Federal Initiatives: Friend or Foe

Submitted by Geoff Peters, General Counsel, American Charities for Reasonable Fundraising Regulation

Often in this space we spend time discussing federal initiatives that might limit the abilities of charities to do their work effectively. But much of regulation is at the state level, and it doesn’t always directly involve fundraising. For example, in many states nonprofits are exempt from collecting sales taxes and also are exempt from property taxes. Yet even these can and sometimes are tied back to fundraising. Take Virginia as an example.

In Virginia a nonprofit can secure a sales tax exemption which removes the requirement of collecting or paying state and local sales or use taxes. This can reduce the costs of things purchased by the nonprofit as much as 4% to 5% in Virginia and more or less elsewhere. BUT, Virginia tax code only provides this benefit if “The entity’s annual general administrative costs, including salaries and fundraising, relative to its annual gross revenue under generally accepted accounting principles, is not greater than 40 percent.”

This type of thinking is becoming more and more common. In New York, Executive Order 38 required that no more than 15% of state granted funds be used to reimburse for administrative services. Louisiana uses the same formula. In some states, like Oregon, it depends upon your charitable purpose. And in some states real property tax exemption either doesn’t apply to all nonprofits or conservation easements are excluded. In some local areas the threat of real property taxation has forced nonprofits to make PILOT (Payments In Lieu Of Taxes) remittances.

Given the nearly unquenchable craving of government entities (federal, state and local) for revenues, it isn’t hard to see that challenges to nonprofit organizations abound in one form or another. And, often our best defense is to publicly ask the question: “Can the government deliver the services to meet public needs more efficiently and economically than we do?” Given most nonprofits’ penchant for efficiency, use of volunteers, and effective charitable fundraising they are nearly always more effective than government bureaucracies.

Thus, Virginia is but one example of an ignorant legislature which has used the percentage spent on administration and fundraising as the criteria for withholding a tax benefit to charities doing business in that state. Without citing them here, those in the industry are familiar with numerous studies which show that this thinking is not only faulty but counterproductive. And, those who attended the recent Bridge Conference had the pleasure of hearing an industry leader, Steven Nardizzi, CEO of Wounded Warrior Project lay out, point-by-point, why his organization has rejected that thinking and has raised more money for their mission as a result. To see a video of Nardizzi’s presentation at the Bridge Conference, click here.