scheme in which the State imposes a 1.2% and 3.8% gross receipts tax upon all of the receipts of all RHCFs, but only reimburses RHCFs for taxes paid on receipts for the care of Medicaid patients. They assert that this statutory scheme unconstitutionally discriminates against RHCFs whose non-Medicaid patient population (i.e., private pay patients and patients whose nursing home fees are funded by insurers, health maintenance organizations or the Federal Veterans Administration) is larger than the Statewide average of 20%.

On plaintiffs' motion for summary judgment, they submitted evidence to demonstrate that (1) while private pay rates substantially exceed allowable Medicaid rates, an RHCF's net profits do not correlate with having a higher percentage of private pay residents in its patient population; and (2) RHCFs catering largely to Medicaid patients are able to earn substantial profits under existing Medicaid reimbursement rates.

Supreme Court granted plaintiffs' motion. It concluded that, as a gross receipts tax, the statutory scheme imposed the burden of the assessments more heavily upon some RHCFs than others, without any policy justification other than the State's interest in raising revenue, which it considered to be inadequate (citing Stewart Dry Goods Co. v Lewis, 294 US 550). The court further held that plaintiffs' evidence dispelled all of the rationales suggested by the State for the differential treatment of RHCFs based on their relative mix of Medicaid and non-Medicaid patients.

On the State's appeal, the Appellate Division affirmed (253 AD2d 548). The Court determined that there was a disparity of taxation under the assessment and Medicaid reimbursement scheme, as RHCFs with larger Medicaid populations "have the majority of their revenues not subject to assessments * * * while RHCFs like the plaintiffs, having a large proportion of gross receipts from non-Medicaid sources, must shoulder the burden" (id., at 549-550). That Court further held that a denial of equal protection occurred here because of that disparate treatment, which could not be justified by the State's interest in raising revenue (id., at 550). The Appellate Division also held that a gross receipts tax treating "differently the same transaction—the provision of skilled care to residents of RHCFs—without regard to profits (id.)," was invalid under Stewart Dry Goods Co. v Lewis (supra).

On the State's appeal as of right (CPLR 5601 [d]), we reverse and declare the statutory scheme constitutional.

Discussion

The parties do not dispute that these gross receipts taxes do not proceed along suspect lines or involve any fundamental rights of plaintiffs. Therefore, there are three well-established principles that set the framework for equal protection review on this appeal. First, any classification respecting differential taxation of nursing homes, in this case based on the composition of their patient populations, enjoys a strong presumption of constitutionality, which plaintiffs must overcome beyond a reasonable doubt (see, Maresca v Cuomo, 64 NY2d 242, 250

). Second, the assessments are subject to the lowest level of judicial review, whether any rational basis supports the legislative choices (see, id.; see also, Heller v Doe, 509 US 312, 319-320).

Third, here rational basis review is being applied to a system of taxation. "This standard is especially deferential in the context of classifications made by complex tax laws" (Nordlinger v Hahn, 505 US 1, 11). We noted in Trump v Chu (65 NY2d 20) that, in reviewing the validity of taxation classifications "the equal protection clause does not prevent State Legislatures from drawing lines that treat one class of individuals or entities differently from others unless the difference in treatment is `palpably arbitrary' or amounts to an `invidious discrimination'" (id., at 25, citing, inter alia, Lehnhausen v Lake Shore Auto Parts Co., 410 US 356, 360

). The Equal Protection Clause "imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of State taxation. The State may impose different specific taxes upon different trades and professions and may vary the rate of excise upon various products" (Allied Stores v Bowers, 358 US 522, 526-527 [emphasis supplied]).

In our view, plaintiffs have failed to meet their heavy burden of demonstrating a violation of the Equal Protection Clause here. We assume without deciding that this taxing scheme— which at most has the net effect of exempting RHCF receipts for the care of Medicaid patients from a general gross receipts tax on all of these facilities—created a "discrete and objectively identifiable class" triggering equal protection analysis in the first instance (San Antonio Ind. School Dist. v Rodriguez, 411 US 1, 22; id., at 60 [Stewart, J., concurring]). Even if the classifications in these gross receipts assessment statutes created a discrete class of nursing homes taxed disparately on the basis of their low proportions of medically indigent patients, plaintiffs have failed to establish any equal protection violation under the rational basis level of judicial scrutiny applicable here, and the courts below erred by holding otherwise. That standard of review has been characterized by the United States Supreme Court as "a paradigm of judicial restraint" (Federal Communications Commn. v Beach Communications, 508 US 307, 314).

Under the rational basis standard, the Legislature, in creating a classification, "need not actually articulate at any time the purpose or rationale supporting its classification. Instead, a classification must be upheld against an equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification" (Heller v Doe, supra, 509 US, at 320 [internal citations and quotation marks omitted] [emphasis supplied]).

Two principles flow from the proposition that any reasonably conceivable state of facts provides a sufficient rational basis to sustain a classification. First, "it is entirely irrelevant for constitutional purposes whether the conceived reason for the challenged distinction actually motivated the legislature" (Federal Communications Commn. v Beach Communications, supra, at 315). Thus, "[t]he legitimate purpose justifying the provision need not be the primary purpose of the provision * * * and, indeed, a court may even hypothesize the motivations of the State Legislature to discern any conceivable legitimate objective promoted by the provision under attack" (Maresca v Cuomo, supra, 64 NY2d, at 251 [emphasis supplied]). Second, the State "has no obligation to produce evidence to sustain the rationality of a statutory classification. A legislative choice is not subject to courtroom factfinding and may be based on rational speculation unsupported by evidence or empirical data" (Heller v Doe, supra, at 320 [internal quotation marks omitted] [emphasis supplied]).

The United States Supreme Court's rejection of the equal protection challenge to California's Proposition 13 in Nordlinger v Hahn (supra) is especially instructive here. Under Proposition 13, approved by the California voters in 1978, increases in residential and commercial real property tax assessments were...