Does a nonprofit association of teaching physicians qualify for Kansas's educational-institution sales-tax exemption?

Plain-English summary

A set of programs supporting an educational organization was being spun off as a separate nonprofit "institute" — organized to operate as a school under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii) and soon to be headquartered in Kansas. It asked whether it qualifies for Kansas's educational-institution sales-tax exemption. The Department's answer is no.

The definition. 1998 Senate Bill 493 defined "educational institution" — long exempt on its purchases — as colleges, universities, and other nonprofit post-secondary schools, and broadened it to include four specific categories:

1. a group of educational institutions operating exclusively for an educational purpose (e.g., the NCAA);
2. nonprofit endowment associations and foundations organized to hold and administer a permanent fund for the sole benefit of an educational institution;
3. nonprofit trusts/foundations organized to hold and disburse intercollegiate sporting-event receipts and gifts for the benefit of an educational institution; and
4. nonprofit trusts/foundations organized primarily to conduct scholarly investigations and research for the sole benefit of an educational institution.

Why it fails. The Department found the institute is not a group of educational institutions and not an endowment association (subsections 1–3), and it does not qualify under subsection 4 either. That research category was meant for entities like the separately incorporated university research foundations (for example, the medical and industrial research corporations formed by the University of Kansas) — not for "engineering societies, nursing groups, medical, law, or honorary fraternities, associations of professors, or other college or university associations" that aren't primarily organized to do research for a college or university. This organization is an association of teaching physicians, not an entity whose primary purpose is research for the sole benefit of an educational institution.

Bottom line: operating as a nonprofit school under the federal tax code doesn't make an organization an "educational institution" for Kansas sales-tax purposes. Because the association of teaching physicians fits none of the statutory categories, its purchases are taxable.

What this means for you

Professional associations, societies, and institutes

A nonprofit that educates or serves professionals is not automatically an exempt "educational institution" in Kansas. The exemption targets schools and a few narrowly defined trust/foundation categories tied to a specific college or university — professional associations and societies generally do not qualify.

Research and foundation entities

The research-foundation category (subsection 4) is narrow: the entity must be organized primarily to conduct research for the sole benefit of a college or university — like a university's own incorporated research foundation. Broadly educational or professional missions won't fit.

Federal status isn't the test

Being a 501(c)(3) or a "school" under IRC 509(a)(1)/170(b)(1)(A)(ii) does not decide the Kansas question. Kansas applies its own statutory definition of "educational institution," construed narrowly.

Common questions

Q: We're a nonprofit school under the IRS rules — are we exempt in Kansas?
A: Not necessarily. Kansas uses its own definition of "educational institution." The Department found this association of teaching physicians did not fit any category, so its purchases are taxable.

Q: What entities does the exemption actually cover?
A: Colleges, universities, and other nonprofit post-secondary schools, plus four specific categories — groups of educational institutions, endowment associations/foundations, intercollegiate-athletic receipts trusts, and research foundations operated for the sole benefit of an educational institution.

Q: Why didn't the research category apply?
A: That category is for entities organized primarily to do research for the sole benefit of a college or university (like a university research foundation), not for an association of teaching physicians.

Citations and references

• 1998 Senate Bill 493 — defined "educational institution" for Kansas sales-tax purposes (colleges, universities, and nonprofit post-secondary schools) and added four categories of qualifying trusts/foundations/groups tied to an educational institution.
• IRC §§ 509(a)(1) and 170(b)(1)(A)(ii) — the federal provisions under which the institute was organized as a school; not determinative of the Kansas exemption.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-037

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

April 24, 2002

XXXXXXXXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX

Dear XXXXXXXXXXXXXX:

I have been asked to respond to your letter of April 10, 2002. You request a private letter ruling that determines whether XXXXXXXXXXXX qualifies for exemption from Kansas sales tax.

In your letter you stated:

The XXXXXXXXXXXXXXXXXXX programs that supported the objectives of an educational organization, is being spun off as a separate not for profit organization which will operate as a school under IRC Sections 509(a)(1) and 170(b)(1)(A)(ii). The new organization is called the XXXXXXXXXXXXXXXXX and will soon be headquartered in Kansas. Would you please review the attached information regarding the Institute's objectives and determine whether it may receive sales tax exemption in Kansas? The Institute received status as a not for profit corporation in Kansas on XXXXXXXXXXXX, I look forward to hearing from you.

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.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 04/25/2002 Date Modified: 04/25/2002

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