Majority Of Tax-Exempts Pay Tax Anyway

April 25, 2011       Samuel Fanburg      

Some 63 percent of nonprofits reported paying various types of fee and taxes to local and state governments during 2010. Of these types of assessments, 17 percent reported paying field-specific taxes, 36 percent paid “other payments,” 9 percent paid PILOT (payments in lieu of taxes) and 42 percent of nonprofits paid user fees.

These are among the results of surveying by the Johns Hopkins University Center for Civil Society Studies and published in a report, “Taxing the Tax-Exempt Sector — A Growing Danger for Nonprofit Organizations,” written by Lester M. Salamon, Stephanie L. Geller and S. Wojciech Sokolowski.

The study illustrated that although nonprofits have generally enjoyed the benefits of a tax-exempt organization, for the past five years a majority of nonprofits have been paying charges accrued to local and state governments.

Salamon, director of the Baltimore, Md., located Johns Hopkins Center for Civil Society Services, described this tactic as self-defeating. “What these governments are essentially doing is driving more need to the government side, by taxing these nonprofits, programs need to be eliminated. It’s really cutting off its nose despite its face.

”The types of fees encumbered by nonprofits have varied in their scope and application to their size. PILOTs have been generally applied to larger nonprofits. This is a type of fee that is negotiated by local governments and nonprofits.

Of the responding organizations, 9 percent paid a fee like this with the largest share of payments coming from elderly housing & service organizations (26.4 percent).

The average amount paid in PILOTS by survey respondents was $422,095. Again, PILOT payments are generally reserved for larger organizations thus the explanation for such a large sum of money.

By surveying organizations that paid this type of fee, Salamon found some nonprofits understood the reasons for these charges. “We found that in some of the responses,” said Salamon, “that nonprofits were saying that we can understand reasons for payment, but it has to be voluntary. They understood it couldn’t be a free ride.”

Of the respondents, 17 percent of nonprofits were paying “field specific payments.” These are the types of charges associated with admission charges or bed taxes. Two-thirds of organizations that paid this type of tax indicated bed taxes or ticket taxes as the charge appropriated by the local government.

Calculating other fees, the average respondent paid $8,000 in 2009. Reflecting that some respondents paid significantly more, respondents averaged $78,480 for these types of payments in 2009. The largest groups averaged payments of $142,541 compared to mid-sized and smaller groups who averaged payments of $23,208 and $7,856 respectively.

User fees were another popular way for the government to receive revenue from local nonprofits. These payments include fees for services such as water, sewer or garbage collection over the past year. 42 percent of respondents indentified this type of taxing to their organization. In user fees, the media amount of respondent fees was $3,064 in 2009, with an average fee of $122,277. The largest organizations averaged payments of $258,524, mid-sized groups paid an average of $19,022 and the smallest groups averaged a $2,557.

Altogether, two-thirds (63 percent) of the respondents are currently paying some type of fee or tax to local governments and noted that these payments are not new. 92 and 89 percent of nonprofits have been paying users feeds or “other” payments to state and local governments respectively for at least 5 years.

Salamon said there are some avenues for reimbursement for nonprofits paying these types of fees.

“There is a provision in Office of Management and Budget (OMB) circulators that local expenses can be reimbursed by the Federal government,” said Salamon. “The message we’ve gotten from people however is that they’re not really aware of that tactic. Some weren’t even getting their core costs covered, expressing a dissatisfaction in government funding already.

”These types of payments have represented a significant burden on nonprofit respondents. 40 percent of respondents paying these fees, said they would need to introduce or raise fees for programs/services because of charges by the government, 40 said they would have to appeal for donations to cover additional charges, 21 percent had to cut programs/services and 2 percent of respondents had to close altogether.

To combat fiscal pressures and budget deficits felt by local governments, Salamon advocated for a retooling of the tax system for corporations.

“We have so many corporations taking advantage of tax loopholes,” said Salamon. “We need to cut down on special deductions as part of the solution. It’ a leaky system in how many ‘outs’ it provides to businesses.”

Actions nonprofits have taken to fight these new proposal mirrors the many ways nonprofits are being hurt by the government charges. 15 percent of respondents indicated they had joined with other nonprofits to fight new proposals, 13 percent encourage umbrella organizations or associations to address the issue and 11 percent had signed a correspondence to a government official.

Salamon continued to discuss that this is not the right way to alleviate fiscal challenges felt by local governments.

“I think that this fundamentally a community question. There is real need for revenue to solve this problem. National revenue needs to be adjusted. Our political system hasn’t faced up to the revenue side of the situation, not the cost,” said Salamon. “Nonprofits have been hit hard already, and I don’t think this that this is the solution.”

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