Tuesday, July 14, 2009

More Evidence of trend towards increased local taxation of Nonprofits

Another state court has imposed local taxes on nonprofits, providing more evidence that state and local governments are looking greedily towards nonprofits as means to shore up budget deficits.  In Wisconsin, a Wukesha County Judge ruled, after a three year court battle, that a nonprofit health care provider must pay taxes on all of its office equipment, according to the Milwaukee Journal Sentinel:

Waukesha County Circuit Judge Michael O. Bohren determined that ProHealth Care could be taxed on its headquarters because the corporation supports many for-profit ventures and because it does not pass a litmus test as a "benevolent" organization. The leader of a statewide coalition of 170 nonprofit groups said the case appears to represent the latest example of government tax collectors turning to nonprofit entities to replenish depleted tax coffers. "That's a topic that's rising," said Deborah Blanks, president of the Wisconsin Nonprofits Association. "That's something that a lot of nonprofits are going to have to look at."

 The following blurb is particularly ominous for nonprofits resisting local taxation:  

Attorney Stan Riffle, who represented the City of Pewaukee in the case, said he suspects ProHealth Care hoped to establish a precedent in Pewaukee that could be used later to seek property tax exemptions in other communities where the company has property. Instead, Riffle said, the ruling likely will embolden other municipal tax assessors faced with nonprofit property owners trying to avoid paying taxes. "Obviously assessors talk to one another," he said. "The word of this decision will get around."

The sentiment towards increased local and even national taxation of tax exempt nonprofits is fueled not only by the pragmatic need for government funding but also by an implicit, widely held belief or stereotype that nonprofits are getting away with tax fraud, a sentiment expressed in this Athens (Georgia) Banner-Herald op-ed piece:

Charitable organizations are part of the basic fabric of American life. There is a nonprofit for just about any cause or concern, often with all sorts of subspecialties. Each was developed to provide a service, even if it's only for one individual with special needs. Because we believe they are important to our collective well-being, we have exempted them from certain requirements of the tax code, including local and state property taxes and state and federal income taxes. Recent news stories about whether Nu i's Space, which provides services to local musicians, should pay property taxes (probably not, in my view) or how Angel Food Ministries, an area-based Christian food charity, provided millions in loans and housing to its founder, could well be warning signs for taking another look at requirements and limitations of these charities. The lines may not be drawn the right way. . . .

In our attempt to foster the American spirit of volunteerism, we have created a system full of loopholes and potential for serious fraud and abuse. With little effort, I could set up my own nonprofit - call it Myra's Garden, located in my own backyard. The purpose is environmental education. I could get three of my friends or family members to agree to serve on the board of directors and give a couple of children's programs each year, maybe for my three grandchildren or a couple of neighborhood kids. I then could apply for grants and seek tax-deductible contributions to help with my garden. My garden property could become tax-exempt. Once I generate enough income, I could begin to pay myself a salary, all for working in my yard and throwing a kids' garden party each year. I could charge all my plants, tools and fertilizers to Myra's Garden. Someone probably would (and should) suggest the IRS or state of Georgia take a closer look at what I'm doing. However, as long as my reports are in order and I remit payroll and sales taxes on time, no government agency is likely to come looking into my little scheme. Sadly, this kind of abuse is widespread in our nation. It's time to take a cold, hard look at what it means to be a "charity." It's time we carefully review the rules for nonprofit status and figure out how, as a community and a nation, we provide the appropriate incentives and supports while eliminating misuse and abuse of tax-exempt status.

This cases are seemingly few, far between, and of little consequence.  But as I said in my immediately previous post, they represent a disturbing devaluation of nonprofits everywhere.  I suppose its easier to tax nonprofits but in the long run the strategy is counterproductive if one assumes that the revenues lost by nonprofits will be less effectively or efficiently, and more uniformly spent after being sifted through government mazes.

dkj

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