Losing Our T-Shirts to the Tax Man

As the United States looks for ways to promote democracy throughout the world, it should not lose sight of one of the factors that have fostered this at home--vital nonprofit groups. These groups take on the responsibility of providing countless public services and pulling citizens together who care about public-spirited issues and providing them with the information to become involved.

The United States is nearly unique in viewing such groups as a key ingredient in a healthy democracy. Its tax laws have exempted nonprofit groups and allowed them to use the mails at special rates. As political parties have declined, advocacy groups have become the means of empowering millions of citizens to feel that they have a voice.

Yet that contribution is now in jeopardy. A tradition of encouragement is being reversed by forces in Congress and the Reagan Administration that view such groups as an encumbrance.

The House Ways and Means Committee is now fashioning legislation that would breach the tradition of not taxing activities that are substantially related to what a group, as a public organization, is all about. In other words, nonprofits that operate shops to sell calendars or T-shirts heralding their cause would be taxed. Institutions that foster appreciation of nature, art or history by providing materials to the public would face a tax on all “inherently commercial” items of a functional or decorative nature unless those institutions could afford to give the materials away. Organizations would be taxed for collecting fees to cover the costs of taking members on trips to deepen appreciation of a group’s particular concerns.

In effect, Congress is being urged to selectively abandon the long-established rule that exempts taxes on sales activities that are “substantially related” to a group’s public purpose. This essentially fair rule would be rent with exceptions that have no rationale and simply respond to complaints of commercial entrepreneurs. In many cases, the nonprofit organizations pioneered in developing interest in an activity before commercial operators ever entered the field. The Sierra Club, for instance, has been running outings for its members since 1901.

There would be no equitable rule spelling out why some substantially related activity is taxed and some other such activity is exempt, except when the squeaking wheel has political connections.

Not only would commercial complaints force widespread revocation of the exemption; in some cases the complainers also would put nonprofits at a competitive disadvantage. This would be particularly true for organizations accepting advertising for a magazine that they publish as a house organ. Even if they publish the magazine at a financial loss as a service to their members, they would face a tax on their net advertising revenue (they could deduct only the costs of getting the ads and printing them). All other costs would be ignored. Commercial magazine publishers, in contrast, can offset all of their expenses against their income. There would be no parity or equity in the way nonprofit publishers of magazines would be treated.

Various nonprofits are urgently hunting for solutions to their particular problems with this legislation, but the fact remains that fundamental principles that have nurtured America’s nonprofit community are about to be breached:

--That income derived from selling items closely related to the basic purpose of nonprofits should not be taxed.

--That contributions should not be taxed.

--That the earning of passive income (from investments, rents and royalties) should be encouraged in order to build financial stability and thus should be exempt from taxation.

--That principles of equity across classes of taxpayers in similar situations should underlie the tax code.

All these principles will be in tatters if this legislation moves forward. And this legislation comes on top of other moves by the Internal Revenue Service to narrow the definition of deductible money for nonprofits and to expand the scope of what is regarded as lobbying. At turn after turn, nonprofits are feeling a chilling message that they should withdraw and do less.

No one disagrees with the notion of taxing income from sales by nonprofits in businesses that are far afield from their chartered purpose--if fair allocations of relevant, offsetting expenses are allowed. But the proposals advancing now in the Ways and Means Committee would move way beyond this standard and leave America’s nonprofits in financial disarray and weaken their ability to play a vital role in American life. Such fundamental changes should not be rushed through Congress.