Rev. Rul. 82-31

ISSUE

Does the sale to the nonprofit parent-teachers association described below come within the scope of the federal excise tax exemptions for states and local governments?

FACTS

A taxable article was sold to a local unit of the parent-teachers association, which in turn donated the article to a state-operated school. The association, consisting of a local group of teachers and their students' parents, works to improve the school and to benefit the students. The association is controlled by the members and managed by their elected officers. It possesses financial autonomy and is the source of its operating funds. The association provides funds, materials, and various services that supplement the school's existing programs and provide additional benefits for the students.

LAW AND ANALYSIS

Section 4041(g)(2) of the Internal Revenue Code exempts from the taxes on diesel and special fuels imposed by section 4041 sales for the exclusive use of any state, political subdivision or the District of Columbia. Comparable exemptions from the manufacturers excise taxes, the tax on communications, and the highway use tax are provided by sections 4221(a)(4), 4253(i), and 4483(a).

In determining whether a sale to, or use by, an organization is for the exclusive use of a state or local government, it must be established that the organization is either (a) controlled, directly or indirectly, by an agency of a state or local government, or (b) is performing a traditional governmental function on a nonprofit basis. See Rev. Rul. 70-214, 1970-1 C.B. 230; Rev. Rul. 71-485, 1971-2 C.B. 371; Rev. Rul. 74-253, 1974-1 C.B. 316.

Ordinarily an organization will not be considered to be performing a traditional governmental function for purposes of the exemption unless it is performing an essential governmental function that state or local governments generally have performed directly and that would have to be carried on by the state or local government if the organization did not exist. The term traditional governmental function does not include activities of an organization merely because they are of the type that could appropriately be carried on by a state or local government if it chose to do so, or merely because they supplement existing government activities. The separate exemptions provided for hospitals (section 4253(h)) and schools (section 4041(g)(4), 4221(a)(5), and 4253(j)) make clear that the state and local government exemptions were not intended to apply to every organization that performs an important social or charitable function that is also sometimes performed by government. See Rev. Rul. 82-30, page 165, this Bulletin.

A parent-teachers association is not controlled directly or indirectly by a state or local government authority when its fiscal and administrative policies are formulated and controlled by its members who are independent of that authority.

Further, the parent-teachers association is not performing an essential governmental function that state and local governments generally have performed directly and that would have to be carried on by the government if the association did not exist. Although the programs of the association are of the type that could appropriately be carried on by the government, they are unlike the usual programs that are operated by the government. The association's activities are directed to supplementing existing state school programs and providing additional benefits for the students.

HOLDING

When taxable articles are sold to the parent-teachers association or when taxable communications services and facilities are furnished to the association, the excise tax exemptions provided by sections 4041(g)(2), 4221(a)(4), and 4253(i) of the Code do not apply because these transactions are not for the exclusive use of a state or local government. Further, the exemption from the highway use tax provided by section 4483(a) does not apply to the operation of vehicles by the association.

Section 6416(b)(2)(C) of the Code allows a credit or refund of the tax paid on articles sold to a state or local government for the exclusive use of a state or local government. However, this section does not establish a basis for a credit or refund on the later donation of an article by the association to the school because this would not be a sale to a state or local government.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 58-107, 1958-1 C.B. 429, holds that a substantially similar organization is not entitled to the excise tax exemption under former section 4224 of the Code because the sale of taxable articles was not direct to a state or local government. Under this revenue ruling the organization described in Rev. Rul. 58-107 also would not be entitled to the tax exemptions presently provided in sections 4041(g)(2), 4221(a)(4), 4253(i) and 4483(a).

Rev. Rul. 58-107 is superseded.