Sunday, August 01, 2010

What Does A Nonprofit Do That's Facing Being Taxed?

These are difficult times verging on a recession.  Without a doubt these are extraordinary times, with national and local unemployment levels at record highs for recent years; municipalities, including cities and states facing daunting budgetary shortfalls; and nonprofits in some U.S. cities and states may be the first in recent history to pay taxes.

As nonprofits by definition do not make any profit whatsoever, most states and municipalities (like the federal government) have not taxed nonprofits operating in their jurisdiction because these organizations provide services, products, and other benefits in the public's interest (arguably adding to any state or town's infrastructure, economy, and quality of life) at no profit.  The nonprofit most often provides the work and goal of its mission statement by raising its own funds and providing its efforts at either no fee, a sliding scale fee relating to the beneficiary's income level, or at a fee that is lower than the private sector's charge for the same service or product.  In other words, these organizations' efforts are usually not cost prohibitive to the benefactors.  These public services are accessible.  Taxation on an organization that makes no profit, funds its operations by raising funds, and provides its efforts to the benefit of the community has traditionally been seen as a double hit to the nonprofit sector.  As such, it is not difficult to imagine that nonprofits who raise all funds for all expenses would find paying taxes an additional financial burden in an already extraordinarily difficult economy.  Nonprofits face the exact same near recession economy as they fundraise, right now, as any other entity: for profit, municipality, or other nonprofit tries to stay afloat.  It isn't easy for any of us.

In my March 21, 2010 blog post, Some U.S. States Considering Taxing Nonprofits to Make Up for Empty Coffers, I report on what cities and states have been considering taxing nonprofits within their jurisdictions.  These states and municipalities are from outside of these nonprofits, adding an extra expense line into the operating budgets of every nonprofit they tax.  These nonprofits will have to spend money to raise that additional (tax) money, which is an additional overhead (internal operations') cost for the nonprofit that is not raising new additional money for operations, but of course instead purely passing through the money they raise to pay their tax bills to the state or municipality that taxes them.  Put another way: the state or city that charges nonprofits taxes that operate within its boundaries is putting the burden of raising that state's or city's funds, for its coffers, on organizations that exist to provide the services or products that they do, at no profit.  In effect, these jurisdictions are saying to nonprofits, 'hey, our leadership could not trim our spending enough nor cut costs enough, or bring in any new revenue; so, would you please go out, at your expense, and get us some revenue?  We're laying this problem at your already poorly funded feet.'

Yes, nonprofits are active businesses operating in the cities and states that they conducting their business in.  Yes, some nonprofits that contract with those states or cities, receiving the benefit of having that business.  Yes, all state or municipal services, utilities, etc. are made available to nonprofits like any other taxed entity; but here's the thing...no nonprofit makes money paying dividends or other forms of profit to owners, shareholders, or investors.  By virtue of them being nonprofits, these are very lean efficient organizations that operate to either meet costs or spend down at the end of their fiscal year.  Now, though, they must besides doing so for their operations, also fundraise for the state or city that taxes them, too.  Yet, as I state in my March 21 blog post,

"I wonder if these cities or states that are proposing these taxes have properly researched the cost/benefit analysis, over a year, over three years, over five years, etc. (the cost vs. benefit to their communities) if they tax these organizations. See the National Committee for Responsive Philanthropy's 2009 study, "Strengthening Democracy, Increasing Opportunities" that found "Research on nearly 70 nonprofits from New Mexico, North Carolina, Minnesota and Los Angeles County over a five year period showed that these groups combined generated nearly $14 billion worth of benefits for their diverse communities, and many other non-monetary gains. The return for every dollar invested in these groups ranged from $89 to a staggering $157." If nonprofits, or even those people or entities that donate to nonprofits, pay for a tax burden, all of that [sic. new additional] money is money that could have been spent on [sic. the nonprofit's] programs that will not be provided, and in turn, the services, programs, and products that all of the nonprofits within these taxing jurisdictions will have, in effect, raised very expensive tax dollars, indeed."  [2012 Addition to this Post: The State of Oregon did a similar study which may also help any nonprofit working with its legislators to demonstrate that the value of the nonprofit sector is extant and important.  It is Study Finds Oregon Nonprofits $13 Billion Industry  It is not a sector to take lightly in any state, I'm sure.]

The benefit that any nonprofit brings to the region that it serves should not be underestimated nor taken for granted, and I would argue that these states or municipalities that are taxing their nonprofits are doing both.  Perhaps, to be fair, these states' or municipalities' leaders are not clear on what all a nonprofit does that is a low cost benefit to its community (and contribution to that economy); or perhaps they are not clear on what a nonprofit corporation is, how a nonprofit operates, or how one funds itself in a given year.

