Opinion ID: 2592913
Heading Depth: 2
Heading Rank: 3

Heading: Pueblo's Sales and Use Tax Exemption

Text: The City of Pueblo has elected to exempt charitable organizations from sales and use taxes incurred in the conduct of their regular religious or charitable functions and activities. § 14-4-76, Pueblo, Colo. Mun.Code. The tax code goes on to define charitable organization: Charitable organization means any entity which: a. Has been certified as a not-for-profit organization under Section 501(c)(3) of the Internal Revenue Code; and b. Is a religious or charitable organization. As used in this definition, a charitable organization is an organization which exclusively, and in a manner consistent with existing laws and for the benefit of an indefinite number of persons, freely and voluntarily ministers to the physical, mental or spiritual needs of persons, and which thereby lessens the burdens of government. § 14-4-21(5) Pueblo, Colo., Mun.Code (italics in original). This definition is circular, in that it uses the phrase charitable organization to define itself. The parties' assumptions regarding the interpretation of this definition caused this case to develop in a somewhat confused way. Both parties have agreed to the stipulated facts set forth at the trial court level, but they nonetheless adopt significantly different interpretations of these facts, which lead to conflicting logical conclusions. For example, the parties stipulated that Catholic Health is a religious organization with not-for-profit 501(c)(3) status. Joint Waiver of Trial and Submission of Case Based on Stipulated Facts, 2-3. Catholic Health believes these stipulated facts are effectively akin to stipulating that Catholic Health meets the charitable organization definition. Under Catholic Health's interpretation of the definition, a religious organization with 501(c)(3) status is a charitable organization. Catholic Health believes the third paragraph, which sets forth a variety of additional requirements an organization must meet to be deemed a charitable organization, applies only to charitable organizations as listed in subsection (b) of the definition, and is thus inapplicable to religious organizations. However, the City of Pueblo, under its interpretation of the definition, reaches an entirely different conclusion based on the same stipulated facts. The City of Pueblo reads the third paragraph of the definition as applying to all charitable organizations under the definition, including religious organizations. Thus, under this interpretation, even if Catholic Health is a 501(c)(3) religious organization, it must still exclusively, and in a manner consistent with existing laws and for the benefit of an indefinite number of persons, freely and voluntarily [minister] to the physical, mental or spiritual needs of persons, [thereby lessening] the burdens of government in order to qualify for a sales and use tax exemption. § 14-4-21(5). Thus, we examine the code and explain our understanding of the sales and use tax exemption.
The plain language of the tax exemption supports the interpretation that any organization, including religious organizations, must meet the requirements of the third paragraph in order to be entitled to an exemption. The interpretation argued by Catholic Health, that all religious organizations enjoying 501(c)(3) status are entitled to an exemption, has one of two effects. First, it can essentially eliminate the third paragraph of the definition. Second, this reading may be premised on the limited applicability of the third paragraph, applying the organizational requirements only to charitable organizations as used in paragraph (b) of the definition, rather than the overarching definition; this essentially exempts religious organizations from these programmatic requirements. Nonetheless, proceeding from the flawed premise that all religious 501(c)(3) organizations are entitled to a tax exemption, the operative question for a reviewing court would be whether the operation of Villa Pueblo was a religious activity. Finding no definition of religious activity in the City of Pueblo tax code, the trial court and the court of appeals turned to principles of constitutional law in an attempt to define the scope of religious activity. However, we disagree with this interpretation. When construing a statute, we analyze it as a whole, ascribing to each word and phrase its familiar and generally accepted meaning, assuming the drafters intended that meaning should be given to each word. Dep't of Transp. v. Stapleton, 97 P.3d 938, 943 (Colo.2004). In order to give full meaning to all words and phrases in the tax code's definition, we believe the third paragraph must not be idly eliminated. Rather, the third paragraph sets forth the overarching operational characteristics all charitable organizations, including religious organizations, must have in order to be eligible for the tax exemption. In other words, we believe the third paragraph is intended to modify the first sentence of the definition. Under our interpretation, the definition, by its plain language, incorporates two requirements. First, the organization must be a 501(c)(3) that is either religious or charitable in nature. Second, the organization must exclusively, and in a manner consistent with existing laws and for the benefit of an indefinite number of persons, freely and voluntarily [minister] to the physical, mental or spiritual needs of persons, thereby lessening the burdens of government. § 14-4-21(5) Pueblo, Colo., Mun.Code. Thus, an organization does not automatically qualify for a sales tax exemption simply because it is a religious or charitable organization with 501(c)(3) status. Rather, the organization must be engaged in qualifying activities in order to be eligible for the exemption. We reach this conclusion for three reasons. First, the City of Pueblo, in drafting the tax code, made the affirmative decision to emphasize the first and the third instances of the phrase charitable organization, thereby equating the two phrases and indicating the requirements of the third paragraph were intended to apply to all charitable organizations, rather than only those nonreligious charitable organizations. Second, the use of the word or in subpart (b) of the definition indicates there are two categories of charitable organizations  charitable and religious  which may satisfy the definition. See May Dep't Stores Co. v. State ex rel. Woodard, 863 P.2d 967, 976 (Colo.1993) (interpreting or as demarcating different categories). In other words, charitable and religious organizations are two categories within an overarching group of charitable organizations, as defined by the code. For our purposes, whether an organization is religious or charitable in nature is immaterial, because they are treated the same way under the code. Third, the section of the code actually setting forth the exemption states that charitable organizations are exempt from sales and use taxes incurred in the conduct of their regular religious or charitable functions and activities. § 14-4-76. It does not exempt charitable or religious organizations from those sales and use taxes. The plain meaning seems to require that religious organizations which meet the requirements of the definition are a subset of charitable organizations, rather than a distinct group, separately entitled to a tax exemption.
