The stuffed-bear debate: When do you tax what nonprofits sell?
You can see the trend everywhere: * In Minneapolis, travelers are patronizing the on-campus travel center of the University of Minnesota.
* Some of the finest scarfs in Boston are sold by the Museum of Fine Arts (MFA).
* Public schools in Colorado regularly rent films from the 5,700-item collection of Academic Media Services, run by the University of Colorado.
Increasingly, America's nonprofit organizations are turning to commercial sales of goods and services to keep them in the black. And, increasingly, the nation's small-business community looks at this competition from non-taxpaying entities and sees red. The sides are shaping up for what could be a most curious chapter in the annals of tax law: the Battle of the Stuffed Bears.
The issue itself is not new. Since 1950, the US Internal Revenue Code has taxed ''unrelated business income'' (UBI) of nonprofit organizations. But inflation and cutbacks in federal grants have recently lured hard-pressed nonprofits into commercial marketing - to the dismay of for-profit businessmen. One measure of their complaint: The nation's 780,000 nonprofit organizations paid only $24.6 million in 1982 UBI taxes. And that figure, says Jeffrey S. Giancola of the US Small Business Administration, is ''abysmally low.''
Why so low? Well, pity the IRS auditors looking at stuffed bears. Sold by a zoo, the bears are probably not taxable: They serve an educational purpose, teaching youngsters about mammals. Sold by an art museum, however, they could be considered ''unrelated.'' But the art museum probably won't be taxed on sales of reproductions of ancient coins - unless the coins are hung on chains and sold as necklaces. Those scarfs in Boston seem to pass muster: They feature Asiatic and Persian art motifs. But what about reproductions of chairs? ''If you sell an item purely for its utility purpose, then it isn't art-related,'' says the MFA's director of finance, John Higgins. So ''if somebody can sit in it,'' he queries, ''does that make it taxable?''
And what about other areas of competition with private-sector companies - hearing aids sold by nonprofit clinics, squash-court time sold by YMCAs, computer time sold by an industry association? All of it, says the small-business community, is unfair.
Last fall, these and other complaints surfaced in an SBA report entitled ''Unfair Competition by Nonprofit Organizations With Small Business.'' It noted that ''nonprofit activity represents a form of indirect government competition with the private sector.'' Why ''government''? Because, as Yale law professor Henry Hansmann explains, tax exemptions amount to ''a kind of a capital subsidy to nonprofits'' - allowing them to retain their full earnings, accumulate capital, reduce their costs, and undersell the for-profit enterprises.
The SBA report has clearly touched nerves on both sides. Since it raised the issue, there have been two significant shifts in federal policy (by the National Science Foundation and the Office of Management and Budget) designed to reduce competition between nonprofits and small businesses. The issue has also given birth to the Business Coalition for Fair Competition, a Washington-based lobbying group for congressional action.
But what action should be taken? The SBA report's conclusions, calling for a higher UBI tax and a tighter definition of ''related'' business activities, are characterized by Bob Smucker of Independent Sector (an umbrella organization for nonprofits) as ''Draconian.'' He worries about such things as the nation's nursing homes, only about 20 percent of which operate as nonprofits. If they get taxed into extinction, he wonders whether ''the for-profit (nursing home) is going to be as concerned about serving clientele who can't pay.''
Of the manifold questions raised by this Battle of the Stuffed Bears, that one seems paramount. To what extent, after all, do the nonprofits serve a public good different from that served by the for-profits? That issue, striking at the heart of our reasons for granting tax-exempt status in the first place, is complex and difficult.
And just now, with elections in the offing, Congress seems loath to touch it. Nor is the IRS complaining: S. Allen Winborne, an IRS assistant commissioner who oversees exempt organizations, notes that ''we don't think our problem is with the regulations as such.'' So the issue may continue to simmer.
As well it should. It is still largely unknown to the public and needs far more study. Clearly, the nation's entrepreneurial spirit needs defending. But so, too, do the high ideals underlying many nonprofits. The need is for a concerted effort by academicians, researchers, and thinkers from both sides to gather data, articulate policy, and hammer out a philosophy of nonprofit enterprise that lifts the nation above the current stuffed-bears debate.
