BUTRAP, INC. AND DAVIS COUNTY COMMUNITY SCHOOL DISTRICT (1977)(DR)(ST)
Topic Code: G091, N096, R081, S431, V046 Document Reference:
IN RE: The Petition of BUTRAP, INC. AND DAVIS COUNTY COMMUNITY SCHOOL DISTRICT FOR A DECLARATORY RULING ON SALES TAX EXEMPTIONS STATUS PURSUANT TO SECTION 422.45(5) OF THE IOWA CODE.Department of Revenue and Financeiowadrf77-240-6A-DRDECLARATORY RULING
The Iowa Department of Revenue issues this Declaratory Ruling pursuant to a Petition for Declaratory Ruling filed on behalf of BUTRAP, Inc. and the Davis County Community School District; Section 17A.9, The Code 1977; and Rule 730-7.23, Iowa Administrative Code. Petitioner, Davis County Community School District, is a legally organized school district under the laws of the State of Iowa. Its address is 102 South High Street, Bloomfield, Iowa. Petitioner, BUTRAP, Inc., is an Iowa nonprofit corporation organized under Chapter 504A, The Code 1975. The address of its registered agent, Mr. Larry Miller, is 102 South High Street, Bloomfield, Iowa. The Petitioners have requested a declaratory ruling that BUTRAP, Inc. is not required to pay retail sales tax upon services and supplies furnished to and purchased by it as a part of a building trades program organized in conjunction with the building trades classes of Davis County Community High School. For reasons stated below, the Department concurs that upon the facts presented and under the Department's past and present posture with regard to administrative rules interpreting Section 422.45, The Code 1977, BUTRAP, Inc. is within the retail sales tax exemption set forth in subsection 422.45(5). The Department reserves its right, however, to alter this ruling in the future through enactment of administrative rules under the provisions of the Iowa Administrative Procedure Act. Any such rules will be prospective in nature. The creation of BUTRAP, Inc. as disclosed by the Petition for Declaratory Ruling and representatives of Petitioners at a November 30, 1977 meeting with Department representatives may be outlined as follows: Approximately three years ago two high school manual arts teachers employed by the Davis County Community School District proposed to the Davis County Community School Board that a building trades program be created. The Board approved the proposal and delegated the responsibility of organizing the program to Superintendent of Schools Edward L. Hutchcroft. Mr. Hutchcroft contacted the Iowa Department of Public Instruction for information regarding organization and funding. In a letter dated March 6, 1976, the Department of Public Instruction outlined a recommended method of organization which had been used by at least one other Iowa school system. The method by which the Davis County Community School System might "cooperate with a non-profit corporation to manage the house project" was outlined as follows:1. The corporation purchases a lot.
2. The school district instructors for the program design or select a house plan to fit the neighborhood and the lot purchased.
3. The corporation approves the plan designed.
4. The school obtains estimates on construction costs, finalizes plans and specifications.
5. The corporation uses the above items to obtain the necessary finances.
6. The school, through the instructors, orders all materials as needed and coordinates the subcontracted work necessary.
7. All bills are sent to the office of the vocational director who manages the bookwork.
8. Monthly reports are prepared by the vocational director who summarizes the cost and the bills to be paid which in turn are presented to the corporation to write the checks for payment.
