87-1017 - Sales





Petitioner, :




Respondent. :



This is an appeal to the Utah State Tax Commission from a decision of the Auditing Division of the Utah State Tax Commission (Respondent) to withdraw institutional clearance No. XXXXX following a finding by Respondent that the XXXXX (Petitioner) is not a religious institution. An informal hearing in the above-captioned matter was held on XXXXX in the offices of the Utah State Tax Commission. David J. Angerhofer, Hearing Officer, heard the matter for the Tax Commission. XXXXX, Attorneys at Law, represented the Petitioner. XXXXX, Managing Auditor, represented the Respondent.


Petitioner was issued institutional clearance No. XXXXX on XXXXX and was consequently exempt from sales and use tax on sales made to or by Petitioner in the conduct of its regular religious or charitable functions and activities. On XXXXX, Respondent withdrew institutional clearance No. XXXXX since it was the understanding of Respondent that Petitioner derived its income from fees paid for psychological counseling and from the sale of literature and that Petitioner was not, therefore, a religious institution.

Exemptions from sales and use tax are set forth in Utah Code Ann. 59-12-104 (1953). Subsection (8) exempts "sales made to or by religious or charitable institutions in the conduct of their regular religious or charitable functions and activities." It is Respondent's position that Petitioner does not qualify for the first prong of the statutory test, i.e., the requirement that an institution must be a religious or charitable institution. There is no question but that Petitioner meets the second prong of the test. Sales made to or by Petitioner are in the conduct of Petitioner's regular religious or charitable functions or activities (setting aside for the moment the question of the nature of the functions and activities). The sole issue of this appeal is whether or not Petitioner is a religious institution. If so, then Petitioner is exempt from sales and use tax pursuant to Section 59-12-104(8) and is entitled to the reinstatement of institutional clearance No. XXXXX retroactive to XXXXX. If Petitioner is not a religious institution then Petitioner is not exempt from sales and use tax pursuant to Section 59-12-104(8), Petitioner is not entitled to reinstatement of institutional clearance No. XXXXX, Petitioner's vendors are then required to collect tax on sales made to Petitioner, and Petitioner is required to apply for a retail sales tax license and collect and remit tax on sales of books and publications. Petitioner is a nonprofit corporation. Petitioner filed Articles of Amendment with the State of Utah on XXXXX, which Articles of Amendment superseded the previously existing Articles of Incorporation and Amendments. The Articles of Amendment state in part that "the Corporation is formed exclusively for religious purposes and is not formed for the private benefit or gain of any person" (Article 3); "no part of the income or assets of the corporation shall ever inure to the benefit of any private party or individual" (Article 4a); and that upon dissolution the assets of the corporation will be distributed to a section 501(c)(3) organization (Article 8). The fact that an organization is nonprofit is insufficient to establish an exemption pursuant to Tax Commission Rule R865-43S-1-C. "The exemption granted by the statute Utah Code Ann. 59-12-1041 under this rule does not apply to institutions merely operating on a nonprofit basis. Every institution claiming exemption under this rule must obtain from the Tax Commission an approval of its claim for such exemption." Nonprofit status is a necessary but not sufficient requirement for a sales and use tax exemption.

Petitioner testified that it enjoys tax exempt status for federal income tax purposes and that this status has never been challenged by the IRS since Petitioner organized in the State of Utah approximately 19 years ago. Petitioner presented a copy of letter from the IRS dated XXXXX, which letter determined that Petitioner "is to be treated as a church for tax purposes." Petitioner noted that cases in which the tax exempt status of the XXXXX was denied involved taxes prior to XXXXX. See XXXXX v. United States, 412 F.2d 1197 (Ct. C1. 1969); XXXXX v. Com., 83 T.C. 381 (Tax Ct. 1984), aff'd 823 F.2d 1310 (9th Cir. 1987). Petitioner stated that in these cases the denial was based on the grounds of a benefit inuring to private individuals, that subsequent changes have occurred in the structural organization of the XXXXX, and that the inurement problem no longer exists.

In Walz v. Com., 397 U.S. 664 (1970), the court held that granting an ad valorem property tax exemption to an entanglement with religion. Shortly thereafter in Lemon v. Rurtzman, 403 U.S. 602 (1971), the court held that a New York statute which favored parochial schools was excessive government entanglement in religion and, therefore, unconstitutional.

Most recently, the Supreme Court in the Corporation of the Presiding Bishop v. Amos, 55 U.S.L.W. 5005 (1971), held that the excessive government entanglement standard which was first established in Walz would be further expanded to include employment discrimination suits. The Amos decision authorized religious organizations to require employees in church owned, nonprofit business, to meet certain standards set by the church. The Court reversed the district court holding that the district court's efforts to distinguish religious from nonreligious purposes through an examination of the religion's tenets, rituals, and administration, was an improper exercise of governmental power because it was excessive government entanglement in religion. The court reiterated the need for separation between church and state and sought to avoid "the kind of intrusive inquiry into religious belief that the district court engaged in this case." Amos, 55 U.S.L.W. at 5009.

Concurring, XXXXX analyzed the potential chilling effect on religion from the government's attempt to determine whether or not an activity carried out by a church is religious or not religious in character. This substantial potential for chilling religious activity makes inappropriate a case-by-case determination of the character of a nonprofit organization, and justifies a categorical exemption for nonprofit activities.

. . . then while every nonprofit activity may not be operated for religious purposes, the likelihood that many are makes a categorical rule a suitable means to avoid chilling the exercise of religion. Id. at 5010 (Brennan J., concurring). Based on Petitioner's nonprofit status in the State of Utah, Petitioner's current tax exempt status with the IRS, and using the guidelines set forth in Amos, the Tax Commission hereby finds Petitioner to be a religious institution for the purpose of Utah Code Ann. 59-12-104(8) (1953) and finds that Petitioner qualifies for sales and use tax exemption on sales made to and by Petitioner in the conduct of Petitioner's regular religious functions and activities.


Based on the foregoing, the Utah State Tax Commission hereby reinstates institutional clearance No. XXXXX retroactive to XXXXX. The Auditing Division is hereby ordered to adjust its records in accordance with this decision.

DATED this 14 June, 1988.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco G. Blaine Davis

Commissioner Commissioner