Can local 501(c)(4) civic clubs claim Utah's sales tax exemption for charitable institutions, either on their own or by using a related 501(c)(3) foundation's exemption number?

Plain-English summary

Local civic clubs chartered by an international service organization asked whether they qualify for Utah's sales tax exemption for religious and charitable institutions. The clubs held 501(c)(4) tax-exempt status (social-welfare organizations) from the IRS, while a related, separately operated foundation held 501(c)(3) status (true charities) and had its own Utah sales tax exemption number. Some local clubs had been treating themselves as covered by the foundation's exemption number, viewing themselves as operating under its "umbrella."

The Commission held the clubs do not qualify on their own, and cannot simply use the foundation's exemption number:

• 501(c)(4) status isn't enough. Utah's charitable exemption statute (§ 59-12-104(8)) is implemented by Utah Admin. Code R865-19S-43(A) ("Rule 43A"), which limits the exemption to organizations the IRS recognizes as 501(c)(3) — not 501(c)(4). The clubs, as 501(c)(4) organizations, don't meet that requirement no matter how similar their activities might be to a charity's. The Commission pointed to two of its own prior rulings reaching the same conclusion for other non-501(c)(3) entities: PLR 06-019 (declining to extend the exemption to a 170(c)(1) organization) and PLR 95-038 (denying exemption to a different 501(c)(4) organization, holding the Commission has "no discretion to ignore" Rule 43A absent compelling grounds).
• Borrowing another organization's exemption number doesn't work either — unless you qualify as its "subunit." To piggyback on the foundation's 501(c)(3) exemption, the clubs would need to complete Form TC-160 and submit both the foundation's own IRS determination letter and an IRS group exemption letter specifically naming the clubs as subunits of the foundation (per Form TC-160(1)(B)). The record here showed no such group exemption letter naming the clubs, and the international organization's own legal counsel confirmed the clubs "cannot operate under another organization's tax ID number" because they're chartered by the international organization, not the local foundation.
• Even a qualifying subunit isn't automatically exempt on everything. The Commission added that even if the clubs later obtained subunit status, only sales "in the conduct of [the foundation's] regular... charitable functions and activities" would be exempt — not every purchase or sale the clubs make.

What this means for you

501(c)(4) organizations (civic leagues, social-welfare groups)

Federal 501(c)(4) status does not translate into Utah sales tax exemption, regardless of how charitable your activities feel. Only 501(c)(3) status (or qualifying as a documented subunit of a 501(c)(3)) satisfies Rule 43A.

Local chapters, clubs, or affiliates of a larger nonprofit network

Don't assume you can use a parent or sister organization's Utah sales tax exemption number just because you feel affiliated. You need actual documentary proof — specifically, an IRS group exemption letter that names your organization by name as a subunit — filed with Form TC-160.

Accountants and tax professionals

This ruling reinforces that Rule 43A's 501(c)(3)-only line is strictly enforced with essentially no discretion for the Commission to deviate absent "compelling grounds," and that the subunit pathway (Form TC-160(1)(B)) has real documentary teeth — informal affiliation or shared branding isn't sufficient.

Common questions

Q: Our 501(c)(4) organization does a lot of charitable work — doesn't that count?
A: Not under Utah's rule. Rule 43A ties the exemption strictly to IRS 501(c)(3) recognition, not to whether the organization's actual activities look charitable.

Q: Can our local chapter use our national organization's Utah exemption number?
A: Only if you can document, via Form TC-160, that you're a subunit specifically named on an IRS group exemption letter tied to a 501(c)(3) central organization — informal affiliation or shared branding isn't enough.

Q: If we do qualify as a subunit, is everything we sell exempt?
A: No — only sales made in the conduct of the central charitable organization's regular charitable functions and activities are exempt.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-103 (imposition of sales and use tax)
• Utah Code Ann. § 59-12-104(8) (religious/charitable institution exemption)
• Utah Code Ann. § 59-12-104.1 (procedural requirements)
• Utah Admin. Code R865-19S-43(A) (Rule 43A — 501(c)(3)-only requirement)
• Utah Admin. Code R865-19S-43(C) (Rule 43C — Form TC-160)
• 26 U.S.C. § 501(c)(3); 26 U.S.C. § 501(c)(4)

Prior Commission rulings cited:

• PLR 06-019 (170(c)(1) organization not exempt)
• PLR 95-038 (501(c)(4) organization not exempt)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/08-011.pdf

Original ruling text

FINAL PRIVATE LETTER RULING

                                  REQUEST LETTER

DEAR TP REP

I discussed the question of tax exemption with you last DATE. I included the attached
communication I had with INTERNATIONAL CLUB legal department. I wondered if the
subject could receive a written reply as to the instruction from the Utah Tax Commission. Could
you forward this as a private letter asking for a ruling? I would like to have clarity in writing on
the subject.

