Health Enterprises of Iowa v. Iowa Department of Revenue

IN THE COURT OF APPEALS OF IOWA

No. 24-0103
Filed February 19, 2025

HEALTH ENTERPRISES OF IOWA,
Plaintiff-Appellant,

vs.

IOWA DEPARTMENT OF REVENUE,
Defendant-Appellee.
________________________________________________________________

Appeal from the Iowa District Court for Polk County, Scott D. Rosenberg,

Judge.

A nonprofit corporation seeks judicial review of the Iowa Department of

Revenue’s denial of tax refund claims. AFFIRMED.

Cody J. Edwards and Ronald L. Mountsier of Dickinson, Bradshaw, Fowler

& Hagen, P.C., Des Moines, for appellant.

Brenna Bird, Attorney General, Patrick C. Valencia, Deputy Solicitor

General, Ian Jongewaard, Assistant Solicitor General, and Stephen P. Sullivan,

Assistant Attorney General, for appellee.

Heard by Ahlers, P.J., and Badding and Buller, JJ.
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BADDING, Judge.

Following years of contested case proceedings, the Director of the Iowa

Department of Revenue denied two refund claims for sales tax, use tax, and

vehicle registration fees paid by Health Enterprises of Iowa, a chapter 504

nonprofit corporation providing group purchasing access and other shared

services to Iowa hospitals. Health Enterprises’ members are “nonprofit hospitals

licensed pursuant to chapter 135B,” making them individually eligible for tax

exemptions under Iowa Code section 423.3(27) (2013). But the director’s final

order on appeal concluded that Health Enterprises—a separate, unlicensed

entity—was not eligible for the exemptions. The district court agreed with the

director’s conclusion on judicial review. Health Enterprises appeals, claiming that

its members’ tax exemptions should “flow through” to Health Enterprises.

I. Background Facts and Proceedings

This appeal arises from a long-pending dispute over a pair of tax refund

claims filed by Health Enterprises of Iowa, a chapter 504 nonprofit corporation. It

comes to this court with an extensive procedural history and a more than 18,000-

page administrative record. However, as the Director of the Iowa Department of

Revenue observed in his final order, the dispositive facts are few and undisputed.

During the relevant period, each of Health Enterprises’ members were

nonprofit hospitals licensed under Iowa Code chapter 135B. In April 2016 and

July 2017, Health Enterprises submitted refund claims to the department for sales

tax, use taxes, and vehicle registration fees that it paid over the course of three

years. As the basis for this refund, Health Enterprises claimed an exemption under

Iowa Code section 423.3(27), which excludes from taxable sales the price of
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certain goods and services furnished “to a nonprofit hospital licensed pursuant to

chapter 135B to be used in the operation of the hospital.”1 Health Enterprises

argued that it was entitled to the exemption because it is a nonprofit entity

comprised of licensed nonprofit hospitals, and because “a group of exempt

institutions acting in concert should be afforded the exemption available to the

exempt institutions which make up the entity.”

The department denied Health Enterprises’ claims. In August 2017, Health

Enterprises filed a protest. Several years of proceedings ensued. Following a two-

day hearing, an administrative law judge issued a proposed decision that found

Health Enterprises’ purchases were not exempt under section 423.3(27) because

it was not a nonprofit hospital licensed under chapter 135B. Health Enterprises

appealed the decision to the director, who entered a final order affirming the

department’s refund denials. Finding the language of section 423.3(27)

unambiguous, the director concluded “[t]here is simply nothing in the provision at

issue that would indicate that an entity that is not, itself, a nonprofit hospital

licensed under chapter 135B is eligible for the exemption in section 423.3(27).”

The district court affirmed the director’s final order on judicial review. Health

Enterprises now appeals, challenging the department’s legal conclusion that Iowa

1 Health Enterprises invoked matching exemptions for use taxes and vehicle
registration fees. See Iowa Code § 423.6(6) (exempting from use tax goods and
services “exempt from the sales tax under section 423.3,” subject to exceptions
not relevant here); id. § 321.105A(2)(c)(1) (exempting from the new registration
fee “[e]ntities listed in section [423.3(27)], to the extent that those entities are
exempt from the tax imposed on the sale of tangible personal property, consisting
of goods, wares, or merchandise, sold at retail in the state to consumers or users”).
There is no dispute that Health Enterprises’ eligibility under section 423.3(27) is a
requirement for all three of the exemptions it claims.
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Code section 423.3(27) unambiguously requires a taxpayer to be a “nonprofit

hospital licensed pursuant to chapter 135B” to qualify for an exemption. It also

asks this court to find, as matters of fact, that Health Enterprises is a group of

nonprofit licensed hospitals “acting in concert,” that it is consequently a “nonprofit

hospital licensed pursuant to chapter 135B,” and that the purchases at issue in its

refund claims were “used in the operation of the hospital.”

