Does a nonprofit that gives administrative support to a medical school's teaching faculty qualify as an exempt 'educational institution' in Kansas?

Plain-English summary

A nonprofit organization that provides administrative assistance to a medical school and its clinical faculty — helping them fulfill teaching, research, and patient-care missions — asked whether it qualifies for exemption from Kansas sales tax as an "educational institution."

The 1998 definition was broadened, but has limits. The Department explained that 1998 Senate Bill 493 defined "educational institutions" (long exempt on their purchases) as colleges, universities, and other nonprofit post-secondary schools, and broadened the definition to also include four categories: (1) a group of educational institutions operating exclusively for an educational purpose; (2) nonprofit endowment associations and foundations organized exclusively to hold and administer a permanent fund for the support and sole benefit of an educational institution; (3) nonprofit entities organized principally to hold receipts from intercollegiate sporting events and disburse them for the sole benefit of a school's athletic programs; and (4) nonprofit entities organized for the primary purpose of conducting scholarly investigation and research for the support and sole benefit of an educational institution.

This organization fits none of the categories. The Department found the organization "does not meet the qualification requirement of subsections (1) through (3)" — it is not a group of educational institutions like the NCAA, nor an endowment association. It also does not qualify under the research prong: that provision exempts separately incorporated university research foundations, "not… engineering societies, nursing groups, medical, law, or honorary fraternities, associations of professors, or other college or university associations that are not primarily organized to engage in research and development." Because the organization is "an association of teaching physicians, rather than an organization 'whose primary purpose [is] encouraging, fostering and conducting scholarly investigations and … research for the support and sole benefit of an educational institution,'" it is "not exempt from paying sales tax on its purchases."

Bottom line: a faculty support organization tied to a medical school is not automatically an exempt educational institution. Unless it fits squarely within one of the four statutory prongs, its purchases remain taxable.

What this means for you

Affiliation with a university is not enough

Being closely connected to a school — even providing administrative support to its faculty — does not confer the school's exemption. The organization must fit one of the specific statutory categories.

The research prong is narrow

The exemption for research entities is aimed at separately incorporated foundations "primarily organized to engage in research and development for the benefit of a college or university." Professional associations, faculty groups, and similar bodies do not qualify just because their members teach or do research.

Know which prong you are claiming

An organization seeking this exemption should be able to point to the specific prong it satisfies — group of institutions, endowment association, athletic-receipt entity, or research foundation — and show it is "organized and operated" for that purpose for the "sole benefit" of an educational institution.

If you don't fit, the fix is legislative

Where an organization performs valuable work but fits no exemption, the remedy is a statutory change, not a departmental interpretation. The Department applies the categories as written.

Common questions

We support a medical school's faculty — are we exempt?
Not on these facts. An association of teaching physicians providing administrative assistance is not one of the four categories in the 1998 definition, so its purchases are taxable.

What are the four categories added in 1998?
A group of educational institutions; a nonprofit endowment association/foundation; a nonprofit athletic-receipts entity; and a nonprofit research foundation — each organized for the support and sole benefit of an educational institution.

Why doesn't the research prong cover a faculty group?
Because that prong covers entities "primarily organized to engage in research and development" for a school, not professional or faculty associations whose primary purpose is something else.

Could we still become exempt?
Only if the organization is restructured to fit a category, or the Legislature adds an exemption. The Department cannot extend the exemption by interpretation.

Citations and references

• 1998 Senate Bill 493 — broadened the definition of "educational institution" to include the four categories described above (a group of educational institutions; endowment associations and foundations; athletic-receipt entities; and research foundations), each for the support and sole benefit of an educational institution. The ruling quotes the definition but does not cite a codified statute number.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued October 21, 1998 by Thomas E. Hatten, Attorney, Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-177

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 21, 1998

XXXX
XXXX
XXXX

RE: Your Letter dated August 24, 1998

Dear XXXX:

I have been asked to respond to your letter of August 24, 1998. You request a private letter ruling that determines whether the (XXXX) qualifies for exemption from Kansas sales tax. You state that XXXX is a nonprofit organization that provides administrative assistance to the XXXX and its clinical faculty in fulfilling their teaching, research, and patient care missions.

1998 Senate Bill 493 defined “educational institutions,” which have been exempt on their purchases for some time, as colleges, universities, and other nonprofit post secondary schools. The bill broadened the definition to include certain trusts and foundations that are operated for the benefit of educational institutions, and purchases by groups of educational institutions. The law provides:

Such phrase [“education institution”] shall include: (1) A group of educational institutions that operates exclusively for an educational purpose; (2) non-profit endowment associations and foundations organized and operated exclusively to receive, hold, invest and administer moneys and property as a permanent fund for the support and sole benefit of an educational institution; (3) nonprofit trusts, foundations and other entities organized and operated principally to hold and own receipts from intercollegiate sporting events and to disburse such receipts, as well as grants and gifts, in the interest of collegiate and intercollegiate athletic programs for the support and sole benefit of an educational institution; and (4) nonprofit trusts, foundations and other entities organized and operated for the primary purpose of encouraging, fostering and conducting scholarly investigations and industrial and other types of research for the support and sole benefit of an educational institution.

Your organization does not meet the qualification requirement of subsections (1) through (3). It is not a group of education institutions, such as the NCAA, nor is it an endowment association. Endowment associations are chartered to own, control, or otherwise administer funds that are bequeathed, donated, or held in trust for the benefit of a college or university.

Your organization also does not qualify under subsections (4). State universities have established separately incorporated nonprofit foundations that engage in research and development for the benefit of the university. This provision exempts purchases by such organizations, which include non-profit corporations that perform medical and industrial research that were incorporated by the University of Kansas, and other such organizations. This exemption was not intended to exempt groups such as engineering societies, nursing groups, medical, law, or honorary fraternities, associations of professors, or other college or university associations that are not primarily organized to engage in research and development for the benefit of a college or university. Your organization is an association of teaching physicians, rather than an organization “whose primary purpose [is] encouraging, fostering and conducting scholarly investigations and . . . research for the support and sole benefit of an educational institution.” Accordingly, the XXXX is not exempt from paying sales tax on its purchases.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination. Please call me if you have any additional questions. My number is (785) 296-4008.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 11/04/1998 Date Modified: 10/10/2001

Table 1

Table 2