Thanks for your help.
NAME

                                  RESPONSE LETTER


                                          November 18, 2008

NAME
ADDRESS

RE: Private Letter Ruling Request—Sales and Use Tax Exemption Treatment for 501(c)(4)
Institutions

Dear NAME:

   You have requested a ruling as to whether two local CLUBS and districts are eligible for

exemption from Utah sales tax under Utah’s exemption for religious and charitable institutions.
The CLUBS, which are for districts ##### and #####, are chartered by INTERNATIONAL
CLUB and operate with 501(c)(4) exemptions determined by the Internal Revenue Service
(“IRS”). The FOUNDATION operates with a 501(c)(3) exemption determined by the IRS and
has a Utah sales tax exemption number. The FOUNDATION and the CLUBS operate separately.
Other local CLUBS view themselves as operating under the umbrella of the FOUNDATION;
they use the FOUNDATION’S exemption number to treat themselves as exempt.

Applicable Law

Page 2

    Utah Code Ann. § 59-12-103 imposes sales and use tax on sales of tangible personal

property and other specifically enumerated services. Utah Code Ann. § 59-12-104(8) provides
an exemption for “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 . . .” Utah Code Ann. § 59-12-104.1 restates the same qualifications as § 59-12-
104(8) and then provides some procedural requirements to facilitate the administration of the
exemption.

     Utah Admin. Code R865-19S-43(A) (“Rule 43A”) limits religious or charitable

institutions to 501(c)(3) organizations, stating:

   A. In order to qualify for an exemption from sales tax as a religious or charitable
   institution, an organization must be recognized by the Internal Revenue Service as
   exempt from tax under Section 501(c)(3) of the Internal Revenue Code.

In addition, Utah Admin. Code R865-19S-43(C) (“Rule 43C”) requires that the institutions
submit Form TC-160 to qualify for the exemption. Rule 43C states:

   C. Every institution claiming exemption from sales tax under this rule must
   submit form TC-160, Application for Sales Tax Exemption Number for Religious
   or Charitable Institutions, along with any other information that form requires, to
   the Tax Commission for its determination. . . .

Form TC-160(1) specifies that institutions provide certain documentation, stating:

   1. Per administrative rule R865-19S-43, applicant must document exemption
   status as follows: A. Attach a copy of the IRS determination letter exempting your
   organization from federal income tax under IRC Section 501(c)(3) [or] B. If your
   organization is claiming exemption as a subunit of a central organization, attach a
   copy of the central organization’s religious or charitable 501(c)(3) determination
   letter and IRS group exemption letter specifically naming your organization as a
   subunit . . .

Under Form TC-160(1)(B), an organization that is a subunit “must” provide both the central
institution’s determination letter and the group exemption letter specifically naming the
organization as a subunit.

   I.R.C. § 501(c)(3) organizations are:

   (3) Corporations, and any community chest, fund, or foundation, organized and
   operated exclusively for religious, charitable, scientific, testing for public safety,
   literary, or educational purposes, or to foster national or international amateur
   sports competition (but only if no part of its activities involve the provision of
   athletic facilities or equipment), or for the prevention of cruelty to children or
   animals, no part of the net earnings of which inures to the benefit of any private
   shareholder or individual, no substantial part of the activities of which is carrying

Page 3

   on propaganda, or otherwise attempting, to influence legislation (except as
   otherwise provided in subsection (h)), and which does not participate in, or
   intervene in (including the publishing or distributing of statements), any political
   campaign on behalf of (or in opposition to) any candidate for public office.

I.R.C. § 501(c)(4) organizations are:

   (4)(A) Civic leagues or organizations not organized for profit but operated
   exclusively for the promotion of social welfare, or local associations of
   employees, the membership of which is limited to the employees of a designated
   person or persons in a particular municipality, and the net earnings of which are
   devoted exclusively to charitable, educational, or recreational purposes.
   (B) Subparagraph (A) shall not apply to an entity unless no part of the net
   earnings of such entity inures to the benefit of any private shareholder or
   individual.

Analysis

    Section 59-12-104(8) exempts sales made to or by religious and charitable organizations

in the conduct of their regular religious and charitable functions and activities. But, Rule 43A
specifies that in order for the organization to qualify for the sales tax exemption, the IRS must
recognize the organization as a 501(c)(3) organization. Likewise, Form TC-160(1)(A) requires
such institutions to provide the Utah State Tax Commission the IRS determination letters finding
those institutions to be 501(c)(3) organizations. In the current situation, the CLUBS are not
501(c)(3) organizations and thus by themselves are not charitable institutions. They simply
cannot meet the requirements of Rule 43A and Form TC-160, and they cannot qualify for a sales
tax exemption.

