The Fair Tax Act, Part XLIX
Section 706 deals with one of the stickier areas of any tax law: Non-profit organizations.
`SEC. 706. NOT-FOR-PROFIT ORGANIZATIONS.
`(a) Not-for-Profit Organizations- Dues, contributions, and similar payments to qualified not-for-profit organizations shall not be considered gross payments for taxable property or services for purposes of this subtitle.
`(b) Definition- For purposes of this section, the term `qualified not-for-profit organization’ means a not-for-profit organization organized and operated exclusively–
`(1) for religious, charitable, scientific, testing for public safety, literary, or educational purposes;
`(2) as civic leagues or social welfare organizations;
`(3) as labor, agricultural, or horticultural organizations;
`(4) as chambers of commerce, business leagues, or trade associations; or
`(5) as fraternal beneficiary societies, orders, or associations;
no part of the net earnings of which inures to the benefit of any private shareholder or individual.
`(c) Qualification Certificates- Upon application in a form prescribed by the Secretary, the sales tax administering authority shall provide qualification certificates to qualified not-for-profit organizations.
`(d) Taxable Transactions- If a qualified not-for-profit organization provides taxable property or services in connection with contributions, dues, or similar payments to the organization, then it shall be required to treat the provision of said taxable property or services as a purchase taxable pursuant to this subtitle at the fair market value of said taxable property or services.
`(e) Exemptions- Taxable property and services purchased by a qualified not-for-profit organization shall be eligible for the exemptions provided in section 102.
Non-profits are special exceptions from taxation under the current income tax structure and the FairTax bill continues to exempt them from taxation as well. The definition of ‘not-for-profit’ is a bit more restrictive than the current one, which should mean fewer organizations could qualify, though how many organizations this would affect is anyone’s guess.
My understanding of the bill is that non-profits would pay FairTax on their purchases unless they were for “for resale, to produce, provide, render, or sell taxable property or services, or in furtherance of other bona fide business purposes.” Example, a church would not pay FairTax on bibles they were going to resell but would on bibles they were going to distribute for free.
This is incorrect.
Non-profit organizations are a specific exemption from the rules that you mention, at least according to everyone I have spoken to at AFFT and also according to studies done by Kotlikoff and others which either exempt said consumption or account for it as not being added relative to the income tax.
The work of donating things to charity and providing free services to folks in need is intentionally not taxed today and the FairTax preserves this activity as well. The official government line on why this is done today is that private non-profits do work that the government would otherwise be funding, and thus they encourage it by eliminating most taxes on that kind of activity. Most states also exempt non-profits from taxation to one degree or another today.
To tax a portion of their business inputs would result in a new direct tax on actually performing charitable activities, which for many non-profits is indeed a ‘bona fide business purpose.’
Non-profits only collect and remit tax on activities that they directly charge for, and are exempt from tax otherwise, to the best of my knowledge.
For more info on this, take a look at The Fair Tax in Plain English.
Just read page 27.
A non-profit doesn’t have a “bona fide business purpose” – they aren’t a business – so the only exemptions that apply are purchases “for resale, to produce, provide, render, or sell taxable property or services.” All other purchases are taxed.
Kotlikoff, et al., explains it in “Taxing Sales Under the FairTax: What Rate Works?” (http://www.fairtax.org/PDF/TaxingSalesUnderFairTax.pdf): “The FairTax taxes nonprofits’
sales of goods and services to individuals and their
purchases of goods and services that are not sold on to
individuals, including capital goods.”
What is specifically expempt for non-profits is the wages of their employees (they aren’t a “taxable employer”).
