Opinion ID: 2592913
Heading Depth: 3
Heading Rank: 1

Heading: Interpretation of the Exemption

Text: 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)).