St. Martin Evangelical Lutheran Church v. South Dakota

1981-05-26

Headline: Court rules church-run elementary and secondary schools exempt from federal and state unemployment taxes, reversing the state court and blocking tax collection from schools that are part of their churches.

Holding: The Court held that employees of schools that are part of a church organization are exempt from federal and state unemployment taxes under the statute, and it reversed the South Dakota Supreme Court.

Real World Impact:

Prevents states from collecting unemployment taxes from church-run schools lacking separate legal status.
Protects pay and benefits administration for teachers and staff at such church-operated schools.
Leaves separately incorporated religious schools' tax status unresolved.

Topics: religious schools, unemployment taxes, tax exemption, church-state law

Summary

Background

St. Martin Evangelical Lutheran Church and Northwestern Lutheran Academy are schools run directly by their church organizations. After a 1976 change to the Federal Unemployment Tax Act (FUTA), the Secretary of Labor and South Dakota treated many nonprofit private schools as subject to unemployment taxes. State officials sought to collect those taxes from these two church-operated schools, and lower tribunals reached different results before the South Dakota Supreme Court held the schools taxable.

Reasoning

The Court faced a basic question: does the FUTA exemption for service "in the employ of a church" cover schools that are not separate legal entities but are run by a church or church association? The majority read the statute to mean "church" refers to the congregation or church authority that hires and directs staff. It concluded the 1976 repeal of a different exemption did not change that wording, so employees of schools that are integral parts of their churches remain exempt. Because the statutory exemption resolved the dispute, the Court did not decide the First Amendment arguments.

Real world impact

The ruling prevents states from collecting FUTA-style unemployment taxes from schools that are legally part of their churches. It leaves open the question of separately incorporated religious schools, which must meet other exemption tests. The case is sent back to the state court to apply the federal interpretation in light of this decision.

Dissents or concurrances

Justice Stevens agreed with the outcome but emphasized that congressional reports suggested Congress intended broader coverage; he nevertheless agreed the statutory text controls here.