Monday, June 2, 2008

Arizona Court of Appeals Upholds Property Tax Exemption for Botanical Garden in Face of UBIT Challenge

In Tuscon Botanical Gardens, Inc. v. Pima County, the Arizaon Court of Appeal ruled that an organization dedicated to horticultural and botanical education was entitled to property tax exemption even though it operates a gift shop, book store, and meeting area rented out for weddings and other social events.  Here are the relevant facts as found by the court:

TBG is dedicated to horticultural and ecological education. It operates 16 different gardens representing a variety of gardening traditions and botanical themes on its 5.74 acre (249,840 square feet) site in central Tucson. Six buildings totaling 8,533 square feet are located on the site. A meeting hall known as "Porter Hall," a "sun porch," (collectively, unless otherwise specified, the "meeting areas") and a gift shop are located in Building 2. According to Defendant/Appellant Pima County ("County"), the gift shop and meeting areas encompass 2,101 square feet out of Building 2’s 3,887 square feet.

TBG designed the gift shop to enhance its educational mission and the books and other materials sold are primarily educational. In addition to educational items, however, TBG also sells non-educational items such as stationary, napkins, baskets, salsa seasonings, dishes, wall ornaments, hats, and t-shirts. TBG makes a profit from the gift shop in that its receipts from sales exceed the cost of goods sold. But it does not make a profit from the shop if staffing and utility costs, the value of unpaid rent for the space it occupies, and other operating expenses are considered. square feet out of Building 2’s 3,887 square feet. 

Porter Hall is one of TBG’s main meeting rooms; it is used primarily by TBG for its staff and committee meetings. TBG does, however, exhibit art for sale in the meeting areas and it earns a commission on the occasional art sales. This commission income does not cover the true cost of TBG’s operation of the meeting areas. TBG also rents the meeting areas to third parties from time to time for various activities such as weddings, private parties, and meetings. TBG does not realize a profit from these rental activities.

The Court found that despite these activities, the organization operated exclusively for charitable purposes and thus deserved tax exemption.  Perhaps the organization, also exempt under IRC 501(c)(3) will owe federal tax on unrelated business (or maybe not, depending on how often the activities occur).  But apparently, there is no unrelated business income tax under Arizona law. 


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