You may think that when you donate to a nonprofit in Hawaii, it’s tax free. Think again.
While donors can claim tax write-offs for their contributions, nonprofits in Hawaii must pay the General Excise Tax on fundraising events.
Charity balls, fairs, concerts and road races that benefit a particular cause — events involving a ticket or admission price — are all subject to the GET, a tax on gross revenues for business activities in Hawaii. The majority of businesses are subject to a 4 percent tax, in lieu of a sales tax. In Honolulu, businesses pay an additional 0.5 percent surcharge and are permitted to pass on to consumers a 4.712 percent charge, to recoup the actual impact of the 4.5 percent tax on gross receipts.
“That is not normal,” said David Thompson, vice president of public policy at the Washington, D.C.-based National Council of Nonprofits.
At Harvard Law School, a tax policy specialist agreed.
“I’ve never heard that before. It’s certainly a surprise to me,” said Professor Daniel Halperin. “The income for fundraising is tax free at the federal level.”
But Rep. Marcus Oshiro, chair of the House Finance Committee, defends the approach.
“I think it’s about treating a like enterprise or like activities the same. If it’s a fundraising activity – say, selling bread – it operates, acts like, seems like another entity selling bread for revenue generation.”
How the GET applies to nonprofits is confusing enough that it appears some organizations interpret the tax differently from others.
When the Honolulu Academy of Arts puts on its annual Kamaaina Christmas holiday fundraising gala, a $10,000 table for 10 costs the museum about $3,600 to put together, factoring in food, equipment rentals, entertainment and other event costs. For the donor, $9,150 of the $10,000 total is tax deductible. But the organization says it pays $471.20 in GET on that table, or 4.712 percent of the total donation.
At the American Heart Association’s annual Heart Ball, donors pay between $3,500 to $25,000 for tables. Some years, they’ve sold as many as 120 tables, but due to the economic recession, lately they’ve sold about 80 tables. This year’s gala grossed $646,380 and netted $535,082, according to the association. But the heart group says it paid $6,432 in GET on auction revenues and the dinner — not the gross receipts.
It’s common nationally for cities and states to exempt nonprofits from paying a sales tax. But taxing fundraising dollars is unusual. On top of paying the GET on fundraising revenues, nonprofits in Hawaii pay the GET on everything from tables and chairs to soap and stationery.
To be sure, Hawaii nonprofits do benefit from several tax exemptions. Like their counterparts on the mainland, Hawaii nonprofits do not pay property taxes. Cash donations (independent of fundraisers), gifts, grants, membership and convention fees are also exempt. But for many organizations, fundraisers are an important vehicle for raising money.
Hawaii nonprofits have fought hard to keep the few exemptions they possess. Pressed for ways to make up this year’s state deficit, legislators considered several bills that would have required more taxes from nonprofit organizations. These measures included revoking their property tax exemptions and adding a 1-percent levy on conferences and conventions. None of the measures passed.
Cash-strapped states all over the country this year considered bills that would take away nonprofits’ tax exemptions. Minnesota recently enacted fees on nonprofits to help maintain city streetlights. Rochester, N.Y., did the same. Pennsylvania considered imposing a property tax assessment last year.
Hawaii’s considerations, though, were among the most sweeping.
Debate about ending nonprofits’ tax exemptions isn’t likely to be resolved soon, as states continue to dig themselves out of the recession. Nonprofits are being asked to do more as governments scale back social services — which is precisely why nonprofits were given tax exemptions in the first place.
“We can’t do what we’re set out to do whether you’re feeding the hungry or providing health services,” said Thompson at the National Council of Nonprofits. “You’re taxing revenues of the nonprofits so it’s restricting their abilities to relieve the burden on the government.”
In Hawaii, said Don Weisman, the American Heart Association’s communications and government affairs director, the association relies heavily on fundraising because it doesn’t accept government grants.
“The Heart Ball is the largest portion of our fundraising in Hawaii,” he said. “Everything is a donation.”
Other Hawaii nonprofit executives such as the Easter Seals’ John Howell say living with the GET’s impact on fundraising is hard enough. He reeled at the thought of losing the other exemptions.
“We would be out of business,” he said.
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