Kotlikoff details in Note 8 how he removed the wages from the final consumption expenditures of non-profits:
“The personal consumption expenditure (PCE) within the
NIPA accounts includes the final consumption of nonprofit
institutions serving households (NIPA Table 2.9, line 57, $183.7
billion) and their sales to households (NIPA Table 2.9, line 64,
$676.8 billion). We estimate and remove the wage and salary
portion of the final consumption expenditures of nonprofit
institutions. First, we remove the portion of nonprofit final
consumption expenditures that is attributable to educational
nonprofit institutions, since they have already been removed
from the base institutions (NIPA Table 2.9, line 61 minus line 67,
$52 billion). That leaves the final consumption expenditures at
$131.7 billion. Next we estimate the ratio of wages and salaries
to total expenditures of nonprofits by taking NIPA Table 1.13,
line 51 and dividing it by the sum of NIPA Table 2.9, lines 58 and
70; the result equals 51.65 percent. We apply this ratio to the
$131.7 billion to get $68 billion. That represents our estimate of
the salaries and wages of nonprofit employees that are not
involved in the production of goods and services that are sold to
households.”
Doing the math, $63.7 billion (131.7 – 68) of non-profit’s spending would be taxable. That would be ~$19 billion in FairTax paid by non-profits according to Kotlikoff.
Also, I didn’t include the “Capital Spending by Nonprofits” (Kotlikoff, Table 2, Line 18). That’s another $58 billion taxable spending bringing the total taxable amount to $121.7, or $36 billion in FairTax that would be paid by non-profits.
Nice work finding that detail in Kotlikoff’s study… hadn’t seen that part.
Well I have to cede that Kotlikoff reads the bill this way, but I am simply unsure. The AFFT folks obviously state this differently, and I have yet to hear from Congressman Linder on this issue.
My concern on this is if in fact your interpretation is the express intent, it is a significant new tax on non-profits that did not exist before, and it singles out charity activity (specifically) as taxable.
For example, for a citizen to give $2000 to a church costs nothing in tax. But if the church gives away room & board in a free shelter it operates, all the expenses of the shelter would be expressly taxed at 23% of consumption spent. If prices effectively increase by 15% as many think they will, then the church’s free shelter becomes 15% more expensive with little relief save employer-side tax costs on payroll (which could only amount to at most 7.65% of costs if nothing but labor was being paid for). Given that these charities pay no tax today, this is essentially a shift of the tax to their activities and to the donators’ monies. The aforementioned $2000 is now taxed to the tune of $460 if it is spent entirely on charity.
However, in the large scheme of things, the ~$36 billion would probably only turn into a single percentage point of rate increase one way or the other, so perhaps the effect is small on a macroeconomic scale. I just don’t want to see private charity becoming less attractive.
You need to keep in mind one of the expressed purposes of the FairTax, “To tax all consumption of goods and services in the United States once, without exception, but only once.” If a soup kitchen could buy soup tax free and give it away, when is that consumption taxed? The answer is that if the soup kitchen is giving it away, it’s taxed when they buy it. If they are selling it, it’s taxed when it’s sold.
I understand that, but we have multiple parties in assumed authority on the subject stating different things.
And to be honest, the term ‘bona fide business purposes’ is a vague term offered after the whole notion of profit, suggesting perhaps other expenses that aren’t directly related to sales. It could be interpreted in a number of ways.
For example, if I run a computer store and I buy a receipt book, which will last me perhaps several months, which costs less than $4 and represents less than one cent of price to any of my customers, I can buy it tax-free. No one other than my business use will consume that receipt book. It will never effectively get taxed. Many forms of business expenses are like this. The phone bill, the rent for my business, etc are essentially going to be tax-free too. No one other than my business consumes them, ever. They just never get taxed. Not even once. Instead when the owners profit, and they spend their profits, then something gets taxed. But wait, that works for charity activity too, doesn’t it? Certainly the businesses that provided food to the church profited, and they will spend their profits and get taxed.
So what would be different between allowing the non-profit to provide the soup-kitchen for free and providing their sermons for free? Certainly their rent on the church won’t be taxed, will it? And their employees aren’t taxed, either.
I am just unsure on this point. I believe the bill requires a clarifying statement in this section to make its intent explicitly clear.
Certainly their rent on the church won’t be taxed, will it?
My understanding is that their rent would be taxed. As would be their utility bills, etc.
And their employees aren’t taxed, either.
No, but that is expressed specifically in the bill. This is the one benefit that non-profits have.
Fred,
My understanding is that purchases for business purposes are not taxed. The not-for-profits rent and utilities would be purchases for business purposes and therefore not taxed.
