Oregon Bill Ties Exemption To Program Expense Ratios

May 1, 2011       Mark Hrywna      

Charities that don’t spend at least an average of 30 percent of their expenses on programming for three years would risk losing certain state tax deductibility, due to a bill passed by the Oregon state Senate.

Under Senate Bill 40, charities registered in Oregon with more than $200,000 in annual revenue would have to spend at least 30 percent of their budgets, averaged over three years, on functional program expenses to keep state tax-deductible status for contributions. Federal tax deductibility would not be affected but all charities are required to register to fundraise in the Beaver State, so the legislation could impact organizations around the country.  Sanctioned nonprofits would still be allowed to solicit donations but would be required to disclose that donations to the organization are not deductible for Oregon state purposes. This would impact not just nonprofits incorporated in Oregon but also organizations simply mailing into the state for donations from Oregon residents. The attorney general would have some discretion in disqualifying charities from receiving tax-deductible contributions, in special circumstances, such as a capital campaign or start-up organizations.

A spokesman for the attorney general’s office expects the measure to gain approval. The measure was introduced in January and it passed by a 28-2 vote in the Senate on April 11. The bill was sent to the House the next day where it was referred to the desks of the co-speakers.

“We’re very confident, there’s a lot of support for the bill, and no one’s stepped up to work against it,”said Tony Green, director of communications for Attorney General John Kroger, who proposed the bill to legislators. He expects the measure to gain approval from both houses and be signed by the governor by the end of June. Calls to Gov. John Kitzhaber’s office seeking comment were not returned.

The Direct Marketing Association Nonprofit Federation (DMANF) drafted a letter to state Sen. Ginny Burdick, chair of the Finance and Revenue Committee, opposing the legislation on grounds that it’s unconstitutional, citing U.S. Supreme Court precedents.

“It’s a back-door way of getting at the old, ÔWe can regulate nonprofits and fundraising simply by using percentages,'”said Robert Tigner, general counsel and secretary for the Association of Direct Response Fundraising Council (ADRFCO) in Washington, D.C.

The Nonprofit Association of Oregon (NAO) came out in favor of the bill ahead of a public hearing on the measure last month, saying that the measure would only affect a handful of the nonprofits engaged in unethical fundraising practices. There are more than 22,000 registered charitable organizations in Oregon.

“It’s the wrong way to regulate charity,”said Tigner. “Numbers prove nothing in and of themselves. Numbers shouldn’t be used to impose sanctions absent a demonstration that there’s a failure of stewardship,”he said.

The bill had been in previous legislative sessions but was on the radar screen of the state’s Department of Justice before Kroger took office in 2009, said Green. It grew out of a “20 Worst Charities”list, which the AG implemented after taking office in 2009, according to Green. The 20 charities on the list — which does not include an Oregon-based charity — raised an estimated $56 million combined each year. “He was struck by how little money organizations actually spent on their stated purpose,” said Green, and decided to make it a priority. The AG’s office last year initiated litigation against a number of charities, particularly veterans’ organizations, to address the issue.

The 30 percent level does not reach the 65-percent standard suggested by the Better Business Bureau’s Wise Giving Alliance, said Green, but “the idea here is to root out the particularly bad actors. “While the AG’s office can go after charities in court from a variety of angles, he said the legislation takes a different approach, making it more a regulatory than prosecutorial function. Based on legal precedent, Green said the state couldn’t dictate charities’ spending, however, the issue is one of tax policy. “Essentially, the purpose of the law is to encourage public-oriented organizations, those that benefit the public, so we do control tax policy, so there’s no reason to provide a tax subsidy to those organizations”that don’t spend money on programs.

“The problem for nonprofits is the whole regulation industry for 30 years has been trying to manipulate this fundraising percentage device so they can employ it in their regular regulatory scheme; that’s why we’ve had four Supreme Court cases,”said Tigner.

“The consequence of this passing is that the enthusiasm for regulating by numbers rather than wrongdoing has not died down one bit,”he said. “You could see a brush fire like this spreading across the country, maybe not in this legislative session. If 30 percent doesn’t produce a backlash, how about 40? 50?”

Already there has been some discussion about raising the three-year average spent on program expenses from 30 percent to 40 percent. As the conversation creeps around a higher percentage for program expenses, NAO might withdraw its support. The association was a little disappointed – but not surprised Ð that the conversation has started to focus on the 30 percent threshold, said Deborah Steinkopf, NAO’s director of development and communications. The group is surveying membership to determine exactly how an amended bill might impact nonprofits.

Steinkopf stressed that NAO isn’t so much in favor of establishing a baseline as much as getting front of the issue of “bogus nonprofits”that give the sector a bad name. The original bill made sense, she said, because it didn’t add many reporting or document burdens. “The 30 percent was low enough, the language was robust enough to give the AG some ability to go after groups that are sort of bogus, unscrupulous charities,”she said, adding that most Oregon nonprofits are good stewards and the bill was a way to make that clearer to the media and public.

The AG’s office does not have a position on the 40-percent threshold. “We want to pass the bill, find a consensus point,”Green said. “We thought 30 percent was reasonable, we want to know what the legislature wants,”he said.

Mark Fitzgibbons, vice president of corporate legal affairs for American Target Advertising (ATA), a Manassas, Va., direct response fundraising firm, conceded that there are organizations that do sloppy work and probably shouldn’t be tax-exempt. “But the way this bill is written, what they’re trying to do, it’s just further evidence that state charity regulators have animosity toward”four landmark Supreme Court decisions on the 1st Amendment” and charitable free speech, he said. The cases to which he was referring are:

*Village of Schaumberg v. Citizens for a Better Environment;
*Madigan v. Telemarketing Associates;
*Riley v. National Federation for the Blind, and,
*Secretary of State of Maryland v. Joseph H. Munson Co.

Fitzgibbons, one of the nation’s more outspoken critics of state charity regulators, said the U.S. Supreme Court has beaten back state regulators each time, ruling that lawmakers cannot regulate how much charities can spend on administrative or fundraising expenses.

The problem is that charities don’t have the money to afford a lawsuit to challenge the Oregon bill if it ever gets approved. “Even if all charities got together and file a lawsuit, they’re scraping pennies, and charities don’t like to get involved in litigation, so regulators know they can beat up on charities and get away with it,”Fitzgibbons said. NPT

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