Summary of U.S. Supreme Court Decision
On June 5, 2025, the U.S. Supreme Court unanimously decided that Catholic Charities Bureau, Inc. and its four related subsidiaries (Catholic Charities) are entitled to Wisconsin's religious employer exemption from the state's unemployment tax program. The Court held that Wisconsin's denial of exemption "facially differentiated among religions based on theological lines," in direct violation of the First Amendment.
Wisconsin Religious Unemployment Tax Exemption
Wisconsin's religious employer exemption relieves nonprofit employers "operated primarily for religious purposes and operated, supervised, controlled, or principally supported by a church or convention or association of churches" from participating in Wisconsin's unemployment tax system. Leading up to the U.S. Supreme Court's decision, the Wisconsin courts concluded that Catholic Charities was not eligible for exemption.
- First Prong: The Wisconsin courts looked to Catholic Charities' activities, which include providing employment and mental health services to individuals with disabilities across Wisconsin, regardless of faith. The courts concluded that such activities are secular and charitable in nature, not religious.
- Second Prong: The Wisconsin courts conceded that Catholic Charities, although separately incorporated, satisfied the second prong for exemption eligibility by being operated, supervised and controlled by the Catholic Church.
The U.S. Supreme Court thus focused on Wisconsin's interpretation of whether Catholic Charities was "operated primarily for religious purposes."
While unanimous, the U.S. Supreme Court's holding was based on narrow grounds. The Justices invalidated only the specific holding of the Wisconsin Supreme Court that Catholic Charities did not qualify for exemption because it did not imbue program participants with the Catholic faith, supply religious materials, or serve only fellow Catholics. Such interpretation of Wisconsin law impermissibly provided a denominational preference for overtly religious groups who do proselytize (i.e., seek to convert someone to their religion) or provide services to only those of the same faith as the organization.
Opportunities for Exemption
The U.S. Supreme Court's ruling suggests that other nonprofit organizations affiliated with a church, such as senior housing or even a hospital, that provide services to a broad range of recipients, may qualify for exemption. However, Justice Jackson points out in her concurrence that the Court's decision still allows Wisconsin and other states with a similar exemption to limit application of the religious employer exemption based on the kind of services provided, so long as the distinction is not made on theological lines. Nevertheless, the decision seems to make clear that church-affiliated organizations that provide social or charitable services without religious teachings should not be denied exemption on such basis.
In light of the Catholic Charities case, religious-affiliated nonprofits should review their eligibility for unemployment tax exemptions and whether the organization has been denied exemption based on how it provides its services. If your organization is church-affiliated and providing charitable or social services, it may qualify for exemption under the new standard articulated by the U.S. Supreme Court. If you would like to know more about unemployment tax exemptions or the effect of the Catholic Charities decision on your nonprofit organization, contact Heidi Gabriel or another member of the Reinhart Tax Team.
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