There’s a reason it’s called “legalese.”

After all, at what dinner party would you hear the phrase: “To the fraternal, religious, charitable, scientific, educational, communal, or social welfare activities of such persons, or to the activities of such hospitals, infirmaries, and sanitaria as such, and not to any activity the primary purpose of which is to produce income even though the income is to be used for or in furtherance of the exempt activities of such persons”?

The excerpt above is otherwise known as Hawaii Statute 237-23.5 and actually applies to nonprofit tax exemptions. To the untrained eye, the law, even when read in its entirety, is not easy to interpret. In fact, while reporting my article on nonprofits and the General Excise Tax, the difficulty in understanding the law became apparent. Nonprofits don’t read it the same way.

Nonprofits vary in their interpretation and application of the law, even though the Hawaii Department of Taxation — seemingly in response to the confusion — long ago produced an explicit interpretation. And that is: Gross revenue receipts from fundraisers are taxable.

This might seem minor. But the law adds up to a heavy chunk of change. Every bake sale, race, dinner, auction, or gala to support a charity is subject to the GET. This means every charity on Oahu must pay 4.5 cents on every dollar received at those events.

“It’s been the position of the department for many years,” says Hugh Jones, supervising deputy attorney general who provides regulatory oversight for the nonprofit sector in Hawaii. “It is an interpretation of the law, but the law also gives the law to the Department of Taxation to interpret the law.”

While his may have been the position of the department for many years, it’s not easy to find on its web site.

Google helps. A quick search turns up something called, “Tax Facts: Tax Issues for Hawaii Nonprofit Organizations.” The brochure from the Department of Taxation is clearer than the law. “…Gross receipts derived from any activity the primary purpose of which is to produce income are subject to the GET even though used to fund the exempt purposes or activities of the organization. Consequently, gross income received from the conduct of any fundraising activity is subject to the GET.”

Then there’s a document called “Think Twice Before Forming a New Charity,” a document from the Attorney General and Hawaii Department of Commerce and Consumer Affairs warning against the surprising costs associated with running a nonprofit.

“Sometimes people decide to form a nonprofit in order to get the tax exempt benefits,” it says. “Not all of a charity’s revenue is tax exempt. Donations are, but income from fundraising activities is subject to federal and Hawaii’s general excise tax (GET).”

Heavy legalese. Confusing websites. Clear tax brochures. These are the choppy waters nonprofits navigate in filing their taxes.

“Probably a lot of nonprofit executives don’t truly understand when they pay what,” says Lisa Maruyama, president and CEO of Hawaii Alliance of Nonprofit Organizations. “They defer to their tax specialist. There needs to be some education about it, too.”

Follow Civil Beat on Facebook and Twitter. You can also sign up for Civil Beat’s free daily newsletter.

Comments