Does a support endowment corporation formed solely to support an exempt community-based mental retardation center share that center's sales-tax exemption?

Plain-English summary

A community-based mental retardation center ("Corporation A") is exempt from Kansas sales tax under K.S.A. 79-3606(jj), as a center organized under the community-based mental retardation statutes and licensed by the state. A separate endowment corporation ("Corporation B") was formed for the sole purpose of supporting Corporation A. Corporation A controls Corporation B through a shared board of directors, and the two entities' financials are consolidated in the annual audit. The center asked whether Corporation B — the support endowment — is also exempt from sales tax. The Department said yes.

Why the endowment shares the exemption. K.S.A. 79-3606(jj) exempts "all sales of tangible personal property or services, including the renting and leasing of tangible personal property, purchased directly on behalf of a community-based mental retardation facility." Because Corporation B's only purpose is to support Corporation A, Corporation A controls Corporation B through the board, and Corporation B's purchases are made on behalf of the community-based mental retardation facility, the Department concluded the endowment "will enjoy the same exemption for which" the center qualifies.

Bottom line: a support endowment whose sole purpose is to support an exempt community-based mental retardation center — and whose purchases are made on the center's behalf — shares the center's sales-tax exemption under 79-3606(jj).

What this means for you

Nonprofit centers and their support/foundation entities

If a separate foundation or endowment exists solely to support an exempt community-based mental retardation facility, is controlled by that facility, and makes purchases on the facility's behalf, its purchases can fall within the same 79-3606(jj) exemption. The exemption follows the statutory "purchased directly on behalf of" language, not the number of corporate shells.

The facts that mattered

The Department leaned on specific features: the endowment's sole purpose of supporting the center, the center's control through a shared board, consolidated financials, and purchases made on behalf of the facility. A support entity that lacked those ties might not reach the same result.

Confirm the underlying exemption

This ruling assumes Corporation A is exempt under 79-3606(jj). The support entity's exemption is derivative — it depends on the center genuinely qualifying as an exempt community-based mental retardation facility and on the purchases being for the facility's benefit.

Common questions

Q: Can a support foundation share a mental retardation center's sales-tax exemption?
A: Yes, on these facts. Because the endowment existed solely to support the exempt center, was controlled by it, and bought on its behalf, the Department extended the same 79-3606(jj) exemption to the endowment.

Q: What does K.S.A. 79-3606(jj) exempt?
A: Sales of tangible personal property or services (including rentals/leases) purchased directly on behalf of a community-based mental retardation facility.

Q: Does any affiliated nonprofit automatically get the exemption?
A: No. The result turned on the endowment's sole supporting purpose, the center's control, and purchases made on the facility's behalf — not on affiliation alone.

Citations and references

• K.S.A. 79-3606(jj) — exempts all sales of tangible personal property or services (including renting and leasing) purchased directly on behalf of a community-based mental retardation facility; the basis for extending the center's exemption to its support endowment.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-071

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

July 11, 2001

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Re: Kansas Sales Tax

Dear XXXXX:

Your correspondence of April 11, 2001 has been referred to me for response. Thank you for your inquiry.

In your letter you provide the following information:

XXXXXX XXXX, Inc. (Corporation “A”) is exempt from sales tax under [K.S.A.] 79-3606(jj) as a community-based mental retardation Center organized pursuant to K.S.A. 19-4001 et. seq., and licensed in accordance with the provisions of K.S.A. 75-3307b and amendments thereto. The XXXXXX XXXX XXXXXX Corporation (Corporation “B”) was formed as an endowment with the sole purpose of supporting (“A”). A majority of the board members of “B” are from “A”. For accounting purposes, our Certified Public Accounting firm has determined the two corporations to be affiliated due to the fact that “A” controls “B” through the board of directors and therefore requires that the annual audit consolidate the financial records of the two corporations.

The statute 79-3606(jj) reads as follows: “All sales of tangible personal property or services, including the renting and leasing of tangible personal property, purchased directly on behalf of a community-based mental retardation facility . . .” This is the sole purpose of Corporation “B”.

In summary, “A” is exempt from sales tax; the sole purpose of “B” is to support “A”; and “A” has controlling interest in “B” through the board of directors; financial information must be consolidated’ purchases are made on behalf of a community-based mental retardation facility.

By your letter you ask whether the XXXXXX XXXX XXXXXX Corporation (Corporation “B”) is exempt from sales tax. Based on the fact you present, we believe the answer is yes. The XXXXXX XXXX XXXXXX Corporation (Corporation “B”) will enjoy the same exemption for which XXXXXX XXXX, Inc. (Corporation “A”) qualifies.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

Date Composed: 07/12/2001 Date Modified: 10/11/2001

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