United States: Illinois Appellate Court Holds Recycler Of Electronic Equipment Not Entitled To Sales Tax Or Property Tax Charitable Exemptions

The Illinois Appellate Court has held that a nonprofit recycler of electronic equipment did not qualify for charitable exemptions from Illinois sales tax or property tax.1 The taxpayer's activities were not considered to be charitable because it failed to show that it made "gifts" to an indefinite number of individuals through its recycling activities, that it gave liberally or that it lessened a burden of government. Also, the taxpayer did not prove that it was a charitable organization that put its property to primarily charitable use based on activities of providing low-cost or free technology.

Background

The taxpayer, a Missouri non-profit corporation that recycled and refurbished electronic equipment, maintained locations in Illinois and Missouri. The taxpayer was exempt from federal income tax, did not have capital stock or shareholders, and no one received a profit from its operations. The taxpayer's articles of incorporation stated its purpose was "to provide low-cost/free technology and services to college students who cannot afford it." Also, its mission statement was "to keep reusable materials out of the landfill and improve technology awareness and availability to the underserved through recycling/refurbishing and educational opportunities using recycled and refurbished technologies."

The taxpayer was funded by three sources: (i) monetary donations and grants; (ii) sales of refurbished electronics; and (iii) sales of its scrap to end processors who paid the taxpayer on a per pound basis. The majority of the taxpayer's funding was provided from the sale of scrap materials generated as a result of the recycling process. The taxpayer received compensation for some electronic items that it took to other vendors for recycling, but it was required to pay a hazardous material fee for recycling items that contained toxic chemicals, part of which was passed through as a fee to individuals and nonprofit organizations.

The taxpayer offered several programs at its Illinois location, including a free computer program that provided participants a computer in exchange for volunteering service hours.2 For the 2009 tax year, the taxpayer provided 50 people with free computers, including 20 people who donated service hours to the taxpayer. The remaining 30 people received their computers through a "Christmas Giveaway" program.

In 2009, the Illinois Department of Revenue denied the taxpayer's requests for charitable exemptions from sales tax and property tax. An administrative law judge (ALJ) recommended that the taxpayer's requests for charitable exemptions be denied because the taxpayer failed to establish that it was a charitable organization that used its property primarily for charitable purposes. Following the taxpayer's requests for administrative review of the ALJ's decisions,3 circuit courts denied the taxpayer's complaint to review the sales tax exemption decision, and upheld the denial of the taxpayer's property tax exemption. After the taxpayer appealed the circuit courts' decisions to the Illinois Appellate Court, the cases were consolidated.

Charitable Tax Exemptions

Illinois law provides a sales tax exemption for corporations that are "organized and operated exclusively for charitable . . . purposes[.]"4 There is a property tax exemption for property that is owned by a charity and that is "actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit[.]"5 Also, Illinois offers a property tax exemption where a "charitable organization . . . uses the property exclusively for the distribution, sale, or resale of donated goods and related activities and uses all the income from those activities to support the charitable . . . activities of the owner, whether or not such activities occur on the property."6 The charitable exemption from property tax is authorized by the Illinois Constitution,7 but the charitable exemption from sales tax is strictly a creation of statutory law.

In Provena Covenant Medical Center v. Department of Revenue, the Illinois Supreme Court reiterated its definition of "charity" as "a gift to be applied . . . for the benefit of an indefinite number of persons, persuading them to an educational or religious conviction, for their general welfare-or in some way reducing the burdens of government."8 The Court reviewed a property tax exemption and construed whether the taxpayer qualified for an exemption based upon the Court's construction of the constitutional requirement that an exemption be "exclusively charitable."9 As explained by the Court, a charitable institution possesses the following characteristics:

  • Has no capital, capital stock or shareholders;
  • Earns no profits or dividends, but derives its funds mainly from public and private charity and holds them in trust for the objects and purposes expressed in its charter;
  • Dispenses charity to all who need and apply for it;
  • Does not provide gain or profit in a private sense to any person connected with it;
  • Does not appear to place obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses; and
  • The primary use of its property is for charitable purposes.10

Activities Not Charitable

In affirming the denial of the charitable exemptions from sales tax and property tax, the Illinois Appellate Court first considered whether the taxpayer's activities were charitable. The taxpayer argued that it engaged in two separate charitable activities: (i) providing lowcost and free technology; and (ii) recycling. The Appellate Court held that the ALJ's decision that the taxpayer's recycling operations did not qualify as a charitable activity was not clearly erroneous.

The Appellate Court extensively relied on decisions previously issued by it and the Illinois Supreme Court in Provena.11 In Provena, the Appellate Court explained that "[t]o be charitable, an institution must give liberally." Similar to the medical care activities at issue in Provena, the taxpayer's recycling activities were not per se charitable activities. The Appellate Court agreed with the ALJ that the taxpayer did not make a "gift" because it was compensated for its activities both in the form of fees that it charged in connection with the items that it received and from the sale of items following the recycling process. There was no evidence that the taxpayer "gave liberally" through its reduced fees and fee-waiving policy. The general benefits to the public by improving the environment did not constitute a gift to support a charitable exemption.