We do not believe Catholic Health's self-described waiver of its charitable exemption claim requires us to adopt its interpretation of the tax exemption. Catholic Health interprets the code as offering two distinct types of exemptions  one for religious organizations which, if they enjoy 501(c)(3) status, are entitled to an exemption for all taxes incurred in the conduct of their regular religious ... functions and activities, and a separate exemption for charitable organizations, which, in addition to being 501(c)(3) organizations, must also meet the far stricter guidelines of the third paragraph of the definition before they will be entitled to exemptions for their regular ... charitable functions and activities. Thus, Catholic Health understood its waiver as electing to pursue only the religious exemption claim. However, under the City of Pueblo's interpretation of its code, such a waiver is problematic, for one of two reasons. First, the code may disallow any waiver of the charitable exemption argument, because all exemptions for religious organizations fall within the broader category of charitable organization exemptions. Second, the code could be seen to accommodate a waiver, but only insofar as it signifies a party's self-identification with one type of organization entitled to an exemption if the necessary prerequisites are met  in this case, opting to identify as a religious organization, while still recognizing the applicability of the definition's third paragraph. Catholic Health's waiver is based on its incorrect interpretation of the tax code. Given our understanding of the code, we presume Catholic Health intended its waiver to merely clarify its identification as a religious organization, rather than a waiver of its entire claim.
Although our interpretation of the code stems from its plain meaning, our view is also supported by our obligation to avoid interpretations that invoke constitutional deficiencies. Adams County Sch. Dist. No. 50 v. Heimer, 919 P.2d 786, 792 (Colo.1996). By adopting this plain language interpretation of the charitable organization definition, we avoid a potential constitutional conflict created by Catholic Health's interpretation. Catholic Health contends all religious organizations with 501(c)(3) status should be entitled to a sales and use tax exemption. However, the United States Supreme Court has held such a subsidy, directed exclusively to religious organizations, which either burdens non-beneficiaries markedly or cannot reasonably be seen as removing a significant state-imposed deterrent to the free exercise of religion ... provide[s] unjustifiable awards of assistance to religious organizations and cannot but conve[y] a message of endorsement of religion, in violation of the Establishment Clause. Texas Monthly, 489 U.S. at 14-15, 109 S.Ct. 890 (Brennan, J., plurality opinion) (internal citations omitted). Catholic Health's interpretation would carve out a tax exemption for religious organizations solely as a result of their religious nature, rather than the work of the organization. Such an exemption would put other secular organizations, engaged in exceedingly similar activities, at a marked competitive disadvantage. Many of the constitutional arguments involved in this case arise from an interpretation of the code we reject. In contrast, the interpretation we adopt today complies with constitutional requirements. In order for a sales tax exemption to comply with the Establishment Clause, it must serve a broad secular purpose. If the work of a religious organization falls within that secular purpose, it may properly enjoy the tax exemption. The tax code's definition of charitable organization has the properly broad, secular purpose of lessening the burdens of government. See Bob Jones Univ. v. U.S., 461 U.S. 574, 591, 103 S.Ct. 2017, 76 L.Ed.2d 157 (1983) (explaining that charitable exemptions are justified where they benefit society by, for example, supplementing and advancing the work of public institutions already supported by tax revenue). The tax code extends the tax exemption to religious organizations that satisfy this secular purpose, rather than bestowing tax exemptions upon religious organizations