College bookstores go beyond books - and that buys them trouble

Students often complain that college bookstores gouge them with prices kept high by an exclusive textbook market. But college books - sold at break-even prices, according to many campus bookstore managers - may get even costlier if American universities lose some of the tax-exempt status they have enjoyed for many years.

While ``college and university bookstores are a very small part of this perceived competition problem,'' says Gary Distelhorst, executive director of the National Association of College Stores, the impact of a broad reinterpretation of the tax statute on unrelated business income could make quite a difference to students and schools.

After hearing small businesses testify of unfair competition by a growing corps of nonprofit companies, Congress has agreed to review the Treasury Department's proposed restrictions for the unrelated-business-income sections of the Internal Revenue Code.

The nonprofit sector, which pulls in about $300 billion each year, accounts for 6 percent of the gross national product, according to a member of the US House Oversight Subcommittee.

Under a section of current policy - known as the ``convenience of student'' exemption - colleges and universities are able to avoid regular business taxes, says Sheldon Steinbach, vice-president and general counsel of the American Council on Education. Only commercial operations that are not ``substantially related'' to an institution's mission are subject to a tax on unrelated business income.

This loose guideline for what ``is and isn't necessary to the education process has proved a little fuzzy,'' says Abe Schneier, legislative representative for taxes at the National Federation of Businesses in D.C. Some bookstores sell a significant amount of goods that cannot easily be considered ``convenience'' items.

The Treasury Department would like to clear up the source of this confusion, by narrowing the nonprofit exemption category. One of its recommendations is that a commercial activity no longer be considered related to an institution's primary mission solely because it is operated for the convenience of students.

The proposed new standard would allow tax exemptions for dining halls and hospital cafeterias, for example, but probably not for the selling of merchandise like clothing and records.

The American Council on Education and other higher-education groups, however, are resisting any change in current policy on campus business activities.

``If in fact we begin taxing various aspects of higher education that have previously been exempt,'' says Mr. Distelhorst of the National Association of College Stores, ``students, or their parents, will end up paying.... Clearly, in a bookstore context, the price of new textbooks would have to go up.''

Bookstore managers say they need the additional business to cover the money lost on textbooks.

``If a store like ours is going to be able to operate at a profit, it has to sell a lot of other merchandise,'' says the manager of a nonprofit store at a small New England college. ``We sell textbooks because that's what gets us into the school, that's what gets us exclusive rights to sell retail and other merchandise for profit.''

But as for stores that border college campuses, this is an unfair disadvantage. ``One college literally cornered the market in Washington State selling computer software,'' says Terry Hill, a spokesman for the National Federation of Businesses.

Local record, computer, and clothing stores often feel pinched by what they see as loaded competition, says a staff member of the House Ways and Means Committee.

Because the unrelated-business tax is applied inconsistently, campus bookstores ``get all the benefits of the umbrella nonprofit institution'' while being run like any other business, says Mr. Schneier of the Federation of Businesses.

Some 70 percent of US colleges own and operate book and convenience stores as a ``service'' to students.

``They get a subsidized postal rate, subsidized labor, and subsidized offices,'' says Mr. Hill. But supporters of the tax-exempt status say that nonprofit bookstores have disadvantages, too. Typically, many institutions forbid their bookstores from advertising in the commercial market, says Distelhorst, the college stores association official. ``And they are bound,'' he says, ``to an institutional pay scale.''

``College bookstores do not cut prices to compete,'' says one private bookstore owner in Connecticut. ``It would incur the wrath of small businesses in the community.''

What should be done, Distelhorst says, is ``heavier enforcement ... of current law.''