II. Standard of Review

Judicial review of agency decisions is governed by Iowa Code

section 17A.19 (2024). Lowe’s Home Ctrs., LLC v. Iowa Dep’t of Revenue, 921

N.W.2d 38, 45 (Iowa 2018). Relief from a final agency action is available to a party

whose substantial rights have been prejudiced due to one or more enumerated

categories of administrative error. Iowa Code § 17A.19(10). The district court acts

in an appellate capacity to review the agency action according to the standards set

forth in section 17A.19(10). Lowe’s Home Ctrs., LLC, 921 N.W.2d at 45. We apply

the same standards “to determine if we reach the same result as the district court.”

Id.

The parties agree that our review should proceed under

section 17A.19(10)(c), which requires us to determine whether the agency’s

decision was “[b]ased upon an erroneous interpretation of a provision of law.” In

applying that standard, we owe no deference to the department’s interpretation

and are free to substitute our own judgment if we conclude the department made

a legal error. See The Sherwin-Williams Co. v. Iowa Dep’t of Revenue, 789

N.W.2d 417, 423–24 (Iowa 2010) (noting that despite the court’s previous

“indications of interpretive discretion” to the department of revenue, “it is difficult to
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find a clear legislative delegation of interpretive authority” for a word that “has

already been interpreted, i.e., explained, by the legislature through its enactment

of a statutory definition”).

III. Analysis

Iowa Code section 423.3(27) (2013) imposes two conditions for exemption

from sales tax: (1) the tax-exempt goods or services must be sold “to a nonprofit

hospital licensed pursuant to chapter 135B,” and (2) the tax-exempt goods or

services must be “used in the operation of the hospital.” Health Enterprises asks

this court to find that the first requirement is satisfied when licensed nonprofit

hospitals act “in concert” to purchase goods and services through an otherwise

non-qualifying entity. The parties refer to this idea as a “flow-through” or

“concerted-action” theory of exemption. Whether section 423.3(27) embraces

such a rule is a pure question of statutory interpretation.

A. Interpretive Principles

“When engaging in statutory interpretation, we first examine the language

of the statute and determine whether it is ambiguous.” Kay-Decker v. Iowa State

Bd. of Tax Rev., 857 N.W.2d 216, 223 (Iowa 2014). Ambiguity exists where

reasonable minds could differ about the meaning of the statutory text. Sherwin-

Williams, 789 N.W.2d at 424 (citing Norman J. Singer & J.D. Shambie Singer,

Statutes and Statutory Construction § 46:4, at 179 (7th ed. 2007)). Such a dispute

can “arise from specific language used in a statute,” or it can stem from “the context

of the entire statute or related statutes.” Id. at 425 (citation omitted). If a statute

is ambiguous, the court must apply the familiar principles of statutory construction

to determine the legislature’s intent. Kay-Decker, 857 N.W.2d at 223. But if there
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is no ambiguity, “we look no further than the statute’s express language.” Id.

(quoting Rolfe State Bank v. Gunderson, 794 N.W.2d 561, 564 (Iowa 2011)).

“Special additional principles apply in tax cases.” Iowa Auto Dealers Ass’n

v. Iowa Dep’t of Revenue, 301 N.W.2d 760, 762 (Iowa 1981). Statutes imposing

taxes are generally construed in favor of the taxpayer and against the taxing body.

