Court of Appeals Decision May Remove State Tax Exemptions of College Conferences, Property Owned Jointly by Cities and Counties, and Catholic Schools

A recent opinion from the Iowa Court of Appeals may have far-reaching tax consequences for cities and counties, private nonprofit educational institutions, and other entities who are relying on the tax exemption of their members as the basis for the entity’s tax exemption. Specifically, the opinion suggests that purchases made by a group of exempt entities may not be exempt from sales tax even though each of the members of the group can make purchases exempt from tax. That is, based on the court’s opinion, if a group of exempt entities join together and make purchases, the sales tax exemption that applies to each of the individual exempt entities does not “flow through” to the group.

In the recent case, Health Enterprises of Iowa v. Iowa Department of Revenue, the plaintiff-appellant was Health Enterprises of Iowa (“Health Enterprises”). Health Enterprises is an Iowa non-profit entity and each of its individual members were Iowa nonprofit hospitals that could make purchases exempt from tax under Iowa Code § 423.3(27). The issue in the case was whether the sales tax exemption in Iowa Code § 423.3(27) that was applicable to each of Health Enterprises’ member-hospitals would “flow through” to Health Enterprises. In ruling that the exemption of the individual hospitals did not flow through to Health Enterprises, the court looked at the language of the statute and stated:

The problem with Health Enterprises’ position is that its flow-through exemption theory is nowhere to be found in the language of section 423.3(27), nor is it even between the statute’s lines. And that is the beginning and end of our inquiry. 

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We repeat what each of the reviewing courts before us already found: the language of section 423.3(27) is facially unambiguous. To qualify for the exemption, a purchaser of goods or services must be “a nonprofit hospital licensed pursuant to chapter 135B.” Iowa Code § 423.3(27). Through its reference to chapter 135B, the legislature expressly conditioned exemption on a purchaser’s licensure status under a separate statutory scheme—indicating its intent to tether eligibility to a class of entities, not a range of activities.

The court made this conclusion but failed to explain the basis for the Iowa Department of Revenue (“Department”) interpreting other purportedly “unambiguous” statutes to include the flow-through exemption. Indeed, contrary to the court’s opinion that the flow-through exemption is not implicit in Iowa tax law, the Department has a long history of interpreting tax statutes to allow the flow-through exemption for a variety of tax types and taxpayers. In light of the court’s latest opinion, following entities should reconsider whether they are exempt from tax.

Property Taxes for Property Held Jointly By Cities and/or Counties

In a 1992 Attorney General Opinion (Op. Att’y Gen. No. 92-11-4 (Nov. 12, 1992) (1992 WL 470385), the question was whether property owned by “a solid waste agency created under Iowa Code chapter 28E comprised entirely of government agencies” was exempt from property taxes under Iowa Code section 427.1(2) (1992). The statute at issue, Iowa Code § 427.1(2) (1992), provides that the following property is exempt from tax:

2. Property of a county, township, city . . . of the state of Iowa, when devoted to public use and not held for pecuniary profit . . . .

(emphasis added). The solid waste agency was “made up of cities in Iowa County as well as the county itself.” The AG opinion goes on to recognize that “it is apparent that the property could be exempt if the government units operated separate sanitary landfills” but the question “is whether a 28E entity which is comprised entirely of section 427.1(2) government units is exempt from property taxes.” Ultimately, the AG’s office concluded that “a 28E entity which operates a sanitary landfill and is composed solely of section 427.1(2) exempt entities is exempt from property taxes.” The AG’s office made this conclusion even though the statute purportedly applied to property owned by “a” single city or county. 

Under the latest court of appeals decision, it is doubtful that property owned by numerous cities and/or counties would be exempt from property tax. The existing version of the property tax exemption applicable to cities and counties is still found at Iowa Code § 427.1(2) and still applies to property owned by a single city or county. 

2. The property of a county, township, city, school corporation, levee district, drainage district, district organized under chapter 357E, or the Iowa national guard, when devoted to public use and not held for pecuniary profit . . .

(emphasis added). 

Based on the court of appeals decision, under the plain language of the statute, in order for the exemption to apply, the property must be owned by a single county or city  (hint: “A” is singular) and the statute does not apply to property owned by an entity that comprised of more than one city or county. Furthermore, based on the court of appeals analysis, Iowa Code § 427.1(2) also does not apply to 28E entities because the statute recognizes other property “held under joint ownership” but does not mention property owned by entities formed under 28E.   