Any nonprofit that is being taxed for the first time, should do a few things before the taxation begins.  Face the situation (perhaps forming a new volunteer committee responsible to learn about, plan for, and address the new taxation).  If I were the executive director of such an organization, I would:

1. Contact my nonprofit's executive leadership and the organization's bookkeeper and CPA and sit down to meet to discuss this new additional financial burden and liability.  Request that everyone read up on their own time, on the situation, and also learn what is next for your local taxing government and its plan.  Meet and talk.

2. Contact my colleagues working at other local nonprofits, and ask the board to reach out to their colleagues and friends working for other nonprofits in the region, and ask them what their organization's discussion about raising taxes has been and what they are anticipating doing.  I'd also share the same information.

3. Research what the tax equation will be that our nonprofit will be asked to pay, determine what (in a realistic and fair estimation) our actual tax bill will be for the current and then following fiscal year (so, for two years), and then build that new additional tax expense into the current and coming organizational operating budgets for this and next year (and operating budgets should anticipate sluggish economy or even inflation with some padding, etc.)

4. Next, request face to face sit down meetings with each and every representative that represents our organization's street address in that taxing state or municipality's government body (i.e. state senator, governor, attorney general, or city counselor, or county commissioner, mayor, etc.) and share with them what your nonprofit's research and networking has borne out.  If you do not speak up on your organization's interests with the people who represent it in the government taxing it: no one else should be expected to - and an avenue for potential resolution is shut.  Share with the reps what the new additional burden will be, what the economy has already done to slow down or even end some of your nonprofit's fundraising, programs, and services; and make a case for them why this is an extraordinary burden to be laid at the feet of the nonprofit sector through facts, numbers, and the outcomes and results of the new tax burden and this economy's effects on the organization.  If you need compelling examples (perhaps to argue to an entity about to tax your region's nonprofits) of what happens to those the nonprofits assist when nonprofits are taxed by municipalities or states see the recent related news stories posted at the bottom of this blog's post, Some U.S. States Considering Taxing Nonprofits To Make Up For Empty Coffers

5. Continue to network with colleagues at other organizations sharing what you learn and asking what's new in their efforts to fight and pay the new tax.

6. Sit down with leadership and our bookkeeper and re-tool the expenses and look for new or better deals for our expenses so that the new additional expense (tax) burden can be mitigated to some degree.

7. Sit down with fundraising volunteers and staff and discuss what the outward facing (or public) message will be to donors and other supporters, given that now the money our nonprofit raises will be taxed (truly anticipating what their perceptions, concerns, and questions supporters may have, also anticipating hesitancy that might result because of the new tax; and discussing how this can be addressed head on (perhaps via a 'to the point' and forthright letter sent to all donors and supporters speaking solely to the new tax)) and then plan how this will be brought to fruition and follow through.

8. Continue the discussions or follow up with any results that came out of meeting with each representative.  Consider forming a coalition of concerned nonprofits having leadership also willing to meet with its representatives to discuss what can be done.

9. Truly consider whether any major donors would be willing to donate towards the organization's estimated tax bill for that fiscal year, removing the burden altogether.  Consider, too, passing the tax on to the beneficiaries (and if this is not a feasible way to raise the taxes, demonstrate why by showing the real/actual math when meeting with reps).

10. Pay the taxes when they are due.  Yes, there is a battle here.  Yes, these are strange days.  Yet, any entity that puts its organization into jeopardy by ignoring their tax bill is taking on a new battle...a legal one.  Also, not paying bills may become a reputation issue.  You don't want it to start to get out that your organization doesn't pay its bills (which can make everyone from community partners, to donors, to beneficiaries nervous about whether continuing work with your organization is a sound idea).  Hope that paying taxes will only be a temporary thing and that your reps will get it, speak on the floor and vote in the nonprofit sector's best interest, and hopefully this new tax will be ended in the near future.

I'd consider speaking to the press, but I'd only do it if it is not a public relations, brand, or marketing risk for the nonprofit, your cause, and any other community partners that are publicly affiliated with your agency.  Think before you speak.  Determining all of this will take each nonprofit's leadership researching, discussing and weighing the option to speak to the media.  Also, I'd speak to the press only when we have a compelling fact-based data that makes our case well and clearly (through data (shared with the press) that prior to meeting with the press has been checked, re-checked, triple checked, and has been peer reviewed and determined to consistently come out with the same findings).  Just keep in mind, bringing the press in can be a strength - but if not thought out, prior, can become a double edged sword.

In the end, keep a few things in mind: yours' is not the only nonprofit now liable for taxes, and in adversity: partners are made.  There is a coalition, whether your nonprofit joins it, or not, of other nonprofits who are equally under additional new financial burdens, due to taxes, as well.  Whether your organization takes up any relationship with the other local nonprofits also facing taxes, now, too (such as anything from just a simple conversation to forming a formal coalition of organizations) or not, is your choice and perhaps one that should not be dismissed quickly.  There is power in numbers.  Especially in an election year and those come around sooner or later.

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