9. The corporation assists the school in a selection of carpets, colors, kitchen cabinets, etc.
10. Profits from the sale are put into a vocational training awards fund.
The need for a nonprofit corporation separated in some respects from the school district is occasioned by Chapter 278, The Code 1975, which requires that voters approve expenditures for the purchase of realty. (Petitioners assert that this election provision is impracticable in the annual purchase and sale of realty involved in a building trades program.) Superintendent Hutchcroft therefore approached a number of local businessmen with the request that they serve without pay as incorporators of a nonprofit corporation. A number volunteered, and BUTRAP, Inc., an acronym for "Building Trades Program," was organized for the stated purpose of "providing vocational training to students in the construction trades." Articles of Incorporation were filed on behalf of the incorporators by the Davis County Community School District on September 29, 1976. BUTRAP, Inc. acts solely as purchaser and seller of property which is refurbished by the Davis County Community High School building trades program students. Effectively, it is a non-profit, realty holding company used in Davis County Community School District programs. BUTRAP, Inc. and the Davis County Community School District have adhered to the guidelines set forth in the Department of Public Instruction letter. The general course of operations may be elaborated upon as follows: The high school building trades program is annually submitted to the Davis County Community School Board for approval. Upon approval, the program is submitted to the Iowa Department of Public Instruction for curriculum and funding approval. For the past two years the Department of Public Instruction has reimbursed the Davis County Community School District for the salaries of two teachers employed by it who act as instructors for one-half of each school day. Upon approval by the Department of Public Instruction, BUTRAP, Inc. purchases two homes. For each of the two years the building trades program has been in existence, BUTRAP, Inc. has purchased older, deteriorated houses with funds borrowed from a local bank. The first year's loan was interest-free. The second loan was at the substantially discounted rate of six (6) percent. The loans are also used to pay for remodelling materials. Each instructor is assigned a house to refurbish and remodel. The students then design specifications for the individual remodelling plans, and these are submitted to the BUTRAP, Inc. Board of Directors for approval. Board members were selected for their expertise in various areas relating to the projects, notably, secondary education, plumbing and heating, electrical installation, carpentry, real estate, banking, and law. Upon approval by BUTRAP, Inc. remodelling work begins. It should be noted that the instructors for these courses are employees of the Davis County Community School District which has sole authority to hire or fire them. Likewise the students are subject to Davis County Community School District discipline when at BUTRAP, Inc.'s house sites, receive credit from the Davis County Community School District, and are insured against accident by liability insurance owned by the Davis County Community School District. All textbooks, tools and equipment are the property of the Davis County Community School District. BUTRAP, Inc. is also financially tied to the Davis County Community School District. Suppliers of materials used in refurbishing the houses send bills to Mr. Larry Miller, one of the high school instructors and registered agent for BUTRAP, Inc., at the high school. Mr. Miller and the other instructor review the bills for accuracy and have power to veto payment. The principal of the Davis County Community High School keeps the books for BUTRAP, Inc. and each month prepares a sheet itemizing the approved expenses for that period. The BUTRAP, Inc. Board is presented with the list and routinely approves them in what Mr. Peter Burchette, Treasurer of BUTRAP, Inc., characterized as a "rubber stamp" process. Mr. Burchette emphasized that as treasurer he has little everyday contact with the finances of the corporation and serves primarily as signer of checks. It may also be noted that while BUTRAP, Inc. has ultimately paid all the material costs of the projects, the Davis County Community School District has occasionally paid small bills and been reimbursed by BUTRAP, Inc. Thus, daily bookkeeping chores are performed by school personnel. The Davis County Community School District has power to demand an audit of the BUTRAP, Inc.'s books through the presence of a member of the school board on the BUTRAP, Inc.'s board. Such an audit is highly unlikely because of the control exercised by the school district through the instructors and principal. Should the Davis County Community School District ever become dissatisfied, however, the school board can discontinue the relationship at will. Likewise, should BUTRAP, Inc. ever file for bankruptcy, liquidate or dissolve, any assets remaining after settlement of debts would, under its articles of incorporation, be transferred to an institution or corporation qualifying under Internal Revenue Code ยง 501 (c). Since BUTRAP, Inc. was created with the intent of dealing solely with the Davis County Community School District, it is a near certainty that the assets would pass to that institution. Subsection 422.45(5) reads in part:"Exemptions. There are hereby specifically exempted from the provisions of this division from the computation of the amount of tax imposed by it, the following:
5. The gross receipts or from services rendered, furnished, or performed and of all sales of goods, wares or merchandise used for public purposes to any tax-certifying or tax-levying body of the state of Iowa or governmental subdivisions thereof, including the state board of regents, state department of social services, state department of transportation and all divisions, boards, commissions, agencies or instrumentalities of state, federal, county or municipal government which derive disbursable funds from appropriations or allotments of funds raised by the levying and collection of taxes,... ."