Lowe’s Home Ctrs., 921 N.W.2d at 46. Yet “taxation is the rule, exemption is the

exception.” Iowa Network Servs., Inc. v. Iowa Dep’t of Revenue, 784 N.W.2d 772,

776 (Iowa 2010); see also Van Buren Cnty. Hosp. & Clinics v. Bd. of Rev. of Van

Buren Cnty., 650 N.W.2d 580, 586 (Iowa 2002) (noting tax exemptions are

“generally disfavored as contrary to the democratic notions of equality and

fairness, and exist solely due to legislative grace”). Thus, contrary to the general

rule, statutory tax exemptions are “construed strictly against the taxpayer and

liberally in favor of the taxing body.” Lowe’s Home Ctrs., 921 N.W.2d at 46 (citation

omitted). Any doubt must be resolved in favor of taxation, and the taxpayer

seeking the exemption bears the burden to prove entitlement. Sherwin-Williams,

789 N.W.2d at 424.

B. Health Enterprises’ Position

The cornerstone of Health Enterprises’ flow-through theory of exemption is

the Iowa Supreme Court’s decision in American Coll. Testing Program, Inc. v. Forst

(ACT), 182 N.W.2d 826 (Iowa 1970). In that case, ACT—a chapter 504 nonprofit

organization whose members were delegates of educational organizations in

thirty-three states—sought an exemption from sales and use tax under a statutory

exemption for “private nonprofit educational institution[s].” ACT, 182 N.W.2d

at 826 (quoting Iowa Code § 422.45(8) (1966)). The sole question before the court
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was whether ACT was an “educational institution” under the exemption statute in

effect at the time. Id. at 827.

Observing that tax exemptions must be strictly construed, the court found

that ACT’s primary purpose of developing and administering college placement

exams was beyond the plain meaning and prior interpretations of the phrase

“educational institution.” Id. at 827–28 (conceding that “ACT’s activities are related

to the educational process,” but explaining “the fact that it performs a valuable

service for students and schools does not qualify it as an educational institution”).

In reaching this conclusion, the court distinguished educational institutions from

educational activities, emphasizing that “the legislature knew how to exempt all

persons engaged in educational activities from the payment of sales tax on goods

or services purchased for use in such activity, if it wished to do so.” Id. at 828

(citing Cmty. Drama Ass’n of Des Moines v. Iowa State Tax Comm’n, 109

N.W.2d 23 (Iowa 1961)).

After determining that ACT was not an educational institution within the plain

language of the statute, the court closed its opinion by noting:

Plaintiff also cites cases which support the proposition that an activity
which would be exempt if performed by an exempt institution is also
exempt when several qualifying institutions act in concert, such as a
hospital laundry[,] or an organization for joint purchasing by hospitals
to take advantage of volume discounts.

We do not quarrel with the results reached in the cited cases but do
not find them analogous to the case at bar.

Id. (internal citations omitted).

Relying on the above passage, Health Enterprises contends that in the ACT

decision, the Iowa Supreme Court introduced a flow-through or concerted-action
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theory of exemption applicable to all Iowa sales tax exemptions. Yet it cites no

Iowa appellate decision relying on ACT or otherwise finding a non-exempt entity

may claim a tax exemption based on the eligibility of its members. Instead, it points

to a 1992 Iowa Attorney General opinion relying on ACT to find a chapter 28E

entity would enjoy the same property tax exemption as its constituent

municipalities, see Op. Iowa Att’y Gen. No. 92-11-4 (Nov. 12, 1992), 1992

WL 470385, at *3, and a district court’s summary judgment ruling in a different

proceeding that discussed ACT in determining whether Health Enterprises

qualified as a charitable organization under Iowa’s property tax exemption statute.

To shore up its Iowa authority, Health Enterprises cites several out-of-state

cases finding multi-hospital ventures eligible for state tax exemptions based on the

exempt status of their members. See Dep’t. of Revenue v. Cent. Med. Lab’y, 555

S.W.2d 632, 633–34 (Ken. 1977) (finding a medical laboratory organized by

nonprofit hospitals was exempt from sales and use taxes under a statute

incorporating Kentucky’s constitutional exemption for “institutions of purely public

charity”); Cmty. Hosp. Linen Servs., Inc. v. Comm’r of Tax’n, 245 N.W.2d 190,

194–95 (Minn. 1976) (finding property of hospital laundry wholly owned by public

hospitals was constitutionally exempt from taxation, reasoning a subsidiary

“devoted exclusively to serving the purposes of the parent corporations” may be

“disregarded as a separate tax entity”); Hosp. Purchasing Serv. of Mich. v. City of

Hastings, 161 N.W.2d 759, 761 (Mich. Ct. App. 1968) (finding the real and personal

property of a hospital group purchasing organization exempt under Michigan’s

statutory exemption for “charitable . . . institutions”). It also cites several federal
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court decisions and IRS private letter rulings reaching similar conclusions under

applicable federal tax laws.

