Were sales by a charitable hospital's gift shop exempt from Utah sales tax when the shop marketed to the public and competed with private retailers?

Plain-English summary

Utah Private Letter Ruling 95-004 did not decide whether the specific hospital gift shop's sales were exempt.

The Commission explained that sales by a charitable institution could qualify when made in the conduct of its regular charitable functions and activities.

The exemption did not cover sales from an unrelated trade or business.

Competition with private retailers, standing alone, was not enough to disqualify the exemption. But activity going well beyond the organization's stated and approved purposes could lead the Commission to act.

Because the Commission could not determine the actual gift-shop facts from a distance, it referred the matter to the Auditing Division for investigation and a site visit.

Complaint and disputed activity

A competing gift-shop owner complained that a hospital gift shop did not collect sales tax.

The complaint said the hospital shop had expanded beyond serving patients and was:

• Holding open houses.
• Sending special shopping invitations.
• Soliciting the broader public.
• Competing more directly with private gift shops.

The requester argued that those activities were unrelated to the hospital's charitable health-care purpose.

General charitable-sales exemption

Utah Code section 59-12-104(8) exempted sales made to or by religious or charitable institutions in their regular religious or charitable functions and activities, subject to section 59-12-104.1.

The Commission said section 59-12-104.1 primarily addressed purchases by charitable or religious institutions and was not central to the gift-shop-sales issue.

Exemption number and unrelated business

Utah Admin. Rule R865-19S-43 required a religious or charitable organization seeking the exemption to apply for an exemption number and Commission determination.

The rule did not relieve an institution from collecting and remitting sales tax on sales arising from an unrelated trade or business as defined in 26 U.S.C. section 513.

Competition did not decide the issue

The Commission said competition with private enterprise was not enough by itself to disqualify the exemption.

The relevant question was whether the organization went well beyond its stated and approved purposes.

If it did, the Commission said it would be compelled to take appropriate action.

Specific gift-shop status remained unresolved

The Commission said each case could be different and that it could not determine the organization’s actual activity from a distance.

It asked the Auditing Division to investigate when its schedule permitted.

An internal follow-up note dated January 31, 1995 stated that the advisory answer was still not clear-cut and requested a site visit.

Holding

The file established only these general points:

• Regular charitable-function sales could qualify for exemption.
• Unrelated-trade-or-business sales remained taxable.
• Competition alone did not defeat charitable status.
• Activity beyond approved purposes could trigger Commission action.
• The specific hospital gift shop's status was not decided.
• The facts were referred for audit or site review.

What this means for you

Hospitals and charitable organizations

Do not assume every retail operation shares the organization's exempt status. Analyze how the sales relate to the approved charitable function.

Nonprofit gift shops and retailers

Public marketing and competition can be relevant facts, but the Commission said competition alone was not dispositive.

Accountants and tax professionals

Review the exemption determination, organization purpose, customer base, marketing, product mix, unrelated-business analysis, and current Utah rules.

Common questions

Q: Did the Commission rule that the hospital gift shop was exempt?

A: No.

Q: Did it rule that the shop was taxable?

A: No. The specific result remained unresolved.

Q: Did competition with private stores automatically defeat the exemption?

A: No.

Q: What could make sales taxable?

A: Sales through an unrelated trade or business or activities beyond the organization's stated and approved purposes.

Q: What did the Commission do next?

A: It referred the facts for an audit or site visit.

Key source language

• Exempt sales: “sales made to or by religious or charitable institutions in the conduct of their regular religious or charitable functions and activities”
• Unrelated business: institutions “are not relieved of responsibility to collect and remit sales tax on sales resulting from ‘unrelated trades or business’”
• Competition: “The fact that an institution or organization is in competition with private enterprise is not sufficient, in and of itself, to disqualify the exemption.”
• No factual decision: “we are unable to determine from a distance whether this organization goes well beyond its stated purposes.”

Citations and references

• Utah Code Ann. § 59-12-104(8)
• Utah Code Ann. § 59-12-104.1
• Utah Admin. Rule R865-19S-43
• 26 U.S.C. § 513

Source

• Landing page: Utah Private Letter Rulings
• Official ruling file: Utah PLR 95-004
• Outcome note: the response gave only general law and referred the specific facts for audit; no final gift-shop tax status appears in the official file.
• Date note: the page labels the response January 30, 1995 and includes an internal January 31 note seeking a site visit.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

95-004

Response January 30, 1995

Request

January 4, 1995

W. Val Oveson, Chairman

Utah State Tax Commission

160 East 300 South

Salt Lake City, Utah 84134

Dear Commission Oveson:

XXXXX wondered if you would please respond to these two letters and send him copies of your responses.

If you have any questions, XXXXX's home number is XXXXX.

Thank you.

Sincerely,

XXXXX

December 28, 1994

XXXXX

Re:Tax Exempt Status of XXXXX and Related Activities Our File XXXXX

Dear XXXXX

It has come to my attention several times over the past couple of years that the gift shop in the XXXXX continues to operate under the guise of the tax-exempt status of the hospital and does not charge or collect sales tax from its sales activities. In not charging the required sales tax, the hospital gift shop is acting in part in reliance of a 1970 Attorney General's provision issued in regard to the XXXXX. The comments regarding the hospital gift shop have clearly been directed to me and my wife, XXXXX, due to my wife's ownership of XXXXX, a gift shop located at XXXXX, Utah. Originally, I had no concern about a gift shop operated for the convenience of patients. However, it has become clear that the gift shop's activities have expanded far beyond mere convenience to patients.

Over the past couple of years, the gift shop has engaged in considerable outside solicitation in holding open houses and sending out special invitations to shoppers to visit the hospital gift shop. Such expanded activities are not merely incidental to the hospital's charitable purpose. Rather, these activities tend to compete more directly with other businesses in the area. Indeed, it would seem that a considerable number of people shop at the hospital gift shop specifically to take advantage of the savings resulting from the failure to charge sales tax. It would clearly seem that the hospital's exempt status as to gift shop sales should be revoked and that the sales tax on all such sales should be imposed and collected.

Lest our complaint in regard to the hospital gift shop be construed as "sour grapes" competition, please note that we welcome competition from large and small competitors alike. However, a state sponsored subsidy to a hospital gift shop in the form of a sales tax exemption is inappropriate and something less than smart government. Indeed, I see no reason why XXXXX should not be collecting sales tax on all sales from its gift shop. Its charitable function relates to the providing of health care services, not the conduct of a retail business in competition with other tax paying businesses. This seems to be just one more example of legitimate business carrying a disproportionate share of the tax burden of the state. Again, we are happy to compete with any legitimate business. All that we ask is that we be provided a level playing field.

Your attention to this matter is appreciated. Please direct your response to the undersigned at the above address or telephone number.

Very truly yours,

XXXXX

M E M O R A N D U M

TO: XXXXX, Director

FROM: XXXXX, Secretary

DATE: January 12, 1995

SUBJECT:Request for Advisory Opinion - No. 95-004DJ

Attached is a request for an advisory opinion from XXXXX, II. Will you please review the request of XXXXX for an advisory opinion regarding the tax exempt status of XXXXX and related activities. XXXXX would appreciate it if you would RUSH this request.

Please prepare the response for signature by the Commission as per the guidelines established by them.

Thank you.

XXXXX

January 30, 1995

XXXXX

Dear XXXXX

Your letter of XXXXX to XXXXX (copy attached) was forwarded by the XXXXX to Commissioner W. Val Oveson, Chairman, Utah State Tax Commission for review, response, and appropriate action. Our research has focused on the general application of sales and use tax exemptions to hospital gift shops.

It indicates as follows:

1. Utah Code Annotated Section 59-12-104(8) exempts "sales made to or by religious or charitable institutions in the conduct of their regular religious or charitable functions and activities, if the requirements of Section 59-12-104.1 are fulfilled."

2. U.C.A. Section 59-12-104.1 deals primarily with exemption treatment related to purchases by religious or charitable institutions rather than sales by them, and is consequently not relevant to the issues at hand.

3. Administrative Rule R865-19S-43 (copy attached) expands on administration of the exemption and requires that religious and charitable organizations, in order to avail themselves of the exemption, must apply for an exemption number and determination from the Tax Commission. The rule further indicates that such institutions are not relieved of responsibility to collect and remit sales tax on sales resulting from "unrelated trades or business" as defined in 26 U.S.C.A. Section 513 (West Supp. 1993).

4. The fact that an institution or organization is in competition with private enterprise is not sufficient, in and of itself, to disqualify the exemption.

5. If, on the other hand, such an organization goes well beyond its stated and approved purposes, the Commission would be compelled to take appropriate action.

Because each case may be difference, we are unable to determine from a distance whether this organization goes well beyond its stated purposes. Therefore, I have asked the Auditing Division to look into it. They will work it into their schedules as soon as possible.

I hope this explanation is helpful to you.

For The Commission,

Alice Shearer

Commissioner

XXXXX

January 31, 1995

XXXXX

Dear XXXXX

Enclosed is a copy of the Tax Commission response to the letter you received from XXXXX.

If I can be of further service, please advise me.

Sincerely,

W. Val Oveson

Chairman

MEMORANDUM

TO: XXXXX

FROM: Alice Shearer

DATE: January 31, 1995

RE: XXXXX

After we asked for an advisory opinion, the answer was still not clear cut. Will you please ask XXXXX to have someone make a site visit?

The USCA definition of "unrelated trades or business" and our rule are apt to be seen as totally subjective by any interested inquirer. In practice there are surely solid criteria but it does not come through in our letter.

Thank you for your help.