simply by virtue of their religious nature. We have held tax exemptions comply with the Establishment Clause where the scope of the exemption is instrumental in facilitating fair administration of the system and where the exemption makes distinctions based on real differences related to the purposes of the system. Young Life, 650 P.2d at 521. Here, the City of Pueblo created a tax exemption to benefit those organizations engaged in charitable work. It sets forth concrete, secular standards by which it will evaluate whether organizations, including religious organizations, are eligible for the tax exemption. These standards are necessary, in that they provide the City with an objective measure by which to determine eligibility for the tax exemption. The criteria are based on real differences, such as the type of work undertaken by the organization, as well as whether that work is transactional or charitable. Thus, we hold the City of Pueblo tax code, applied as written, complies with the Establishment Clause. However, Catholic Health argues the application of the City of Pueblo's tax code nonetheless violates the Establishment Clause by creating an improper entanglement between government and religion. A statute or ordinance violates the Establishment Clause when it fosters `an excessive government entanglement with religion.' Lemon v. Kurtzman, 403 U.S. 602, 613, 91 S.Ct. 2105, 29 L.Ed.2d 745 (1971) (quoting Walz v. Tax Comm'n of City of N.Y., 397 U.S. 664, 674, 90 S.Ct. 1409, 25 L.Ed.2d 697 (1970)). Catholic Health alleges excessive entanglement has occurred here because the City of Pueblo will be forced to examine Villa Pueblo's operation in order to determine which aspects of the organization qualify for the tax exemption. The trial judge's order would have created this type of entanglement because it held religious exemptions will apply to regularly [related] religious functions, and other than that, for all secular functions like refrigerators and stoves, Villa Pueblo must pay sales and use tax to the City of Pueblo when applicable. Trial Ct. Order, 2-3. While this holding was replaced by the contrary, yet similarly incorrect, holding of the court of appeals, we find the trial judge's reasoning to be representative of an order that would violate the Establishment Clause. See Amos, 483 U.S. at 336, 107 S.Ct. 2862. The interpretation of the code we adopt today also complies with the Free Exercise Clause. The City of Pueblo's imposition of a sales and use tax upon a religious organization does not, in and of itself, violate the Free Exercise Clause by placing an untenable burden on the practice of religion. Catholic Health has not argued the payment of sales tax, in and of itself, violates its sincerely held religious beliefs. Rather, it argues the imposition of a sales and use tax incidentally burdens Catholic Health's ability to practice an unrelated tenet of its religious belief. However, such arguments have been roundly rejected by the United States Supreme Court as failing to constitute a violation of the Free Exercise Clause. See Hernandez, 490 U.S. at 700, 109 S.Ct. 2136 (rejecting the argument that an incrementally larger tax burden interferes with religious activities and further stating such an argument knows no limitations). However, even if the payment of sales and use tax violates some aspect of a religious organization's sincerely held religious belief, this would still not violate the Free Exercise Clause. A state or local government is not required by the Free Exercise Clause to exempt religious organizations from sales and use taxes. Texas Monthly, 489 U.S. at 19, 109 S.Ct. 890 (Brennan, J., plurality opinion) (recognizing a state is under no obligation to make individualized exemptions from sales taxes, even if a religious group is capable of successfully demonstrating payment of that sales tax would violate their religious tenets); see also Hernandez, 490 U.S. at 699-700, 109 S.Ct. 2136 ([E]ven a substantial burden [on religion] would be justified by the `broad public interest in maintaining a sound tax system,' free of `myriad exceptions flowing from a wide variety of religious beliefs.' (quoting Lee, 455 U.S. at 260, 102 S.Ct. 1051)).