    Previously in Private Letter Ruling (“PLR”) 06-019, the Commission declined to expand

the definition of charitable institutions to include organizations operating under I.R.C. 170(c)(1).
The Commission upheld Rule 43A, limiting charitable institutions to 501(c)(3) organizations.
The Commission explained that a 170(c)(1) organization was “not a 501(c)(3) charitable
organization, nor does it have a charitable function or purpose. Therefore, it does not qualify for
exemption under Utah Code Ann. § 59-12-104.1. The fact that the IRS allows a deduction for
donations to [a 170(c)(1) organization] under Section 170(c) does not alter this determination.”
Similarly in the present situation, although the CLUBS are 501(c)(4) organizations and have
some of the characteristics of 501(c)(3) organizations, they are still not 501(c)(3) organizations,
which are required under Rule 43A.

   Furthermore, the Commission previously found that 501(c)(4) organizations, specifically,

do not qualify as charitable institutions under § 59-12-104(8). In PLR 95-038, the Commission
refused to grant an exemption to a 501(c)(4), stating:

   Only organizations which are recognized as religious or charitable organizations
   under section 501(c)(3) of the IRS code qualify for this exemption. The XXXXX
   is recognized as a 501(c)(4) organization.

Page 4

and

   Under Utah Administrative Rule R865-19S-43, only organizations recognized by
   the Internal Revenue Service as exempt from tax under section 501(c)(3) of the
   Internal Revenue Code qualify for this exemption. A 501(c)(4) organization, such
   as yours, does not qualify. Absent compelling grounds for doing so, the
   Commission has no discretion to ignore that administrative rule.

In PLR 95-038, the misrepresentations of other agencies were not compelling grounds to ignore
Rule 43A. In the current situation, the CLUBS are also 501(c)(4) organizations and, therefore,
cannot qualify under Rule 43. Additionally, this current situation presents no compelling
grounds to allow the Commission to ignore Rule 43A. Therefore, the CLUBS cannot qualify as
charitable institutions under § 59-12-104(8).

    Even if the CLUBS by themselves are not charitable institutions, they may still be

subunits of a central charitable institution. Form TC-160(1)(B) provides the requirements: “a
subunit of a central organization [must] attach a copy of the central organization’s religious or
charitable 501(c)(3) determination letter and IRS group exemption letter specifically naming
[the] organization as a subunit.” In the current situation, to qualify for sales tax exemptions as
subunits, your CLUBS must meet the requirements of Form TC-160(1)(B); they must provide
copies of the FOUNDATION’s determination letter and IRS group exemption letter specifically
naming the CLUBS as subunits. If your CLUBS can provide this information, they can complete
TC-160 and qualify for the sales tax exemption. Currently, there is no indication that the IRS has
issued a group exemption letter specifically naming the districts and their clubs as subunits of the
Foundation.

    Please note, even if the CLUBS meet the requirements of Form TC-160(1)(B) and are

found to be charitable institutions, not all purchases and sales by the CLUBS are exempt.
Rather, the sales and purchases must be “in the conduct of [the FOUNDATION’S] regular . . .
charitable functions and activities” to be exempt. See § 59-12-104(8).

    Basically, we agree with SECOND NAME, counsel for INTERNATIONAL CLUB, who

said, “[u]nfortunately, CLUBS cannot operate under another organization's tax ID number. The
CLUBS are chartered by INTERNATIONAL CLUBS, not a particular district's foundation.
Unless the money is going directly to the state FOUNDATION, the CLUBS are not operating
under the ‘umbrella’ of the FOUNDATION.”

Page 5

Conclusion

     Based on the above analysis, the CLUBS and districts by themselves are not eligible for

exemption from Utah sales and use tax under Utah’s exemption for religious and charitable
institutions. Also, the CLUBS and districts cannot just use the sales tax exemption number of
the FOUNDATION. A reasonable interpretation of 2 ND NAME letter indicates that the CLUBS
are not specifically named as qualifying subunits on a group IRS exemption letter as required by
Form TC-160(1)(B). Our conclusions are based on the facts as described. Should the facts be
different, a different conclusion may be warranted. If you feel we have misunderstood the facts
as you have presented them, if you have additional facts that may be relevant, or if you have any
other questions, please contact us.

                                         For the Commission,



                                         Marc B. Johnson
                                         Commissioner

MBJ/aln
08-011