
FILED:  September 29, 2005
IN THE SUPREME COURT OF THE STATE OF OREGON
LANE TRANSIT DISTRICT,
an Oregon Mass Transit District,
Respondent,
v.
PEACEHEALTH,
a non-profit corporation,
Appellant,
  and
DEPARTMENT OF REVENUE,
a department of the State of Oregon,
Defendant.
(OTC 4599; SC S51617)
En Banc
Appeal from the Oregon Tax Court.*
Argued and submitted May 4, 2005.
Josephine H. Mooney, of Calkins & Calkins, Eugene, argued
the cause and filed the briefs for appellant. 
Joel S. DeVore, of Luvaas Cobb, Eugene, argued the cause and
filed the brief for respondent.
KISTLER, J.
The judgment of the Tax Court is affirmed.
*Appeal from Oregon Tax Court, Henry C. Breithaupt, Judge. 17 OTR 364 (2004).
KISTLER, J.
The legislature has authorized mass transit districts
to impose a payroll tax on employers within the district.  ORS
267.385(1).  It also has provided that an organization is not an
"employer" and thus not liable for the payroll tax if it is both
exempt from taxation under IRC § 501(c)(3) and not a hospital. 
ORS 267.380(1)(b).  In this case, the Tax Court concluded that,
although defendant (1) is a 501(c)(3) organization, it is a
hospital and thus liable for the payroll tax.  Lane Transit
District v. PeaceHealth, 17 OTR 364 (2004).  We agree with that
conclusion and affirm the Tax Court's judgment.
Plaintiff is a mass transit district.  Defendant is a
corporation that operates hospitals and related facilities in
Alaska, Oregon, and Washington.  Within plaintiff's mass transit
district, defendant operates two hospitals (Sacred Heart Medical
Center and Cottage Grove Community Hospital), two physician
clinics (PeaceHealth Medical Group and South Lane Medical Group),
and one medical laboratory (Oregon Medical Laboratories).
In 1986, the Internal Revenue Service (IRS) determined
that defendant qualified for an exemption under IRC § 501(c)(3),
in part, because it found that defendant was an organization
described in IRC § 170(b)(1)(A)(iii); that is, the IRS found that
defendant was:

"an organization the principal purpose or functions of
which are the providing of medical or hospital care or
medical education or medical research, if the
organization is a hospital, or if the organization is a
medical research organization directly engaged in the
continuous active conduct of medical research in
conjunction with a hospital[.]"

IRC § 170(b)(1)(A)(iii).  Because defendant does not appear to 
be a medical research organization, the IRS presumably found that
defendant was a hospital the primary purpose of which was to
provide medical care, medical education, or medical research.
Before 2002, defendant paid payroll taxes on the wages
that it paid its clinic, hospital, and hospital administration
employees in the transit district.  In 2002, the Oregon
Department of Revenue (department) determined that defendant did
not owe plaintiff any payroll taxes on the wages that it paid its
employees in either PeaceHealth Medical Group or the Oregon
Medical Laboratory. (2)  Consistently with that determination,
the department refunded to defendant $538,731.78 in payroll taxes
that the department had collected on plaintiff's behalf.
Plaintiff filed a complaint against defendant and the
department in the Oregon Tax Court, seeking a judgment directing
the department (1) to assess payroll taxes on all defendant's
facilities in the transit district, (2) to collect the refunded
tax, with interest, from defendant, and (3) to return that sum to
plaintiff.  On cross-motions for summary judgment, the Tax Court
ruled in plaintiff's favor.  Applying OAR 150-267.380(2)(8), the
court found that defendant is a hospital and thus an employer
within the meaning of ORS 267.380(1)(b).  It followed, the court
reasoned, that defendant was liable for the payroll tax on all
its employees within the transit district.  The court entered
judgment in plaintiff's favor, and defendant has appealed.
The issue in this case arises because defendant is a
501(c)(3) organization that operates both hospital and
nonhospital facilities in the transit district.  Defendant
acknowledges that it owes payroll taxes on its employees who work
at its hospitals in the transit district, but it argues that it
owes no payroll taxes on its employees who work at its clinics
and laboratory in the transit district.  Put in statutory terms,
defendant argues that ORS 267.380(1)(b) exempts a 501(c)(3)
organization from liability for payroll taxes except to the
extent that the organization's employees work in a hospital.  
Plaintiff responds that liability for the payroll tax
does not turn on the nature of the facility in which an employee
works but on the nature of the employer.  In plaintiff's view, an
employer is exempt from the payroll tax only if it is (1) a
501(c)(3) organization and (2) not a hospital.  Plaintiff
disagrees with the assumption, implicit in defendant's argument,
that ORS 267.380 permits an employer that qualifies for a
501(c)(3) exemption as a single corporate entity to engage in a
facility-by-facility analysis to determine whether it is liable
for the payroll tax on some but not all its employees.
In analyzing the parties' arguments, we begin with the
text and context of ORS 267.380.  See PGE v. Bureau of Labor and
Industries, 317 Or 606, 610, 859 P2d 1143 (1993) (describing
statutory construction methodology).  As noted, ORS 267.385(1)
authorizes a mass transit district to impose a payroll tax on an
employer based on the wages that the employer pays its employees
within the transit district.  ORS 267.380 defines the term
"employer" for the purposes of the payroll tax.  It provides, in
part:

