UNITED STATES v. DEPT. OF REVENUE OF STATE OF ILL.

Before Knoch, Circuit Judge, and LA Buy and Robson, District Judges.

The opinion of the court was delivered by: LA Buy, District Judge.

Pursuant to the mandate of the Supreme Court of the United States, the above cause is before us "for further consideration in the light of the developments which have occurred since the injunction was issued." Department of Revenue of Illinois et al. v. United States et al., 368 U.S. 30, 82 S.Ct. 146, 7 L.Ed.2d 90 (1961).

Subsequent to our holding of the unconstitutionality of Sec. 441 of the Illinois Retailers' Occupation Tax Act (Ch. 120, Smith-Hurd Ann. Stats.) and the issuance of the aforementioned injunction, the following events occurred: (1) the Supreme Court of Illinois on May 22, 1961 in an unreported opinion, People ex rel. Holland Coal Co. v. Isaacs, struck down the entire exemption section of the Retailers' Occupation Tax Act as being unconstitutional; (2) the Department of Revenue issued regulations to conform to that opinion by requiring collection of the occupation tax from retailers who sold to the State of Illinois, its agencies and instrumentalities, and the General Assembly of the State of Illinois in July, 1961 (Laws of Ill. 1961, p. 2313, S.H.A. ch. 120, § 441) exempted from the measure of the occupation tax proceeds of sales to any corporation, society, association, foundation or institution organized and operated exclusively for charitable, religious or educational purposes "unless the creation of such an exemption will automatically, and contrary to the intent of this Act, exempt from the measure of the Retailers' Occupation Tax Act the proceeds of sales to the United States Government, its agencies and instrumentalities and contractors with that Government"; and (3) the Illinois Supreme Court in its second opinion issued September 22, 1961 in the Holland Coal Co. case (reported, 22 Ill.2d 477, 176 N.E.2d 889) adhered to its finding of the unconstitutionality of the exemption accorded the State of Illinois, its agencies and instrumentalities but saved the exemption accorded to proceeds of sales to charities on the ground of the separability in Sec. 441 of the exemption granted to sales at retail to governmental units from the exemption granted to sales at retail to charities, schools and churches.

Upon return of the mandate from the Supreme Court of the United States, we permitted the United States and Olin Mathieson Chemical Corporation to file a second amended complaint wherein the fact allegations remain the same, but in which the bases of alleged discrimination have been broadened to encompass (1) the exemption of retailers who sell to charitable, religious and educational institutions with no comparable exemption to retailers who sell to the federal government, and (2) the assessment and administration by the State of Illinois of the Retailers' Occupation Tax Act (Ch. 120, Secs. 440 et seq., Smith-Hurd Ann. Stats.) and the Use Tax Act (Ch. 120, Secs. 439.1 et seq., Smith-Hurd Ann. Stats.) in such manner that the incidence of the occupation tax in law and in fact is borne by the purchaser, who in the instant case is the United States and therefore violates the doctrine of sovereign immunity.

The first issue received its stimulus from language contained in our first opinion which held that the exemption provided by Sec. 441 of the Retailers' Occupation Tax Act was unconstitutional not only because it granted exemption to the class of retailers selling to Illinois, its agencies and instrumentalities and not to those who dealt with the federal government, but also because it exempted retailers who sold to certain non-governmental units such as charities, schools and churches. 191 F. Supp. 723, 729. We do not hesitate to acknowledge that the inclusion of the category of non-governmental units was neither required nor was it necessary to our determination of the unconstitutionality of Sec. 441. We shall and do hereby delete the language of our opinion which appears in the last paragraph of the first column of page 729 to the end of the quotation at the top of the second column.

However, this issue has been raised by the second amended complaint. Certain, charitable, religious and educational institutions have been permitted to intervene. It is urged that the retailer who sells to the federal government must pay the retailers' occupation tax whereas the retailer who sells to charitable, religious and educational institutions need not pay such tax resulting in discriminatory treatment.

We iterate briefly the principles applied in our first opinion. Tax exemptions are founded on public policy and are granted for the accomplishment of public purposes which will benefit the public generally. Tax exemptions are subject to the limitation that they and the classification upon which they are based be reasonable, not arbitrary, and apply to all persons similarly situated.

The exemption accorded to non-governmental institutions operated for charitable, religious and educational purposes is not of recent origin, but is the continuance of an old and well-established public policy. Article IX, Sec. 3 of the Constitution of the State of Illinois S.H.A., provides that property used exclusively for charitable, religious and educational purposes may be exempted from taxation by general law. The Revenue Act of the State of Illinois, Secs. 500.1, 500.2, 500.7, ch. 120, expressly exempts from taxation property used for such beneficent objectives. Many states of the Union have similarly provided for such exemptions from taxation. The federal government has also exempted the income of corporations organized and operated exclusively for religious, charitable or educational purposes. 26 U.S.C.A. Sec. 501(c).

The exemption of these institutions encourages their existence and relieves the State of the heavy burden of maintaining and performing these essential services. Article VIII, Sec. 3 of the Constitution of the State of Illinois forbids the use of public funds in the "aid of any church or sectarian purposes" nor may "any grant or donation of land, money or other personal property ever be made by the state or any such public corporation, to any church, or for any sectarian purpose." Obviously, a distinct dissimilarity exists between religious institutions and governmental bodies. While charitable and educational objectives can, and are, performed through governmental units, the revenue to support them is derived from the power and authority of the government to tax its citizens for the public welfare. But no compulsory process exists to exact contributions to non-governmental organizations dedicated to the moral, spiritual and physical well-being of mankind. The financial resources to accomplish their objectives are derived from the concept of giving voluntarily — without legal obligation or compulsion. This difference forms a reasonable basis for a separate classification and the exemption, therefore, does not discriminate against governmental bodies.

We are in accord with the holding of the Supreme Court of Illinois that the classification of governmental units and these non-governmental units is indeed separate and distinct, and that there is a reasonable classification based on differences between them; that Sec. 441 of the Illinois Retailers' Occupation Tax Act which did not exempt retailers who sold to the federal government but did exempt retailers who sold to charities, schools and churches is not unconstitutional for that reason.

The second issue was not presented at the first hearing. The second amended complaint alleges that the Illinois Use Tax Act (Ch. 120, Secs. 439.1 et seq.) which imposes a tax on purchasers of tangible personal property, and particularly Sec. 439.8 thereof excusing a retailer from remitting such use tax to the State if he has paid the occupation tax, results in placing the legal tax burden upon the purchaser, and therefore, in the instant case, upon the federal government. This set-off provision was not held to be unconstitutional as a gift of public funds to the retailer, or the commutation of his tax, or cancellation of a debt due because the legislature intended only one tax to reach the coffers of the State treasury. Turner v. Wright, 11 Ill.2d 161, 142 N.E.2d 84, app.dism. 355 U.S. 65, 78 S.Ct. 140, 2 L.Ed.2d 106 (1957).

The Use Tax Act does not expressly exempt the United States. However, Rule No. 3 of the Rules promulgated under that law provides in the last paragraph as follows:

The tax which the federal government has here assumed by contract is the tax obligation due the State of Illinois from Olin Mathieson, the retailer. Plaintiffs' argument on discrimination concedes that the use tax is not exacted from the federal government and it is urged by plaintiffs that a retailer who sells to the federal government must pay the occupation tax out of his own pocket because he cannot collect the use tax from the purchasing sovereign; whereas a retailer dealing with a purchaser who is not the federal government need not pay the occupation tax when he collects the use tax from such purchaser. This contention of "discrimination" among retailers because of the immunity of the United States ...