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East River Legal Services v. State, Department of Revenue
Citations: 303 N.W.2d 375; 1981 S.D. LEXIS 231Docket: 13236
Court: South Dakota Supreme Court; March 18, 1981; South Dakota; State Supreme Court
In the case East River Legal Services v. State of South Dakota, the South Dakota Supreme Court affirmed a circuit court decision reversing the Department of Revenue's Declaratory Ruling 79-5, which denied East River Legal Services (ERLS) a sales tax exemption. ERLS, a nonprofit corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, provides free legal services to low-income individuals. The Department initially granted ERLS a sales tax exemption in 1978 but later revoked it in 1979, prompting ERLS to appeal. The central issue was whether ERLS qualifies as a "relief agency" under SDCL 10-45-10, which provides sales tax exemptions for organizations that meet specific criteria, including being recognized as an exempt organization under section 501(c)(3). The court found that ERLS met the criteria for being a relief agency, as the Department's arguments against this classification were insufficient. The ruling emphasized that the Department's criteria did not align with the statutory definition of a relief agency, which focuses on charitable organizations dedicated to alleviating poverty and distress. ERLS's funding sources and purpose were consistent with the statutory requirements, leading to the conclusion that ERLS is entitled to the sales tax exemption. The document outlines the distinction between the approach taken by the Department and the one adopted by the court regarding the criteria for tax exemption under South Dakota law. It emphasizes that the criteria outlined in ARSD 64:06:01:38 are merely guidelines and not exhaustive; thus, an organization does not need to meet every factor to qualify for exemption. The primary inquiry is whether the organization, ERLS, qualifies as a nonprofit charitable organization that exclusively serves the poor and underprivileged under SDCL 10-45-10. The Department argues against ERLS based on three points: (a) it does not relieve the public burden, (b) it is not significantly funded by donations, and (c) its service costs do not exceed collected fees. The Department's claims hinge on ERLS being funded by federal appropriations. However, ERLS provides free legal services with only minimal charges for litigation expenses when clients can afford them. Furthermore, upon dissolution, ERLS's assets will go to a qualifying charitable organization. The court finds the reasoning from Minnesota's Rio Vista case persuasive, asserting that federal funding does not negate the notion of support via donations. It argues that private organizations implementing federally funded programs fulfill charitable objectives and reduce government burdens. After dismissing the Department's claims regarding funding sources, the court concludes that ERLS provides its services free of charge, addressing the final point regarding service cost versus collected fees. Ultimately, the court advocates for a public policy interpretation favoring tax exemption for nonprofit organizations that facilitate access to justice, affirming the circuit court's order granting ERLS tax exemption under SDCL 10-45-10. All justices concur in this decision. Application for exempt status must be submitted to the department, which will grant it if the applicant satisfies SDCL 10-45-10 requirements. Key criteria for relief agency exemption include: 1. The agency must operate solely for public benefit and to alleviate public burdens. 2. No individual in need of services can be denied based on inability to pay. 3. No profit is allowed for agency members, except as salary. 4. Upon dissolution, assets must be allocated for charitable purposes. 5. The agency must not impose barriers, such as fees or mandatory property assignments, to access services. 6. The average service cost must exceed the fees collected. 7. Income should primarily come from donations, not from service charges. 8. Service availability must not be contingent on the ability to pay. 9. The agency must hold a 501(c)(3) exemption from the Internal Revenue Code.