The taxpayer unsuccessfully argued that its recycling activities lessened the burdens on government by addressing the "recycling and reuse of obsolete residential electronic products." The Appellate Court rejected this argument because the government has not undertaken the burden of recycling. The taxpayer did not identify any governmental burden that was reduced by its recycling activities.

Not Charitable Organization Using Property for Charitable Purpose

The Appellate Court held that the ALJ did not commit error by determining that the taxpayer failed to prove that it was a charitable organization that primarily used its property for a charitable purpose. The ALJ and the Appellate Court both used the Illinois Supreme Court's six-factor test referenced above for deciding whether a taxpayer is entitled to receive charitable exemptions. The Department of Revenue conceded that the taxpayer satisfied two of the factors because it demonstrated that it: (i) had no capital, capital stock or shareholders; and (ii) provided no gain or profit in a private sense to any person connected with it. However, the taxpayer failed to show that it derived its funds mainly from public and private charity because the majority of its funding was from the sale of scrap materials. Although the taxpayer characterized the items it recycled as donations, it charged fees for many of the items that it received.

The taxpayer also failed to meet the remaining three factors specified by the Illinois Supreme Court to receive a charitable exemption, as it failed to: (i) dispense charity to all who need and apply for it; (ii) place no obstacles in the way of those seeking charity; and (iii) use its property exclusively for charitable purposes. The taxpayer primarily used its property for recycling activities and the charity that it provided by giving away electronic items for free or at a reduced price was minimal. The 50 computers that the taxpayer gave away in 2009 were insignificant compared to the taxpayer's total revenue. Also, the 20 computers that were given to people who provided services did not constitute charity. Furthermore, the taxpayer failed to show that any of the computers were given to people as a result of waiving the service requirement.12

Commentary

The Illinois Supreme Court's decision in Provena is important in determining whether charitable tax exemptions apply in Illinois. However, in 2012, after the Provena decision, Illinois enacted legislation that significantly changed the charitable exemptions for hospitals.13 Although this recent Court of Appeals' decision is unpublished and cannot be cited as precedent, it employs an analysis that potentially could apply to every type of entity other than a hospital. In combination with the underlying decision from the ALJ, this decision provides valuable insight on how applications for charitable tax exemptions will be rigorously evaluated by the Department of Revenue. Thus, taxpayers other than hospitals that are contemplating a charitable exemption should consider this opinion.

This case highlights the restrictive nature of the "charitable" exemption post-Provena. The Provena case sets a high bar for an organization that attempts to establish that it is "exclusively charitable" for the property tax and sales tax exemptions. As noted above, the requirement that an organization must be "exclusively charitable" is established by Article IX, Section 6 of the Illinois Constitution and the Illinois Supreme Court has made clear that the Illinois General Assembly has no authority to expand the definition of what is considered to be "exclusively charitable."

On the other hand, the sales tax charitable exemption is strictly a creature of statute. Although traditionally, both the property tax and sales tax "exclusively charitable" standard have been the same, it is clear that the Illinois General Assembly has the authority to set a different standard for the sales tax exemption. It will be interesting to observe whether in light of cases such as this, there will be pressure to modify the statutory standard in the case of the charitable sales tax exemption.

Footnotes

1. Web Innovations & Technology Services, Inc. v. Department of Revenue, Illinois Appellate Court, 4th Dist., Nos. 4-12-0749, 4-12-0907, Aug. 28, 2013. This is an unpublished opinion that may not be cited as precedent except for certain limited circumstances.

2. Note that the taxpayer would waive the volunteer service requirement if the participants were unable to perform the service, but the taxpayer did not publicize this policy.

3. he property tax complaint was filed in Vermilion County and the sales tax complaint was filed in Sangamon County. These complaints were reviewed by separate circuit courts due to venue reasons. For property tax appeals, the complaint must be filed in the circuit court of the county in which the property is located. 35 ILL. COMP. STAT. 200/23-15. For sales tax appeals, the complaint must be filed in the circuit court where the taxpayer has its principal place of business. If the taxpayer does not have its principal place of business in Illinois, the complaint must be filed in Sangamon County. 35 ILL. COMP. STAT. 120/12.

4. 35 ILL. COMP. STAT. 120/2-5(11).

5. 35 ILL. COMP. STAT. 200/15-65.

6. 35 ILL. COMP. STAT. 200/15-65(b).

7. See ILL. CONST. art. IX, § 6.

8. 925 N.E.2d 1131 (Ill. 2010), quoting Methodist Old Peoples Home v. Korzen, 233 N.E.2d 537 (Ill. 1968).

9. See ILL. CONST. art. IX, § 6. Note that courts use the same standard for determining a charitable exemption, whether it is for property tax (constitutional exemption) or sales tax (statutory exemption).

10. Methodist Old Peoples Home v. Korzen, 233 N.E.2d 537 (Ill. 1968).

11. 925 N.E.2d 1131 (Ill. 2010), aff'g 894 N.E.2d 452 (Ill. App. Ct. 2008).

12. The Appellate Court also held that the ALJ did not commit error by requiring the taxpayer to present evidence concerning charity provided by its separate location in Missouri. The determination of whether the taxpayer was a charitable organization required a consideration of the activities at both of its locations.

13. P.A. 97-0688 (S.B. 2194), Laws 2012.

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