General Excise Tax on Nonprofits
by Tom Yamachika, President, Tax Foundation Hawaii
Many of us have had the chance to work with nonprofit associations, either as a board member, volunteer, or paid staff. It isn’t clear to many people how our tax laws, specifically our GET, apply to these associations, so I am presenting a simplified guide to how the GET works.
A nonprofit can earn three kinds of income, which I call green, yellow, and red income. These three categories cover most, but not all, of the income that a nonprofit can earn.
Green income is gifts, grants, contributions, and membership dues. Green income is exempt from GET. This kind of income is exempt from GET because it’s a gift, and it doesn’t matter if the recipient is nonprofit, for-profit, or an individual. If the donor gets something substantial in return for the contribution, it’s not a gift and therefore not green income.
Yellow income is what some people call “exempt function income.” To have exempt function income, the recipient must be registered as a tax-exempt organization. An organization registers with the Department of Taxation on Form G-6, which these days is submitted online. If the registration is approved, then exempt function income is income derived from the conduct of an activity that contributes importantly to the reason why the organization is exempt. For example, if the exempt organization is a school, tuition is exempt function income. If it’s a museum, admission fees are exempt function income. For a hospital, charges for medical care are exempt function income.
There are further restrictions on some types of organizations. For example, for a hospital the law says that exempt function income needs to be from the conduct of a hospital “as such.” There was a court case that decided that if a hospital provides a parking lot for patients and visitors and charges parking fees, the parking fees are GET taxable because, although having relatives and friends visit a patient can make the patient get better faster, a parking lot is not a hospital “as such.”
Yellow income is exempt from GET if all these conditions are met. This is the kind of income that is reported on the GET return as exempt and is listed in the second column of the return. Again, an organization can’t have any yellow income unless it is registered on Form G-6 and approved by the State. A determination letter from the IRS recognizing it as federally tax-exempt is not enough.
Red income is most of the other income a nonprofit receives. Red income is income from fundraising. Whether it be a bake sale, benefit dinner, or a silent auction, any income from an activity the primary purpose for which is raising money is GET taxable.
There are a couple of other categories of income that usually aren’t of significance. A nonprofit earning income from dividends is exempt from GET because all dividends are exempt from GET. If it earns some interest from safekeeping funds in the bank, that is exempt because it’s not considered “business” subject to the tax. If it gets a few bucks by auctioning off used property or other physical assets occasionally, there is a “casual sale” exemption that kicks in.
There are, of course, more complicated nonprofit organizations with different kinds of income. This article can’t, and doesn’t, cover everything. It does illustrate that the GET, as applied to nonprofits, is more complex than some folks would care to believe. We encourage nonprofits to get a qualified tax professional involved if they have some income that they aren’t sure how to report or classify.