A nonprofit sales tax has caused confusion and worse: Three new bills may help

Feb 15, 2019 at 3:50 pm
legislative session

Maybe you’ve noticed your YMCA membership has increased. Maybe you had to kick over a few extra bucks for an auction item at a gala supporting your favorite cause.

It is all because of state law changes made last year that had unintended, harmful consequences on nonprofit organizations. 

A 6-percent state sales tax has been added to certain nonprofit services, tickets to fundraisers, auction items and memberships. It has resulted in confusion for nonprofits and increased, costly paperwork as they struggle to figure out what is taxed and what is not. 

But, worse, the new taxes and regulations threaten to weigh down revenue and fundraising for organizations that help society’s most vulnerable.

State nonprofits still maintain their tax-exempt status, but the legislation mandates them to collect a 6-percent levy from some patron purchases. 

Before the YMCA of Greater Louisville paid no tax, but it now makes a monthly payment of roughly $88,000 to the Kentucky Department of Revenue for taxes collected on memberships, CEO Steve Tarver said. The YMCA also has spent thousands of dollars in the weeks prior to the law going into effect to update their systems and papers in order to comply.

Tarver said the YMCA exists to help people get healthy, which, in some cases, basically reduces the burden on government for healthcare. “So that’s the irony of this whole thing,” Tarver said. “My concern is what about the people that choose, just because of this, not to come in and engage in healthy activities.”

Lawmakers insist the new tax on nonprofits was unintended. 

State Senate President Robert Stivers wrote in an op-ed that the sales tax is the result of unexpected affects of old legislation and a state Supreme Court ruling with the tax expansion — and that he expects the General Assembly to fix it. “It was never the intent of the legislature to force nonprofits to charge sales tax on tangible items or admissions to events,” the Manchester Republican wrote in the Courier Journal.

Three new bills under debate in the General Assembly may help ease that burden and would eliminate the nonprofit admissions tax or the tax on items sold for fundraising purposes. 

Officials from nonprofits told LEO that the law’s confusing mandates have caused increased paperwork, taking up more employee time, which could be going toward more charitable pursuits. And many also believe that patrons have spent more cautiously at events and on memberships, because of the 6-percent bump. 

State Rep. Attica Scott, D-Louisville, has heard from several constituents who aren’t happy about the tax. Scott, who has a background in nonprofit management, likewise doesn’t understand the levy’s purpose. She is in favor of legislation that eliminates the 6-percent sales tax for nonprofits.

“We’re talking about groups that support civil rights, human rights, lifting up Kentuckians and working with folks living in poverty and our most disenfranchised neighbors,” Scott said. “This is an issue of basic humanity and saying to Kentuckians we hear you, we see you, we’ve learned from our mistake and we are going to spend this session correcting that mistake.” 

The Cause 

Many believe that lawmakers didn’t fully understand the ramifications that their legislation would have on nonprofits. 

In fact, the effects of House Bill 487 were also compounded by two other factors: a March 2018 Kentucky Supreme Court decision altered the state’s sales and use tax exemptions. Then, Kentucky’s Department of Revenue changed their admission and sales tax requirements based on the language of the new law and the aforementioned ruling.

“You know, when you open up the tax code, wonderful things can happen and awful things can happen,” said Danielle Clore, the CEO of Kentucky Nonprofit Network, whose organization supports all three bills. “We know the only real fix is a legislative fix that is free of wiggle room, and so that is what we will be seeking.”

Given the influence of nonprofits on the economy, everyday Kentuckians might see the effects.

According to the Kentucky Nonprofit Network, nonprofits employ one in 11 Kentuckians and provide 9.9 percent of all Kentucky wages, making them a major contributor to the economic health of the state. In addition, a lot of these organizations help to deliver needed services to those in need, a job usually relegated to governments. When they see a downtick in financial contributions, both their employees and their clients may see reductions in pay and assistance.  

