BEFORE THE STATE TAX
COMMISSION OF UTAH
_____________________________________
XXXXX
Petitioner, :
v. : INFORMAL DECISION
AUDITING
DIVISION OF THE : Appeal No. 87-1017
UTAH STATE TAX COMMISSION : Account
No. XXXXX
Respondent. :
_____________________________________
STATEMENT OF CASE
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.
FINDINGS
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.
DECISION AND ORDER
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.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH.
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner