CMC COLLEGES ASSOCIATED (1978)(DR)(ST)

Topic Code: A094, N101          Document Reference:

IN RE: THE PETITION OF CMC COLLEGES ASSOCIATED FOR A DECLARATORY RULING ON RULE 730-17.11(422,423) IAC AND SECTIONS 422.45(3), (7), (8), and 423.1 and .4, CODE OF IOWA.

Department of Revenue and Finance

iowadrf

78-116-6AB-DR

DECLARATORY RULING

The Iowa Department of Revenue issues this Declaratory Ruling pursuant to a Petition for Declaratory Ruling filed on behalf of CMC Colleges Associated; Section 17A.9, Code of Iowa 1977; and Rule 730-7.23(17A) Iowa Administrative Code.

Petitioner is an Iowa nonprofit corporation organized under Chapter 504A, Code of Iowa 1977. Its address is c/o David Knutson, Executive Director, 1220 - 1st Avenue, N.E., Cedar Rapids, Iowa 52402.

Petitioner has requested a declaratory ruling that CMC Colleges Associated is not required to pay retail sales tax nor use tax upon its purchases of goods, wares, merchandize and services and that CMC Colleges Associated is not required to collect retail sales tax upon its gross receipts derived from its sales activities. For the reasons stated below, the Department rules that upon the facts presented and under the Department's present Rule 730-17.11 (422,423) IAC interpreting sections 422.42, 422.43, 422.45(3), 422.45(7), 422.45(8), 423.1 and 423.4, Code of Iowa 1977, CMC Colleges Associated is within the sales and use tax exemptions set forth in sections 422.45(7) and 422.45(8), Code of Iowa 1977.

The creation of CMC Colleges Associated as disclosed by the Petition for Declaratory Ruling may be outlined as follows: In March of 1978, Petitioner was created and incorporated under Chapter 504A, Code of Iowa 1977, by Coe College, Cedar Rapids, Iowa; Mount Mercy College, Cedar Rapids, Iowa; and Cornell College, Mount Vernon, Iowa; each of which is a private, non-profit educational institution existing under the laws of the State of Iowa. The Articles of Incorporation and By-Laws of Petitioner were drafted at the direction of and submitted to and approved and adopted by the Boards of Trustees of the three member institutions. The incorporators were the Chairmen of the Boards of Trustees and the Presidents of the three member institutions and the Articles recite that they acted as such and executed the Articles by authority of their respective Boards of Trustees analogous to the manner in which a deed is executed by authority of the governing board of a corporate grantor.

The three private non-profit educational institutions are the sole and only members of the Petitioner and further membership is limited to like educational institutions. All decisions of the members affecting the Petitioner are made by them internally and institutionally through their own procedures and not at any "membership" meeting of Petitioner. The affairs of the Petitioner are run by a governing Board consisting ex officio of the President of each member college and the Chairmen of the governing Board of each member college, except the colleges may designate alternate or other personnel of similar status from their constituency to serve as Directors of the Petitioner. All decisions except dissolution require unanimous consent and no member can be expelled. The Petitioner cannot adopt any budget or exact any financial contribution not approved by the members internally. If any member college ceases to function as an institution of higher learning beyond the high school level for more than twelve (12) months, its membership is terminated.

The Petitioner was created as an instrumentality or arm of the three current member educational institutions. The initial funding of the Petitioner was provided by The Hall Foundation, Cedar Rapids, Iowa. Two of the member institutions had made application to The Hall Foundation for a grant to acquire a computer system. At this time all three member institutions already owned or leased some computer facilities but the purpose of the application was to acquire a more sophisticated system, primarily for classroom use but also for paperwork purposes. The response of the Foundation was favorable except it stipulated that its computer grant be made to all three of the Cedar Rapids area institutions of higher learning and that they develop a "cooperative" computer center. Pursuant to this stipulation, a total grant in the sum of $340,656.00 was approved and provided in equal amounts of $113,552.00 to each of the three colleges. A committee consisting of the Presidents of the three institutions and a consultant recommended that the most efficient way in which to implement the "cooperative" requirement would be create a separate entity to own the computer system, among other reasons because: (1) common or tenancy in common ownership is in many ways an awkward form of ownership, (2) the three institutions would not use the system equally, and (3) the billing and bookkeeping under co-ownership would be cumbersome and constitute an unnecessary overhead or operating expense.

The objects and purposes of the Petitioner as set forth in its Articles "...are and shall remain exclusively educational, literary, scientific, and charitable, and its income and assets shall be exclusively denoted to such usages...". The particular objects and purposes of Petitioner as set forth in its Articles are as follows:

"(a)          To develop, maintain, operate and provide facilities and services for the advancement of higher education; "

(b)          To advance the interests and contribute to the educational effectiveness of its member institutions; "

(c)          To develop and assist the member institutions in improving the efficiency of their operation, both administratively and culturally; "

(d)          To assist the member institutions in developing additional sources of revenue."

In sum, and as stated in the Petition, "the first effort is to acquire and employ the computer system in connection with the immediate, direct enhancement of the curriculum and educational activities of the members and their paperwork but the possibility is stated that some time in the future the Petitioner may have independent program and faculty as well (confined, however, to the same educational purposes as are now represented by its members)."

According to the Petitioner, an agreement was made by the three member institutions for the purchase of a computer set-up. The computer is physically present on each of the three member campuses and will be used and operated by and for the benefit of the faculty and students on the three campuses. The Petitioner has (other than its grant) no funding or function other than carrying out the educational programs of its member institutions and effectively is a non-profit "holding company" for assets that are used by its member institutions and which would be directly owned by said member institutions except for the greater efficiency of using Petitioner for that purpose. The Petitioner further states that a schedule will be set up whereby each member institution will pay to Petitioner amounts based in part upon equal sharing of fixed costs and amounts based upon actual use of the system input.

Petitioner, in its request for declaratory ruling seeks confirmation that sales of goods, wares, merchandise, and the furnishing of services to Petitioner and/or the use thereof by Petitioner are exempt from Iowa sales and use tax, and that the gross receipts from sales derived by Petitioner's activities are exempt from imposition of Iowa sales tax, all according to sections 422.45(3), 422.45(7), 422.45(8), 423.1, 423.4, and Rule 730-17.11 (422,423) IAC.

The initial question is whether Petitioner is exempt from the payment of sales and use tax as a "private non-profit educational institution" under the provisions of sections 422.45(7) and 422.45(8), Code of Iowa 1977, and Rule 730-17.11(422,423) IAC. Sections 422.45(7) and 422.45(8) provide in pertinent part as follows:

"7. Any private nonprofit educational institution in this state...may make application to the department for the refund of any sales or use tax upon the gross receipts of all sales of goods, wares or merchandise or from services rendered, furnished, or performed to any contractor, used in the fulfillment of any written contract with...any private nonprofit educational institution in this state which property becomes an integral part of the project under contract and at the completion thereof...is devoted to educational uses as specified in this subsection [with certain exceptions]..."

"8. The gross receipts of all sales of goods, wares, or merchandise, or services, used for educational purposes to any private nonprofit educational institution in this state [are exempt]. The exemption provided by this subsection shall also apply to all such sales of goods, wares or merchandise, or services, subject to use tax under the provisions of chapter 423."

In American College Testing Program, Inc. v. Forst, 182 N.W.2d 826 (1970), the Iowa Supreme Court recognized that an activity which would be exempt from payment of sales and use tax if performed by an exempt institution (a "private nonprofit educational institution") would also be exempt when several qualifying institutions act in concert. The Department's interpretation is embodied in Rule 730-17.11(422,423) IAC, which provides, inter alia, as follows:

"A private nonprofit educational institution consists of a school, college, or university with students, faculty, and an established curriculum, a group of qualifying organizations acting in concert, or libraries." (Emphasis supplied.)

According to the Department's interpretation in Rule 17.11, "a group of qualifying organizations acting in concert" itself constitutes a "private nonprofit educational institution" and as such, is entitled to the exemptions set forth in sections 422.45(7) and 422.45(8), Code of Iowa 1977. Therefore, based upon the facts presented by Petitioner, the foregoing reasoning, applicable provisions of the sales and use tax laws and Rule 730- 17.11(422,423) IAC, it is the Department's ruling that CMC Colleges Associated is a "private nonprofit educational institution" entitled to the foregoing exemptions so long as it consists of "a group of qualifying organizations acting in concert" and so long as the goods, wares, merchandise or services purchased by Petitioner are used for educational purposes. These exemptions would include the purchase and installation of Petitioner's computer system which, according to the facts presented, will be used for educational purposes.

In its request for declaratory ruling, the Petitioner further seeks confirmation that the gross receipts derived from sales of its activities are exempt from sales tax. The Department specifically does not rule with regard to this portion of Petitioner's request for the following reasons. Section 422.45(3), Code of Iowa 1977, provides as follows:

"The gross receipts from sales of educational, religious, or charitable activities, where the entire proceeds therefrom are expended for educational, religious, or charitable purposes, except the gross receipts from games of skill, games of chance, raffles and bingo games as defined in chapter 99B [are exempt]."

The Department cannot determine which, if any, of Petitioner's sales activities will come within the purview of the foregoing section. The gross receipts of Petitioner from any sales activities would only be exempt if derived from sales of educational, religious, or charitable activities where the entire proceeds are expended for one of those same purposes, and with the exceptions set forth in the exemption provision.

This Declaratory Ruling is predicated upon the information presented and submitted in the Petition and has application only to the general fact situations presented in the Petition. If the Petitioner corporation undergoes an internal change in its corporate structure or purpose(s) in the future, it may not qualify nor be entitled to the exemptions set forth herein.

This Declaratory Ruling and the record associated with its issuance are completely open to public inspection in accordance with Sections 17A.3(1)(d), 68A.2, 68A.7, Code of Iowa 1977, and unnumbered paragraph five (5) of Rule 730-7.25(17A) IAC.

Done at Des Moines, Iowa, this 24th day of August, 1978.

IOWA DEPARTMENT OF REVENUE

By G. D. Bair Director of Revenue