State Unemployment Tax Exemption Must Neutrally Apply to Religious Organizations
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APPLIES TO Qualified Religious Employers |
EFFECTIVE June 5, 2025 |
QUESTIONS? Contact HR On-Call |
Quick Look
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Discussion
In Catholic Charities Bureau Inc. v. Wisconsin Labor and Industry Review Commission, the U.S. Supreme Court said that a state’s exemption from unemployment taxes must be neutrally applied to religious organizations.
There, the Wisconsin unemployment insurance tax exempted organizations “operated primarily for religious purposes” that are controlled by a church. The Catholic Charities Bureau (CCB), a nonprofit organization affiliated with the Roman Catholic Diocese of Superior, Wisconsin, was denied an exemption from the state tax because its activities were not “primarily for religious purposes,” namely it did not proselytize and its services were not limited to Catholics. The Wisconsin Supreme Court upheld exclusion of the organization from the state tax exemption. Even though it recognized that the organization’s charitable works were religiously motivated, it failed to account for the fact that the organization’s faith barred it from satisfying the proselytization and limited service criteria uniquely imposed by the state.
The U.S. Supreme Court said that the state unemployment law violated the First Amendment of the U.S. Constitution as applied. Specifically, government laws cannot favor some religions over others. Wisconsin’s denial of the tax exemption imposed a “denominational preference by differentiating between religions based on theological lines.” Religious choices around proselytization and whether to serve only co-religionists are “fundamentally theological choices driven by religious doctrine.” Ultimately, the Court said that a law that differentiates between religions along theological lines is textbook denominational discrimination. Further, the reason for denying the exemption under Wisconsin law was not narrowly tailored to further a compelling government interest.
In its decision, the Supreme Court also noted that the Wisconsin tax exemption parallels the Federal Unemployment Tax Act. Although the federal version of the law was not at issue here, this ruling could be expanded upon by future courts to apply to other government tax exemption laws.
Action Items
- Review tax exemptions with legal counsel for appropriate application.
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