October 15, 1982
Mrs. Judith Meierhenry
Secretary
South Dakota Department of Labor
Kneip Building
Pierre, South Dakota 57501
Official Opinion No. 82-53
Tax Refunds Due to Church-Related Schools
Dear Mrs. Meierhenry:
You have requested an opinion from this office in regard to the following factual situation:
FACTS:
In 1976, Congress repealed 26 U.S.C.A. 3309(b)(3). This section was part of the Federal Unemployment Tax Act (FUTA). South Dakota amended its laws to conform to the federal version, and those laws are found at SDCL 61-1-1 et seq. (1978 Rev. and 1980 Supp.) After the repeal of 26 U.S.C.A. 3309(b)(3) the Secretary of the United States Department of Labor ruled that nonprofit church-related primary and secondary schools were subject to FUTA and that no exemptions existed for them under what could be SDCL 61-1-10.4(1)(1) or (b). South Dakota went along with the interpretation of the United States Secretary of Labor and the State's amended statute, and required church-related schools to pay unemployment tax to the state. All of the church-related schools complied with this, but St. Martin Evangelical Lutheran school at Watertown, and Northwest Lutheran Academy at Mobridge appealed this decision. This case eventually reached the United States Supreme Court and in St. Martin Evangelical Lutheran v. South Dakota, 101 S. Ct. 2142 (1981) the churches won their point. The Supreme Court ruled that they were still exempt from FUTA under 26 U.S.C.A. 3309(b)(1) which is also SDCL 61‑1‑10.4(1). Therefore, since they had always been exempt under 26 U.S.C.A. 3309(b)(1) from the time of its enactment in 1970, the State of South Dakota never had a right to tax the churches under FUTA.
Based on the above facts, you have asked the following questions:
QUESTIONS:
1. Does the Supreme Court decision apply to all church-related schools that have no separate legal existence from a church?
2. Can the Department issue tax refunds to those church-related schools that have no separate legal existence from a church by deducting benefits paid to determine the amount of the refund?
The answer to Question No. 1 is YES. In St. Martin Evangelical Lutheran v. South Dakota, 101 S. Ct. 2142 (1981) at 2151 the Court stated:
We therefore hold that the repeal of § 3309(b)(3) did not alter the meaning of § 3309(b)(1). Petitioners are eligible for exemption under subsection (b)(a)(1) by virtue of the nature of their relationship to the church bodies that employ them.
The court had previously pointed out at 101 S.Ct. 2149, that:
Neither school has a separate legal existence. Thus, the employees working within these schools plainly are 'in the employ . . . of a church or convention or association of churches . . .' § 3309(b)(1)(A).
Both schools in this case were not a separate legal entity from the church and were controlled by a Board of Education elected from the local congregation. Therefore, under the rule of this case, all church-related schools that do not have any separate legal existence from a church are liable for an exemption from FUTA which would be found at SDCL 61-1-10.4(1).
The answer to Question No. 2 is YES. In the Matter of the Determination of Unemployment Insurance Coverage of Northwestern Lutheran Academy and St. Martin's Evangelical Lutheran School, 308 N.W.2d 401 (1981), the Supreme Court of South Dakota set aside its judgment of March 26, 1980 and affirmed the judgment of the circuit court of Hughes County. On March 19, 1979, the Honorable Robert A. Miller, entered his decision in the circuit court based upon the state law of South Dakota, and the South Dakota Constitution. While he noted that the state law in this area was the same as federal law, he rejected any guidance from the Federal Department of Labor in their interpretation, and entered his decision upon the plain meaning of the statutes of South Dakota.
State law must also control concerning the payment of refunds, if any, to those church-related schools that have no separate legal existence from a church. SDCL 61-5-37 is controlling on the subject of refunds. That section of the code provides that refunds may be made upon application by the employer or on the department's own initiative. If the Department of Labor determines that any contributions were erroneously collected it shall allow adjustments to be made or if such adjustment cannot be made, then the Department shall refund the amount of payment erroneously collected, less any benefits which have been paid from such amount, without interest from the fund.
Because the decision of March 19, 1979, entered by Judge Miller, stated that the Department never had any right to collect taxes from church-related schools, the Department must refund any money less any benefits paid out from such funds that were collected. The three year statute of limitations for payments of such refunds would also date from the entrance of Judge Miller's order. While the collection of such taxes may extend back beyond three years, the Supreme Court of this state has refused to allow refunds to go back beyond the three year period. See Matter of Sales Tax Refund Applications, 298 N.W.2d 799 (S.D. 1980). Therefore, the three year period provided for in SDCL 61-5-37 must be observed.
Respectfully submitted,
Mark V. Meierhenry
Attorney General