Finally, Health Enterprises argues that the department itself has embraced

the flow-through exemption theory through prior rulemaking. In the wake of the

1970 decision in ACT, the department amended its rules implementing the

exemption in former section 422.45(8) to recognize that a “private nonprofit

educational institution” includes “a group of qualifying organizations acting in

concert.” Iowa Admin. Code r. 701-17.11 (1977). That rule remained on the books

for more than four decades,2 even after the legislature amended section 422.45 to

include a distinct statutory definition of “educational institution”—now codified at

section 423.3(17)—that did not include “a group of qualifying organizations acting

in concert.” See 2001 Iowa Acts, ch. 150, § 3.3

Although the department has never promulgated a similar rule defining

“nonprofit hospitals” under section 423.3(27), Health Enterprises contends the

department’s longstanding rule for educational institutions all but acknowledged

that a flow-through exemption “is implicit in the law” of taxation in Iowa. According

2 The department rescinded former rule 17.11 in July 2024 during the pendency of

this dispute. See 47 Iowa Admin. Bull. 455 (July 24, 2024).
3 The statute now provides:

The sales price of all tangible personal property, specified
digital products, or services, used for educational purposes sold to
any private nonprofit educational institution in this state. For the
purpose of this subsection, “educational institution” means an
institution which primarily functions as a school, college, or university
with students, faculty, and an established curriculum. The faculty of
an educational institution must be associated with the institution and
the curriculum must include basic courses which are offered every
year. “Educational institution” includes an institution primarily
functioning as a library.
Iowa Code § 423.3(17) (2024).
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to Health Enterprises, the department’s prior interpretation of “educational

institution” suggests there is ambiguity in section 423.3(27) because the

exemptions are “located within the same statute and . . . have [the] same basic

requirements.” Finally, Health Enterprises emphasizes deposition testimony by a

department designee, who acknowledged that two hospitals sharing the cost of

jointly purchased equipment could “claim the exemption on their half of the

purchase price.”

C. Iowa Code § 423.3(27) is Not Ambiguous

The problem with Health Enterprises’ position is that its flow-through

exemption theory is nowhere to be found in the language of section 423.3(27), nor

is it even between the statute’s lines. And that is the beginning and end of our

inquiry. See Vaudt v. Wells Fargo Bank, N.A., 4 N.W.3d 45, 50 (Iowa 2024)

(“When the text of a statute is plain and its meaning clear, the court should not

search for a meaning beyond the express terms of the statute.” (cleaned up)).

Health Enterprises’ theory is, at best, a policy proposal to expand Iowa’s sales tax

exemption to organizations that “the legislature knew how to exempt . . . if it wished

to do so.” ACT, 182 N.W.2d at 828. If this court is to pay “anything more than lip

service” to the rule that tax exemptions must be narrowly construed, id. at 827,

then the director’s final order must be affirmed.

We repeat what each of the reviewing courts before us already found: the

language of section 423.3(27) is facially unambiguous. To qualify for the

exemption, a purchaser of goods or services must be “a nonprofit hospital licensed

pursuant to chapter 135B.” Iowa Code § 423.3(27). Through its reference to

chapter 135B, the legislature expressly conditioned exemption on a purchaser’s
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licensure status under a separate statutory scheme—indicating its intent to tether

eligibility to a class of entities, not a range of activities. See Sherwin-Williams, 789

N.W.2d at 425 (noting courts may not override the legislature’s decision to “act as

its own lexicographer” (citation omitted)); ACT, 182 N.W.2d at 828 (“There is a

distinction between being engaged in educational activities for educational

purposes and educational institutions.”). It is not hard to think of broader

language—such as “nonprofit healthcare organization”—that might have left room

for debate about whether non-hospitals could qualify. This court’s role, however,

is to interpret “the language chosen by the legislature,” not a hypothetical

alternative. Vaudt, 4 N.W.3d at 50 (citation omitted).

For lack of textual support, Health Enterprises tries to locate an exemption

in “the patina of prior judicial interpretation.” Doe v. State, 943 N.W.2d 608, 612

(Iowa 2020). But its argument is built on a single statement in a decision construing

the broader language of a different exemption. ACT, 182 N.W.2d at 828. By

declining to “quarrel with the results” of out-of-state cases finding tax exemptions

for multi-hospital ventures, the supreme court simply distinguished those

authorities on their facts. Id. (“We . . . do not find [these decisions] analogous to

the case at bar.”). It did not announce a new rule of construction or discuss

whether a flow-through theory of exemption might apply under Iowa law.