“It’s definitely a hard issue for nonprofits,” said Mark A. Lloyd, partner and Tax and Employee Benefits Department Chair at the Louisville business law firm Bingham Greenebaum Doll LLP. “The name kind of says it all, right? They’re nonprofit. They’re not operating to make a profit. They’re operating to fulfill their charitable purpose. This sales tax collection kind of distracts them from that.”

The Impact 

On Aug. 11, 2018, roughly six weeks after the law hit, the Kentucky Humane Society felt the impact of the sales tax when it threw Tuxes and Tales, its biggest fundraiser of the year. Organizers were suddenly saddled with an increased workload to prepare for the gala, coupled with the prospect of less profits. 

It attempted to educate gala guests about the taxes beforehand. Materials were sent out explaining the new costs. And the day of the event, those working the fundraiser were on hand to answer any questions. All of which takes time and money.

“People weren’t angry or upset. It was just more of it’s something we have to explain to them, and maybe it’s something they really didn’t budget for coming to that event,” said Alisa Gray, vice president of outreach for the Kentucky Humane Society. “People maybe didn’t bid as much on an item or maybe didn’t donate to our TLC fund. That’s our big ask. Maybe they donated a little less because they knew they were going to have to pay an additional 6 percent on other items that they purchased.”   

One definite effect the law had on the Humane Society was that staff members spent more time coordinating and processing the auction.

Not every item auctioned qualified for state sales tax. Gift cards, for instance, are not included. Yet, if a restaurant gift certificate is added to a basket of, say, wine, the entire caboodle must be taxed. There are several, time-consuming layers of what applies and what doesn’t. Another example being, while straight donations to nonprofits remain untaxed, sponsorships to the gala may be subject to the 6 percent fee, if donors received tickets to the dinner as a condition of their endowment. All these nuances can lead to confusion for both patrons and nonprofit staff.

“In Louisville, we have over 600 fabulous nonprofits that offer so many different services,” Gray said. “And the services they offer are there to support someone in need or a pet in need. If we are able to spend more money on those services… then it’s going to save more lives. Every dollar makes a difference.”

As the Center for Women and Families readies for its annual Celebration of Service and Survival for Feb. 15, Jane White, their development manager, has seen a slight drop in sponsorships, although she can’t necessarily attribute it to the new tax.

“It’s all kind of unknown right now,” White said. “We’re not real sure how it’s going to work out. It’s certainly going to be less revenue no matter how you look at it. I think it will affect the way people look at stuff and how much they are going to spend.”

Staff for the local nonprofit — which assists men and women who have been victims of interpersonal or sexual violence — also have experienced the difficulty in sorting out auction items, so that bidding can be maximized. 

For instance, White said trips to other states and even out of the country being auctioned are not taxed, while those that take place in Kentucky are. Experiences, too, don’t fall under the new law. But, if you happen to stick a bottle of bourbon in to sweeten the deal, then the 6 percent returns. 

Family and Children’s Place, an organization that provides services for abused and neglected children, has seen a different shift. Their main fundraiser, the Champions for Children’s Breakfast to be held April 24, 2019, remains free for those wishing to attend. While no bidding or auctions take place, guests may donate during the event, although it’s not required. Therefore, no taxes are levied on tickets or sponsorships. 

However, Leah Walker, the Director of Communications at Family and Children’s Place, said they have begun to see an effect on events held by third parties. Say a member of the community would like to hold a small fundraiser with an auction for the group. Profits from tickets and auction items sold would then have the additional fee applied. 

“It’s hard to put an exact number to it because the tax hasn’t been into effect a full year yet,” Walker said. “But our guess right now is between $5,000 to $10,000 as an impact based on the third-party events that are hosted for us, but again that’s a guess.”

Nonprofits that don’t want to deal with the admissions or auction tax could move their event across the river to Indiana. Clore said she’s heard of several planners doing this, which hurts Kentucky even more. 

“That’s an exact opposite of economic growth and development,” she said.