"(1) As used in ORS 267.380 and 267.385, unless the context requires otherwise:
"(a) 'Employer' means:
"(A) A person who is in such relation to another
person that the person may control the work of that
other person and direct the manner in which it is to be
done;
* * * * *
"(b) 'Employer' does not include an organization
exempt from taxation under section 501(c)(3) of the
Internal Revenue Code, as amended and in effect on
December 31, 1996, except that 'employer' does include
hospitals."

ORS 267.380.
The text of ORS 267.380 does not support defendant's
position.  ORS 267.380 does not say that a single corporation can
be an "employer" for some of its employees but not for others
depending on the facility in which the corporation's employees
work.  Rather, under the text of the statute, a corporation
either is or is not an employer for the purposes of the payroll
tax.
That much follows from the legislature's use of the
verb forms "does not include" and "does include."  The first verb
form "does not include" excludes from the definition of
"employer" organizations that are exempt from taxation under IRC
§ 501(c)(3).  The use of the second verb form "does include" in
the exception brings back within the definition of employer an
organization that is exempt from taxation under 501(c)(3) but
also is a hospital.  Under the plain text of ORS 267.380(1)(b),
the question is whether a 501(c)(3) organization, as a whole, is
a hospital and thus liable for the payroll tax.
That conclusion leaves one issue unresolved:  When will
a 501(c)(3) organization that includes both hospital and
nonhospital facilities be considered a hospital for the purposes
of ORS 267.380?  The department has promulgated an administrative
rule that addresses that issue.  OAR 150-267.380(2)(8) provides,
in part:

"For the purposes of ORS 267.380(2)(a), a hospital is
defined as:
"(a) A permanent facility or organization with
facilities that include inpatient beds, and with
medical services, including physician services and
continuous nursing services under the supervision of
registered nurses, to provide diagnosis and medical or
surgical treatment primarily for but not limited to
acutely ill patients and accident victims, or to
provide treatment for the mentally ill."

(Emphasis added.)  The legislature has authorized the department
to adopt rules "to effectually carry out the purposes for which
it is constituted."  ORS 305.100(1). OAR 150-267.380(2)(8)(a) is
consistent with ORS 267.380, as we have interpreted it, and
neither party challenge the rule's validity.  See U.P.R.R. Co. v.
Tax Commission, 240 Or 628, 632, 402 P2d 519 (1965) (applying tax
regulation that was consistent with governing statute).
Defendant is a hospital under the terms of OAR 150-267.380(2)(8)(a).  As the Tax Court found, defendant is a
permanent organization with facilities that include inpatient
beds and medical services "to provide diagnosis and medical or
surgical treatment primarily for but not limited to acutely ill
patients and accident victims."  The fact that defendant operates
other nonhospital facilities within the district does not take it
out of that definition. (3)  Because defendant is a 501(c)(3)
organization that is a hospital, it is an employer for the
purposes of ORS 267.380 and thus liable for the payroll tax
pursuant to ORS 267.385(1) on all its employees within the
district.
The judgment of the Tax Court is affirmed.


1. 
Although there are two defendants in this case, only
PeaceHealth has appealed from the Tax Court's judgment.  We use
the term "defendant" to refer to PeaceHealth.
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2. 
The department announced its determination in a letter. 
That letter does not mention the South Lane Medical Group -- the
other facility that defendant operates in the transit district.
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3. 
The Tax Court also appeared to rely on subparagraph (b)
of OAR 150-267.380(2)(8).  Because that subparagraph applies only
to parent and subsidiary corporations, it has no application to
defendant, which is a single corporate entity.  
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