Organizations that are tax exempt under federal law may think that this status carries through to all sectors, such as state and local sales and property taxes. However, tax exemption apart from federal status is often fairly narrowly defined, which this recent story in Nonprofit Quarterly focused on in its discussion of “charitable” activity.
Federal Tax Exemption. To backtrack, an organization can be exempt from federal income tax on a variety of bases, the most common and well-known of which is 501(c)(3) exemption. These organizations must be organized and operated exclusively for “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.” Organizations exempt under 501(c)(3) are diverse, ranging from more traditional schools and hospitals to animal shelters to arts organizations to environmental groups.
Other well-known federal tax exemption types include 501(c)(4) organizations (which have garnered a lot of attention recently with respect to political activity; 501(c)(6) trade associations (including the NFL, which also has been in the news lately; and 501(c)(7) social clubs (which include most sororities and fraternities).
State and Local Exemptions. When it comes to other tax areas like sales/use tax and property tax, however, the lines are drawn much more narrowly. For instance, the starting point will generally be that the organization needs to be a religious, charitable or educational organization. In other words, non-501(c)(3)s are generally out (subject to some variations from state to state). In Colorado, for example, property tax exemption is limited to religious organizations, schools, charitable organizations, and cemeteries.
Further complicating matters, the definition of “charitable” used in the context of property tax exemption is narrower than the federal definition. Under Colorado’s constitution, charitable purposes require a gift relating to education, religion, disease prevention or treatment, relief of suffering or provision of life assistance, construction of public buildings, or other services to lessen the burdens of government.
The Nonprofit Quarterly article highlights an Oregon 501(c)(3) organization, Newspace Center for Photography, an educational nonprofit dedicated to promoting photographic education. The judge in the case stated that its activities were culturally enriching but not necessarily charitable. The article also discusses a case against Princeton University challenging its exempt status on the argument that the university’s patent deals—worth billions—make it more like a business than a charity. Other organizations in the crosshairs include hospitals and college sports programs.
Other Payment Options. While exempt from property tax, some charitable organizations make payments to local governments known as PILOTs (payments in lieu of taxes). These are technically voluntary, though they are often heavily negotiated. Some also may have to pay property tax on some of their property, depending on its use. Princeton, for example, does pay property tax on some of its off-campus buildings and certain graduate housing properties.
Bottom Line. Even for 501(c)(3) organizations, exemption for state and local taxes aren’t a given. An organization should carefully evaluate whether it qualifies for such exemptions, and what it needs to do to obtain and maintain them.