A small church is suing the city of Inver Grove Heights, claiming illegal taxation in a dispute over whether an assessment for road and sewer work is a tax from which a church should be exempt.

The Rev. Henry Gunnick of Grace Christian Reform Church and the church's attorneys contend that in 2006, the Legislature changed the law to define an assessment as a tax. The church points to the Minnesota Constitution, which says churches are exempt from taxes.

Because of that, the church is challenging a $27,761 special assessment for road and sewer improvements along its property on E. 75th Street -- and any citywide assessments in the future.

"The heart of the issue is whether or not the courts will agree with our interpretation that the Minnesota Constitution excludes religious entities from paying taxes," said Dan Dalton, a Michigan attorney representing the church.

But attorneys for Inver Grove Heights and the League of Minnesota Cities say that cities do have the right to charge assessments to churches and tax-exempt entities -- just as they have for more than a century -- and that the Legislature has reconfirmed that right since it changed the tax language.

"The city position is that both under the Constitution of the state as well as under the state statutes, cities can specially assess churches for public improvements that were constructed by the cities," said Timothy Kunst, city attorney for Inver Grove Heights.

The church filed suit on May 14 in Dakota County District Court, and the League of Minnesota Cities has been watching closely. No matter which side wins, if the decision is appealed, cities and churches across Minnesota could be affected, lawyers say.

"If the church is successful, it could have very significant impacts statewide," said Tom Grundhoefer, attorney for the League of Minnesota Cities, which insures cities for litigation.

The church points out that in 2006, when lawmakers and agencies were debating whether fees are actually taxes, the Legislature amended a statute that defines the meaning of words, terms and phrases.

That amendment said, in part: "A 'tax' means any fee, charge, exaction, or assessment imposed by a governmental entity."

Last year, Dalton approached the Inver Grove Heights attorney over the assessment-as-tax question.

Inver Grove Heights officials contacted the league, which in turn asked legislators to clarify the law. Lawmakers then passed an amendment stating that the 2006 amendment did not change a city's ability to issue special assessments to churches, Grundhoefer said.

But, Dalton said, "That doesn't change the fact that the Legislature still defines an assessment as a tax."

Should the church win, Minnesota cities could potentially lose millions of dollars in special assessment fees long assessed to churches and church-related property, Grundhoefer said.

"It doesn't just apply to churches," he said. "You might have churches with church-affiliated colleges that may own a lot of property in a community and have roads and sewer and water facilities going by them."

In some small communities, churches are the major landowners, Grundhoefer said.

Dalton said every religious institution in Minnesota should look at whether it has paid an assessment since 2006, and if so, decide whether it wants to challenge that assessment, or any proposed in the future.

Depending how the courts rule, there's potential for this issue to extend to other tax-exempt properties, said Grundhoefer and Joe Lynch, the Inver Grove Heights city administrator.

A hearing is set for July 26 in Dakota County District Court.

Joy Powell • 952-882-9017