Even if ACT stood for the rule that Health Enterprises attempts to distill, its

application would remain doubtful here. Importantly, the ACT court was asked to

decide whether a college-placement testing organization qualified as an

“educational institution.” Id. at 826. And each of the cases it cited concerned

whether hospital laundries or group purchasing organizations were “charitable”
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entities under applicable state exemptions. See Hosp. Purchasing Serv., 161

N.W.2d at 760; Children’s Hosp. Med. Ctr. v. Bd. of Assessors of Bos., 227

N.E.2d 908, 914 (Mass. 1967); Hosp. Bureau of Standards & Supplies, Inc. v.

United States, 158 F. Supp. 560, 561 (Ct. Cl. 1958). These terms are markedly

more open-ended than the phrase “nonprofit hospital licensed pursuant to

chapter 135B,” which our legislature defined by reference to a separate statutory

scheme. This court may not expand unambiguous language under the guise of

construction. De Stefano v. Apts. Downtown, Inc., 879 N.W.2d 155, 168

(Iowa 2016).

As for its argument that the department has embraced a flow-through

exemption, Health Enterprises fails to explain how the department’s former

definition of “educational institution” or the purported concessions of an agency

deponent control this court’s statutory interpretation on review for legal error. The

bar is high for parties seeking to invoke the principles of estoppel against a

government body, see ABC Disposal Sys., Inc. v. Dep’t of Nat. Res., 681

N.W.2d 596, 607 (Iowa 2004), and Health Enterprises makes no such argument in

its briefing. And although Iowa Code section 17A.19(10)(h) provides relief from

agency actions that depart without reason from “the agency’s prior practice or

precedents,” Health Enterprises stops short of asserting that the department’s

interpretation of section 423.3(27) lacks a rational basis or conflicts with its

previous applications of the same exemption.

At bottom, Health Enterprises’ argument is not rooted in statutory

interpretation—it is rooted in policy. It contends the law should not “penalize,

through taxation, a group of nonprofit hospitals . . . joined together for a common
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purpose, such as reducing costs and providing greater access to care.” See, e.g.,

Hosp. Purchasing Serv., 161 N.W.2d at 762 (“We think it would be unwise to

interpret the statutory provisions under scrutiny here so as to conclude that what

is free from taxation when accomplished by hospitals individually, is suddenly

subject to taxation when hospitals act in concert.”). But whether sound policy

dictates expansion of a tax exemption is not for us to decide. See Randolph v.

Aidan, LLC, 6 N.W.3d 304, 308 (Iowa 2024) (stating the “first principle” of statutory

construction is that “courts don’t write statutes” (citing Iowa Const. art. III, § 1)).

Health Enterprises has come to the wrong branch of government for its relief.

D. Health Enterprises’ Factual Issues

Separate from the interpretative question that marks the throughline of this

case, Health Enterprises asks the court to decide several unresolved factual

issues:

Health Enterprises requests this Court rule that (1) Health
Enterprises is a group of nonprofit hospitals licensed pursuant to
chapter 135B acting in concert, (2) due to Health Enterprises’
relationship with its member hospitals, Health Enterprises is
considered a nonprofit hospital licensed pursuant to chapter 135B,
and (3) purchases by Health Enterprises are “used in the operation
of the hospital” as that phrase used in Iowa Code § 423.3(27).

The department contends these issues are not preserved for appellate review

because they were never decided by the decision-makers below. We agree.

This is a court of review, not first-view. See Lowe’s Home Ctrs., 921

N.W.2d at 53 (remanding for determination of factual questions left unaddressed

by the Department and district court). “Just as we do not entertain issues that were

not ruled upon by the district court . . . , we decline to entertain issues not ruled

upon by an agency when the aggrieved party failed to follow available procedures
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to alert the agency of the issue.” KFC Corp. v. Iowa Dep’t of Revenue, 792

N.W.2d 308, 329 (Iowa 2010) (internal citation omitted) (citing Meier v. Senecaut,

641 N.W.2d 532, 540 (Iowa 2002)). Because Health Enterprises’ fact issues were

never resolved by the department, we cannot do so ourselves on judicial review of

this 18,000-page administrative record. See StateLine Coop. v. Iowa Prop.

Assessment Appeal Bd., 958 N.W.2d 807, 817 (Iowa 2021) (“The role of an

appellate court in an administrative review proceeding is not to be primary fact-

finder.”).

AFFIRMED.