Before Knoch, Circuit Judge, and LA Buy and Robson, District
Judges.
The opinion of the court was delivered by: LA Buy, District Judge.
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.
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).
"Since the State cannot place the legal burden
of a tax directly on the Federal Government or a
foreign government, such governments are not
required to remit the use tax directly to this
State, nor can such governments be compelled to
reimburse retailers for the use tax. However,
this does not relieve retailers of their
liability for retailers' occupation tax on
receipts from retail sales to the Federal
Government or to foreign governments (see
paragraph 1 of Rule No. 40 of the retailers'
occupation tax Rules and Regulations)."
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 ...