This week, we continue looking at nonprofit organizations. We spoke a little about organizations such as charities, civic leagues, trade associations, and labor unions. These organizations are treated as tax exempt both under federal income tax law, to which our state income tax law conforms in large part, and under our General Excise Tax (GET).
Because net income tax and GET are two different regimes that are driven by two different sets of lawmakers (the U.S. Congress and the Hawaii Legislature), there are differences in the kinds of organizations that are recognized as exempt. Many organizations that are tax-exempt under section 501 of the Internal Revenue Code are not recognized as exempt at all under the GET. Social clubs, such as Waialae Country Club where famous golf tournaments are played, are an example. On the flip side, there are organizations that are exempt under GET but are not federally tax-exempt. Hospitals are an example of this class. Hospitals organized as not-for-profit operations are specifically exempt under the GET but are not so under the federal code, which has prompted surviving hospitals in Hawaii to take extra steps to qualify as 501(c)(3) public charities.
There is also a significant difference in treatment on an issue near and dear to many nonprofits – fund raising. Very few nonprofits are lucky enough to have all of their needs bankrolled by sustaining donors, so many put on splashy public events to bring in some needed funds. Common examples of these events are charity golf tournaments and gala balls. When good-hearted folks buy tickets to these events, they certainly receive something in return, but the ticket price paid far exceeds the value received, so it makes sense that part of the price is a donation. For example, say a person buys a gala ticket for $100 for food and beverages worth $60. Federal law requires the charity to tell the donor the worth of the ticket, here $60, and then allows the donor to deduct the difference of $40 as a charitable contribution. The State GET, however, is much more wooden. The GET exempts income received from gifts, but it defines gifts as money received where the donor gets nothing (except perhaps for some intangible satisfaction) in return. The GET, therefore, treats the $100 ticket purchase as fully taxable at 4% or 4.5%. It doesn’t care about the value of the ticket; it only cares that the donor got something of value for the ticket purchase.
People who aren’t aware of these differences easily can get confused. Our lawmakers really should be thinking of ways to make the laws more consistent with reality. The $100 ticket purchase is partly a donation and should be treated as such.
On the back end, what happens to the hotels or restaurants whose products and services are sold by the charities? Are they hit with GET at 4% or 4.5% again, even though the charity is fully taxable at the retail rate when they sell their tickets? Many catering providers think so, and charge accordingly. But they are probably eligible for the wholesale (0.5%) rate if the charity gives them proper documentation such as a Form G-17 resale certificate. Unfortunately, not many charities or catering providers are aware of these rules, and the Department of Taxation hasn’t done a good job of explaining them. In the meantime, the Department has been raking in the retail rate GET from both the charities and the catering providers. Both charities and catering providers should be fighting against this double whammy, especially when the charities’ livelihoods are at stake.