BUTRAP, Inc. appears to fall within this statutory exemption as an instrumentality of government; however, it does not derive disbursable funds from appropriation or allotments of funds raised by the levying and collection of taxes. It must be noted that there is some question regarding the interpretation of subsection 422.45 (5). For many years the Department of Revenue administered this statute without considering whether an instrumentality received disbursable funds from the levying and collection of taxes. Only recently has the Department placed any emphasis on this requirement. Its current position has never been formalized by rulemaking, and the Department has held enforcement in abeyance pending review of the statute by the next session of the General Assembly. If the Legislature fails to act or indicates an intent different from the Department's present interpretation, the Department will commence rulemaking proceedings. The effect of lawful promulgation of a rule interpreting subsection 422.45(5) as requiring that the instrumentalities themselves derive disbursable funds would be to void this Declaratory Ruling since BUTRAP, Inc. does not receive any such funds. Despite this interpretational uncertainty regarding the last quoted clause of subsection 422.45(5), it is clear that BUTRAP, Inc. is an instrumentality of the Davis County Community School District. As was noted in In re Special Service Transportation Corporation, Docket No. 77-4- 6A-DR (Declaratory Ruling issued February 4, 1977), "government instrumentality" has not been clearly defined by the Iowa courts. The Department of Revenue therefore adopted the tests outlined by the North Carolina Supreme Court in Unemployment Compensation Commission of North Carolina v. Wachovia Bank & Trust Co., 215 N.C. 491, 496, 2 S.E.2d 592, 595 (1939). The court there stated:"Perhaps it is impossible to formulate a satisfactory definition of the term 'instrumentalities of government' which would be applicable in all cases. At least it is unwise to undertake to do so. Each case must be determined as it arises. Generally speaking, however, it may be said that any commission, bureau, corporation or other organization, public in nature, created and wholly owned by the government for the convenient prosecution of its governmental functions, existing at the will of its creator, is an instrumentality of government; and that any state created corporation or association, privately owned, and organized and doing business primarily for profit, which is granted certain incidental duties or privileges by the Federal Government is not.
"In the borderline cases in which it does not clearly appear that the agency is or is not an instrumentality of government important factors, among others, which must be considered in determining that such agency is an instrument of government are:
(1) It was created by the government; (2) it is wholly owned by the government; (3) it is not operated for profit; (4) it is primarily engaged in the performance of some essential governmental function; (5) the proposed tax will impose an economic burden upon the government, or it serves to materially impair the usefulness or efficiency of the agency or to materially restrict it in the performance of its duties.
While perhaps, no one of these factors is sufficient, and the presence of all is not required, to constitute any given agency an instrumentality of government, the presence or absence of either requires serious consideration. If the tax in fact is to be paid out of government money, thus placing an economic burden on the government, or if it constitutes an undue interference with the agency in the performance of its governmental functions, the agency may usually be classed as a governmental instrumentality."
Under the facts presented in the instant case, it is clear that while BUTRAP, Inc. was not in a strict sense "created" by the Davis County Community School District, its incorporators organized themselves at the request of the Davis County Community School District and that they would not have done so if it had not been for the request of the school board. It is likewise apparent that should the Davis County Community School District decide to abandon its building trades program, BUTRAP, Inc. would be left without a function to perform. Admittedly, BUTRAP, Inc. is not "owned" by the Davis County Community School District, but neither is it "owned" in the normal sense by the incorporators. It may be pointed out that upon dissolution or liquidation of the corporation any surplus assets almost certainly inure to the benefit of the Davis County Community School District. BUTRAP, Inc. is not operated for a profit, and by making possible a vocational education program, it most certainly is engaged in the performance of the essential governmental function of education. Clearly the imposition of a sales tax upon the materials used by the students in their vocational training would impair the efficiency of the agency and materially restrict it in the performance of its duties. In short, the evidence is convincing that BUTRAP, Inc. would not and could not exist without the motivation and cooperation provided by the Davis County Community School District. Based upon the facts presented by the Petitioner, the aforementioned reasoning and the applicable provision of the sales tax law, it is the Department's ruling that the BUTRAP, Inc.'s status or capacity is that of a governmental instrumentality and that it is therefore exempt from sales tax pursuant to subsection 422.45(5). This 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's corporation undergoes an internal change in its corporate structure or purpose in the future, it may not qualify or be entitled to this exemption. 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, The Code 1977, and unnumbered paragraph five of rule 730-7.23, Iowa Administrative Code. Done at Des Moines, Iowa, this 22nd day of December, 1977. IOWA DEPARTMENT OF REVENUEG. D. Bair Director of Revenue