State to Take a Tax Bite From School Fund-Raisers

Hundreds of school organizations that peddle everything from football buttons to hot dogs as a way to earn money for school activities are facing for the first time the same burden as most business people--sharing the take with the tax man.

The new tax bite comes as a result of a recent State Board of Equalization ruling that a high school wrestling team in Monterey has to pay a sales tax on thousands of dollars it made selling fried calamari.

The 3-2 decision sets a precedent that places new responsibilities on school organizations to either collect a sales tax on certain items they sell or obtain a tax exemption from the Board of Equalization.

Discovered and later billed by tax authorities conducting a routine check at a local fair, the Monterey High School wrestling team balked at paying up. The team claimed that, as a nonprofit high school organization, it was entitled to a tax exemption and did not owe $1,000 in sales taxes.

But, acting on the advice of its lawyers, the board majority ruled last month that either on purpose or by accident the Legislature had repealed automatic tax exemptions for school organizations in the mid-1980s. At that time, staff attorney Ron Dick said, lawmakers replaced a law giving school organizations blanket exemptions with a new measure that specifically named those organizations that would not be required to pay the tax.

He reasoned that any groups--such as school athletic teams--that were not named in the law would not be entitled to an automatic exemption.

On the list of exempted organizations were the Boy Scouts, Girl Scouts, Cub Scouts, YMCA, YWCA, Future Farmers of America, Future Homemakers of America, 4-H Clubs, Special Olympics, Little League, Bobby Sox, Campfire Inc., Future Business Leaders of America, Distributive Education Clubs of America, Vocational Industrial Clubs of America, Collegiate Young Farmers, America Youth Soccer Organization, California Youth Soccer Assn. and Pop Warner Football.

Any other youth organization, Dick said, would have to apply to the board for exemption before they sold taxable goods. The board would then have to decide on a case by case basis whether the exemption was justified.

Two board members--Controller Gray Davis and Chairman Conway Collis--disagreed with the staff lawyer’s interpretation, insisting that the Legislature never intended to make schoolchildren wend their way through the state’s complicated tax laws. They argued, without success, that by passing the new law, legislators meant only to expand earlier exemptions and not to replace them. Davis and Collis cast the two dissenting votes when the Board of Equalization voted to turn down the appeal by the Monterey wrestling team.

“Raising money for athletics is as American as apple pie and here we’re requiring them to go through bureaucratic hoops,” Davis said.

“I just can’t believe the Legislature intended this result. Next they’ll be taxing little 6-year-olds selling lemonade outside their home.”

Davis said the ruling now will force school organizations to familiarize themselves with tax laws that are complicated enough to give a Philadelphia lawyer a headache.

In order for a school organization to know whether, for example, its food sale items are taxable, it will have to delve into narrowly drawn laws governing its temperature. In this case, hot prepared food is taxable; cold food generally is not. So if the organization sells a hot fried ham sandwich on toast it is subject to tax, but a cold tuna on toast is not.

Because candy manufacturers have been influential with the Legislature, candy proceeds are usually not taxable. Neither are baked goods. But when candy, baked goods or any other food item are sold within a place where admission is charged--such as a dance, a football game or a fair--it is subject to the tax. Restaurants operate under a different set of tax rules.

As a practical matter, Collis said, most organizations will have no way of knowing either when something is taxable or how to obtain an exemption. Davis said it is apparent that school groups don’t know about the law because state records show none of them have ever applied for an exemption.

And while the exemptions are expected to be granted almost automatically to school groups, both Collis and Davis said it will take weeks, if not months, for the requests to work their way through the bureaucracy to the board.

“To make groups go through the bureaucratic rigamarole of applying for an exemption is just making it that more difficult for them to operate. These programs are for school kids; they are not a business. These resources should go into teaching kids and not be bogged down in the tax bureaucracy,” said Collis.

Bill Grant, the Monterey High School wrestling coach who was the first to get hit with the special tax, said the Board of Equalization’s decision is particularly burdensome for high school sports programs which increasingly have had to resort to fund raising to make up for cuts in athletic budgets. When he took the coaching job at Monterey High 12 years ago, Grant said, his budget was $12,000. Last year it was under $5,000.

What was once an occasional activity has become a way of life for coaches, he said. And what were once modest ventures such as car washes and bake sales have become more elaborate as the financial needs of team sports become more critical. Monterey wrestling team members and their parents spend nine days each summer selling calamari at the Monterey County Fair and net nearly $10,000.

“Almost every coach in the United States has to do this,” Grant said. “You’re a fund-raiser and a coach. It’s sort of a necessary evil. I have so many friends who have dropped out of coaching because of the frustration of fund raising.”

And now with the tax burden added, he said the job is even harder.

“Aren’t there people out there doing some terrible, wicked things with money and not paying taxes?” Grant asked. “It’s like they don’t have anything better to do but go after us.”

Tax authorities for the board say they haven’t made a concerted effort to “go after” school organizations, but when they do find a violation of the tax law they are required to take action.

The wrestling team’s failure to pay sales tax was discovered during a routine audit of the 1986 and 1987 Monterey County Fair.

“The thing that is ludicrous to me was that the booth right next door to us belonged to the Boys Club of Monterey and they didn’t have to pay anything because they were on that little laundry list,” said Grant.

When Grant’s team appealed its tax bill, it set the bureaucratic machinery in motion for what would ultimately be a precedent-setting decision.

Now that the board has ruled against him, Grant said he will probably appeal to the courts where the lawyer-fathers of some of his team members have agreed to represent him without charge.

“I don’t have any money (to pay the tax),” he said. “We go through every penny we earn.”