A not-for-profit organization is not a business. It has no “business purpose.”
But any expense that goes directly to conducting the non-profit activities would not be taxed.
How does it make sense to tax a not-for-profit for the expenses used to provide a free service and not tax a business for the expenses used to provide a service that has to be paid for?
It doesn’t. My understanding of the bill is that the not-for-profit will only be taxed on items and services that it CHARGES for.
How does it make sense to tax a not-for-profit for the expenses used to provide a free service and not tax a business for the expenses used to provide a service that has to be paid for?
A business isn’t taxed for the expenses used to provide a service because the service is taxed when sold (consumed). With a nonprofit providing a free service, there is no transaction to tax so the only way to tax that consumption (the service) is to tax the inputs.
Again, remember the FairTax’s expressed purpose, “To tax all consumption of goods and services in the United States once, without exception, but only once.†How is the “consumption” of a nonprofit providing a free service taxed unless their inputs are taxed?
Again, remember the FairTax’s expressed purpose, “To tax all consumption of goods and services in the United States once, without exception, but only once.†How is the “consumption†of a nonprofit providing a free service taxed unless their inputs are taxed?”
In many cases, a not-for-profit is providing a product or service that the government would normally be paying for. In order to avoid the dreaded exemption word, I guess a solution would be to tax the not-for-profit for its operating expenses and then allow the not-for-profit to apply for a refund of those taxes.
From my conversations with AFFT that is essentially how it supposed to work.
This is why they get their own certificates, etc. That way they can purchase tax-free or apply for tax refunds on appropriate items.
However, on this blog and others I have run into folks who believe the exact verbiage of the bill puts this into dispute, and I understand their point, but the ‘expert’ at the AFFT phone line told me otherwise.
I chalk it up to ‘buggy’ language in this instance, and it certainly needs clarification.
This link has a paper reaffirming AFFT’s position.
The non-wage/non-sales related expenditures of nonprofits was in both Kotlikoff’s and the AFFT’s calculations of the FairTax base.
This is exactly what I mean. There is clearly a disconnect in the literature, and we could argue both sides of it a good bit. Without 1st-party notion of intent from a legislator, it will be hard to determine what the correct interpretation of this section is.
James is correct. We are all reading our own interpretations into various parts of HR 25. What this tells me is that the Fair Tax needs to be clarified in several areas to spell out the intent of the law in each area. Discussions like on this blog are invaluable in that regard. The discussion needs to be more widespread among the people and certainly within congress.
Financial intermediation services, indexing of social security, treatment of not for profits, transition inventory are a few of the areas that require deeper investigation and clarification.
Our positions on each issue can usually be traced back to our basic philosophies on what fair means. To some, fair means tax income with graduated rates; those with the most income can best afford to pay the most tax. This borrows from the philosophy of Marx; from each according to his ability to each according to his needs. Others think all taxes especially federal taxes are bad, most are unconstitutional. It doesn’t matter if one of the proposed systems is better than the other; both are bad and must be opposed. This is from the strong Libertarian persuasion. Most, who favor the Fair Tax, believe that taxing consumptions makes more sense than taxing production and wealth. Whether Democrats or Republicans, most of these people have more conservative philosophies. They believe that people should harvest the fruits of society based on what they produce for society. Most understand that as an affluent society, we can and should put a floor under everyone. No one should have to do without the basic necessities of life.
Until we reconcile these philosophical differences there will always be disputes. Opposition provides a valuable service and should be encouraged. If advocates can not persuasively defend their position with fact and logic, then perhaps they need to rethink their positions.
We should all strive to find the fairest tax system possible to eliminate as many of the current problems as we can.
Here, here! Marvin –
One problem with any real tax reform is that somebody’s ox will get gored. That is, some group of people will see their taxes go up, even if tax rates are lowered or simplified overall. That one group (and their lobbyists) will fight like hell to keep that tax reform from ever happening, while the masses who would benefit somewhat by the tax reform aren’t really motivated to strongly push the reform and, usually, don’t have lobbyists to push for broad tax reform. (This is a fundamental principle of political philosopy, but it’s been so long since I’ve been in school that I forgot what it’s called. Something like the tyrany of the minority. That is, in a republic a small group that cares strongly about something will win vis-a-vis a large group that is more apathetic.)
