Taxing Non-Profit Organizations

A recent Sunday NY Times article noted that many states are moving to revoke charities’ tax exemptions. And, more recently the Rhode Island General Assembly announced that it is considering the elimination of the sales tax exemption for local charities. For those of us who work with non-profit charities on a daily basis and understand the role that these institutions play in our country, this is a troubling report.

The article reported that the Hawaii Legislature is considering a bill that would require charities to pay a 1% tax and Kansas is considering making them subject to sales tax. The head of the Indiana Association of Cities and Towns is quoted as saying that the municipalities have to look at the public services non-profits use and how the municipalities cover those costs. This is not the first time that state and local governments have tried taxing non-profits and, to date, they have had limited success.

Unfortunately, the knee-jerk reaction to this situation is to point out that the non-profits are hurting in this economy just like everyone else. That is hardly a compelling argument for keeping the taxing authorities at bay. What the non-profit sector has to do is remember a bit of history and understand what might be driving the tax collector to their doors.

First the history. Charity has been a virtue recognized and fostered throughout human history. Organized charity as an integral part of civilization dates back at least to medieval Europe. Taking care of the poor, or in more general terms, those less fortunate regardless of the reason, has been a basic component of civilized society since humanity left the cave.

As society formed governments and taxation became the method of financing those governments, it was recognized by all that the charities job would and should not diminish but would remain a critical component of civilized society. Society’s way of supporting the charities was two-fold. Those with the capacity supported the charities directly with their contributions of money, time or materials. Government demonstrated its support for the critical role of charities in society by facilitating their formation and exempting them from the taxes of ordinary businesses and individuals. Thus, the exemption from property tax to encourage the location of a charity in a particular place. The exemption from sales tax as a subsidy for materials needed to carry out the mission. In the early days there was even exemption from certain payroll taxes until it was recognized that these tax revenues were needed to protect the workers.

So the first question charities should ask when the society sends the tax collector to their door is “What part of our work would you like us to curtail as we redirect some of our resources into your tax coffers?” Since it is unlikely that society is familiar enough with the detailed workings of the local charity, this question may best be asked as a multiple-choice question, listing several critical tasks accomplished by the charity. (Of course the fact that society is generally not familiar with the critical tasks accomplished by the various charities operating in its midst is itself a serious problem and one I will reserve for another discussion.)

The second issue – what is driving the tax collector to the charities’ door? Quite frankly, the tax collector sees a revenue opportunity. The legislature and the politician see available dollars and they want them. Why? The Tea Party people might say it is because the government believes it can do a better job spending those dollars than the people and organizations who now have control over them. The tax collector would never admit that – even to him or herself – but the grain of truth that might be in there is that the tax collector sees wealth and does not see (or does not think s/he sees) it being used or being used effectively. Large budgets, endowment funds, fairly compensated executives with compensation commensurate with their responsibility, reserve funds, etc. These complex items are easily misunderstood by the legislature and the politician.

Charities and non-profit organizations have historically done a poor job of self-promotion. One reason for this is that self-promotion public relations costs money and the non-profit would rather funnel that money into mission related projects. Laudable as that philosophy is, I am afraid the day when that was the correct approach has ended.

Non-profits and charities must be ready to address this issue. Obviously they are not ready now when their first reaction to the municipalities seeking to end their tax exemptions is – “don’t look at us, we are hurting too!”

A regular part of their annual activity should be self-promotion. Economic impact studies can be performed as well as social impact studies and the results of these studies must be shared with media outlets on a regular basis. Organizations should not shy away from reminding society why they are there, what they are doing, the impact of what they are doing and how appreciative they are of the subsidy society is providing so that they can continue. If you would like, we can help you – but regardless of how you address this need, it must be addressed or the tax collector will keep returning for more.

By Frank Monti, CPA
Not-for-Profit Group

Labels: Accounting, Charity Tax Exemptions, CPA, Economic Impact, Monti, Not For Profit Group, Tax

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