Under the court of appeals opinion, property owned jointly by exempt entities is not exempt unless the statute specifically exempts jointly owned property. Indeed, the property tax exemptions specifically reference situations when the property tax exemption applies to jointly owned property. See Iowa Code § 427.1(27) (exemption applying to “not-for-profit cooperative association under chapter 499”); .1(28) (exemption applying to a “joint water utility”). Therefore, in light of the court of appeals opinion, cities and counties and other exempt entities who jointly own property should reconsider whether the property they own is exempt from property tax.

Sales Tax Paid by Private Non-Profit Educational Institutions

Iowa Code § 423.3(17) exempts from sales tax “all tangible personal property, specified digital products, or services, used for educational purposes sold to any private nonprofit educational institution in this state.” The definition of “educational institution” is

an institution which primarily functions as a school, college, or university with students, faculty, and an established curriculum.

(emphasis added). Despite the statute “unambiguously” defining “educational institution” as a single educational institution since 2001, the Department’s administrative rules defined “educational institution” to include “a group of qualifying institutions acting in concert until July 2024.” IAC r. 701—7.11 (2023). Based on the Department’s rules—and contrary to the court of appeals decision—it appears the Department believed the flow-through exemption is “implicit in the law” of taxation in Iowa. The following rulings made by the Department also demonstrate the Department believes the flow-through  exemption is implicit in the law of taxation in Iowa.

Archdiocese of Dubuque. The Department has previously held that Bureau of Education of the Archdiocese of Dubuque was an “educational institution” even though the Bureau was merely an “administrative adjunct” to the educational institutions and the “Bureau itself maintains no regular faculty nor does it have a regularly enrolled body of students.” 

CMC Colleges Associated. The Department has also previously ruled that an entity that was comprised of a group of colleges—CMC Colleges Associated—that banded together to share the costs of computers was exempt from paying sales tax even though the group did not have students, faculty and an established curriculum.

The Department’s rulings are undercut by (1) the court of appeal’s recent opinion and (2) the Department’s action of removing the flow-through exemption from its administrative rules in 2024. Under the court of appeal’s rationale, the exemption for private non-profit educational institutions is unambiguous and can only apply to a single private nonprofit educational institution (hint “an” is singular) that “primarily functions as a school, college, or university with students, faculty, and an established curriculum.” Based on the court of appeal’s decision, purchases made by entities made up of a group of educational institutions should consider whether their purchases are exempt from sales tax. Or, perhaps, the court of appeals got it wrong.

Sales Tax Paid and Charged by NCAA, Big Ten, Big 12, Missouri Valley, and Other  College Conferences

In additional to educational institutions’ purchases being exempt from sales tax under Iowa Code § 423.3(17), Iowa Code § 423.3(78) exempts educational institutions’ sales if the profits from the sales “are used by or donated to a nonprofit entity which is “a nonprofit private educational institution and where the entire profits are expended for” educational purposes. Iowa Code § 423.3(78). 

Despite the legislature defining “educational institution” as a single educational institution that “primarily functions as a school, college, or university with students, faculty, and an established curriculum,” the Department has, until recently, concluded that college conferences comprised of educational institutions are “educational institution” even though those conferences do not primarily function as school, college, or university with students, faculty and an established curriculum. Although the Department’s rules were removed in 2024, the Department’s rules provided as follows:

Organizations such as the Big Ten Conference, Big 12 Conference, and the Missouri Valley Conference are, themselves, educational institutions since they are made up of member schools which are educational institutions.

IAC r. 701—284.1(6)”e”(18) (2024). 

Either the court of appeals was wrong and the flow-through exemption is implicit in Iowa tax law or the Department’s interpretation of sales tax exemptions for an educational exemption to include the flow through exemption was wrong. In light of the differing interpretation of purportedly “unambiguous” statutes, NCAA and college conferences operating in the state of Iowa should reconsider whether their sales and purchases are exempt from sales tax as a result of the make up of the conference membership. 

Conclusion

The Department has historically taken the position that an entity whose membership is made up of exempt entities is exempt from tax since they are made up of qualifying exempt entities. However, according to Health Enterprises of Iowa v. Iowa Department of Revenue, the Department’s historical practice of allowing the tax exemption of the entity’s members to flow through to the entity may not have a statutory basis. Either the Iowa Court of Appeals or the Department is wrong.

Entities who are relying on their members’ tax exemptions to claim a tax exemption should reevaluate whether they are entitled to the exemption they have been claiming.