Nonprofit tax exemptions face new government challenges

On May 26, the New York Times published a story about new challenges questioning the tax-exemptions enjoyed by nonprofit organizations. The story by Stephanie Strom cited a Minnesota Supreme Court ruling last December that said a small nonprofit day care agency was required to pay property taxes because it gave nothing away.

“We were shocked,” Michelle Finholdt, the center’s founder told the Times. “There are a lot of other organizations in our area that we’re similar to, and they are exempt from property taxes.”

In addition, the newspaper reported, Congress has threatened to require wealthy universities to make minimum payouts from their endowments. It has also asked if nonprofit hospitals are really all that different from their for-profit, tax-paying competitors.

What’s more, the Senate Finance Committee has asked for detailed financial information from six evangelical ministries to justify their tax exemptions after concerns were raised about how some churches spend money. The tax-exempt status of charities costs local governments $8 billion to $13 billion annually, according to various rough estimates.

In the Hawai‘i Legislature, HB 1900 was introduced by Representative Pono Chong and heard by the House Finance Committee in 2007. It would have repealed all tax exemptions and credits, including those enjoyed by Hawai‘i nonprofits, except for those pertaining to personal income tax.

Meanwhile, Hawai‘i nonprofits, although exempt from state income and property taxes, are required to pay general excise tax on fundraiser gross receipts, including the contribution portion that donors are allowed to deduct from their personal income tax for which they receive no goods or services in return. 

Theoretically, tax exemptions are granted to organizations that provide a public service or substantially reduce the burdens of government. Property-tax exemptions are granted by the states and a  federal exemption means charities don’t pay income tax.

The Times cited statistics showing some 88 percent of nonprofit revenues in recent years are fees for services, sales and sources other than charitable contributions. Because eof this, nonprofit service providers are often difficult for the public to distinguish from tax-paying competitors.

“We’re all seeing the growth of revenue in this area we call earned income,” Audrey Alvarado, executive director of the National Council of Nonprofit Associations, told the newspaper. The Minnesota court decision “is saying, ‘Wait a minute, charities are supposed to give things away for free.’ ”

“It goes to the core of how nonprofits are classified and defined,” she said, “and I think it is an example of the confusion in the public, and even among folks in the sector itself, about what a nonprofit is.”

In May, the Minnesota Legislature passed a one-year ban on reversing property tax exemptions held by existing nonprofits. The bill will require The Legislature to define what is “purely public charity,” a phrase used in many state laws on charitable property tax exemptions.

“We need to figure out what we mean by ‘purely public charity’ because, frankly, we can’t afford as a state to lose nonprofits providing these kinds of services,” said State Representative Paul Marquart, chairman of the property tax subcommittee. “But it isn’t going to be easy.”