Having adopted this interpretation of the charitable organization definition language, which requires all charitable organizations, including religious organizations, to comply with the terms of the third paragraph, we turn now to whether Catholic Health meets the definition of charitable organization. The trial court held Villa Pueblo's religious activities should be exempt from sales and use taxes, while secular activities could be appropriately taxed. However, we believe the trial court arrived at this conclusion by misapplying the City of Pueblo's tax code. The tax code does not provide an exemption for all religious organizations engaged in their regular religious activity, as Catholic Health suggests. Rather, the tax code provides a tax exemption to organizations, which may or may not be religious, that exclusively, and in a manner consistent with existing laws and for the benefit of an indefinite number of persons, freely and voluntarily [minister] to the physical, mental or spiritual needs of persons, and which thereby [lessen] the burdens of government. § 14-4-21(5). Thus, a religious 501(c)(3) organization that does not meet these operational requirements will not be entitled to a tax exemption, regardless of whether the organization's activities are motivated by a sincerely held religious belief. We believe the court of appeals similarly misunderstood the City of Pueblo's charitable organization definition. Starting from the same incorrect interpretation of the charitable organization definition, the court of appeals determined Catholic Health was a charitable organization because it was a religious organization with 501(c)(3) tax status. Catholic Health Initiatives Colorado, 183 P.3d at 612-13. As a result, the court of appeals believed the only question remaining to be resolved was whether the operation of Villa Pueblo is a religious activity or function. Catholic Health Initiatives Colo, 183 P.3d at 615. Relying on our opinion in Maurer, the court of appeals proceeded to assess the religious nature of Villa Pueblo by examining the nature of the activities undertaken by Catholic Health. [7] Catholic Health Initiatives Colo., 183 P.3d at 617 (citing Maurer, 779 P.2d at 1330-31). However, under the City of Pueblo's tax code, we only reach the question of whether an activity is religious if the organization seeking exemption for that activity meets the charitable organization definition. The operation of Villa Pueblo is not a charitable organization under the City of Pueblo's code, for two principal reasons. First, Villa Pueblo's ministry to the physical, mental, and spiritual needs of residents is not exclusively free and voluntary Second, the work of Villa Pueblo does not exclusively lessen the burden of government. Based on the stipulated facts, it is clear Villa Pueblo operates in order to care for residents' physical, mental and spiritual needs; nursing services, social and recreational facilities, meal delivery, and a multi-denominational chapel are provided for residents. However, these services are not exclusively provided freely and voluntarily. Rather, they are provided on a quid pro quo transactional basis. If a resident requires more intensive nursing care, that care is provided for an additional cost. Similarly, a resident requiring private living quarters or facilities with more amenities must pay a higher monthly fee. We do not interpret the phrase freely and voluntarily to be synonymous with free of cost. Reviewing the definition in the City of Pueblo's code, it bears a striking resemblance to a definition of charitable adopted by this court in United Presbyterian Association: A charity, in the legal sense, may be more fully defined as a Gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works, or otherwise lessening the burdens of government. 167 Colo. at 494-95, 448 P.2d at 971-72 (internal quotations omitted). Given the similarity in the two definitions, we believe the City of Pueblo's use of the phrase freely and voluntarily is meant to encapsulate general charitability. Considering charitability in United Presbyterian Association, we stated: While charging fees would not necessarily remove plaintiff from the category of a charitable institution ..., the fact that it allocates living space from the standpoint of desirability of location and size on the basis of ... monthly charges paid by a resident seems to us lacking in the warmth and spontaneity indicative of charitable impulse. Rather, it seems more related to the bargaining of the market place. Id. at 500, 448 P.2d at 974. The same reasoning applies here. Villa Pueblo's pricing and fee structure indicate the transactional, rather than charitable, nature of the services provided to residents. [8] See id. at 503, 448 P.2d at 976 ([W]here material reciprocity between alleged recipients and their alleged donor exists  then charity does not.). Thus, Villa Pueblo does not exclusively offer its services in a free and voluntary manner. Villa Pueblo does, however, maintain some residents who are unable to pay for the services they receive. Yet this does not change our analysis under this definition. Villa Pueblo does freely and voluntarily minister to some residents. However, the City of Pueblo's definition requires an organization to exclusively provide services in a free and voluntary manner in order to qualify for the charitable organization sales and use tax exemption. As long as Villa Pueblo provides housing or nursing services to residents on a transactional or quid pro quo basis, despite its charity to some residents, it will fail to satisfy the City of Pueblo's definition. See Id. at 501, 448 P.2d at 975 (The furnishing of homes to older adults is not in itself a charitable purpose.). Thus, while Catholic Health may operate Villa Pueblo in order to meet residents' physical, mental or spiritual needs, it does not exclusively do so freely and voluntarily. Villa Pueblo does not fall within the City of Pueblo's definition of charitable organizations entitled to a sales and use tax exemption because it does not exclusively provide its services in a free and voluntary manner. The City of Pueblo's tax exemption complies with the requirements of the Establishment Clause by serving a broad, secular purpose unrelated to the promotion of religion. Further, the imposition of sales and use taxes poses only an incidental burden on Catholic Health's religious practice and therefore does not violate the Free Exercise Clause. It is clear, under our understanding of the code, that distinctions between organizations are immaterial  they must be treated the same, whether their motivations are secular or religious. [9] Given the misunderstandings that have permeated this case, the focus has been on whether Catholic Health is engaged in religious activity, rather than on the threshold question of whether Catholic Health is a charitable organization under the code's definition. We therefore reverse the holding of the court of appeals. In the interest of fairness, we also elect to remand the case, in order to provide the parties with an opportunity to raise issues and present additional evidence as may be appropriate given this new, clarified understanding of the definition.