This is one reason we will probably never get universal health insurance. Even though most folks would benefit from it, there’s not enough strong demand, and those who benefit from our current system (i.e., pharmaceutical manufacturers; insurance companies; doctors’ groups) will fight like hell against it.
OK. I know I’m off topic here. But my real question was: why did the President’s Tax Reform Panel’s proposals get such a bad reception. The proposals would have somewhat simplified the tax system and, arguably, made it a litte fairer (which is what we all say we want), yet it went absolutely nowhere. (I know I, for one, didn’t like them. Partly, I must admit, because they would have raised my taxes without seeming to provide any real benefit.) So, I’m just curious of the other posters’ views here: if the Tax Reform proposals would have moved the ball a litte further in terms of simplicity and fairness, why were they so resoundly rejected? (Or, perhaps the answer is they would not have advanced the ball any.)
Any thoughts?
Hayden
There is much truth in your comments. My thoughts on those issues:
Many fear universal health care because,rightly or wrongly,they equate it with conditions that exist in Britain and maybe to a lesser degree in Canada. Health care is rationed to everyone based on what the government can afford to give to everyone. There are long waiting times for non emergency procedures. They fear that even those willing to pay from their own pocket will not be able to do so. I wouldn’t have a problem if basic health care were universal and the more expensive items be covered by private insurance or individual resources. I certainly object to any insurance plan paying for cosmetic and unnecessary procedures. Liposuction and Viagra may be a couple of examples.
The people that are pushing the strongest for tax reform are mostly Fair Tax and Flat Tax supporters. The fair taxers believe the flat tax is only temporary relief before congress, goaded on by the lobbyists, recreates all of the same problems that exist today. They believe this situation will exist as long as there is an income tax/payroll tax system in place. Others wring their hands and say “the system is broken and should be fixed.” They aren’t really serious. They only mouth those words to placate those who are making noise. It will take a lot more noise before those fence sitters take the issue seriously. The 74 congressmen who support the Fair Tax, for the most part, have been pushed to that position by noisy constituents.
What is needed is more discussion and debate. I have learned a lot from reading this blog. I have been forced to think by those who have presented dissenting views. I encourage everyone to raise issues that don’t necessarily agree with the mainstream line of thought. I would hope bloggers would be thoughtful, honest and respectful in their comments.
The Fair Tax is a big improvement over the present sysem. However, there are clarifications and changes that are needed to make the system work effectively. Indexing social security by 30% is one of those points. As a retiree, it is good for me. But, I think it is an unnecessary and unfair transfer of wealth to retirees. The 30% is meant to cover the increased total prices that will result from the Fair Tax. But, the prebate already covers the total Fair Tax up to the poverty level. By definition there is no price increase up to the poverty level. The social security recipient will also avoid all income taxes, capital gains, estate, AMT and whatever taxes they are now paying. Indexing social security and giving these same people the prebate is a duplication. I am sure that this transfer of wealth to older people is intended to gain suppport from a large voting block. I am afraid thinking like that only dooms the bill to failure. I don’t want to unfairly gore someone elses ox. Perhaps indexation should be net of the prebate.
I couldn’t understand some parts of this article r Tax Act, Part XLIX :: The Fair Tax Blog, but I guess I just need to check some more resources regarding this, because it sounds interesting.
Daniel seems to have some sort of automatic posting software that is posting the same message over and over. Can’t the moderator stop posting these? Or, even better, won’t Daniel stop submitting them?
Joshua should be able to classify his posts as spam. These posts might have gotten in under a bad mouseclick or something and now the spam engine trusts them. I can delete his comments from posts I originated, but that’s all the juice I have here.
Is there a increased or a decreased incentive to donate to a non-profit corporation?
Many people are confused about the concept of a non-profit organization. The terms Non-profit, Not-for-Profit, or Tax-exempt, all mean the same thing.
Which department specifically approves which organizations can benefit from the FairTax bill?