General Excise Tax on Nonprofits
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.
0 Comments
Transit History
This week, I’m going to do something a little different. I’m going to trot out an analysis that was done by one of my predecessors. Who and when will be revealed later. (My comments on how they relate to today’s situation are in parentheses.) “Rapid transit for Honolulu is the most costly single project ever contemplated by either the State or the City.” (It still is. And you would cry if you saw the estimated price tag, which will be revealed later as well.) The City’s transit consultants were trying to figure out how the State and City were going to pay for their portion of the cost, which at the time was 1/3 of the total price with 2/3 to be paid by Uncle Sam. (Fat chance of the Feds giving us that much now.) “The consultants’ analysis of the tax sources prompted them to drop 11 of the possible revenue sources from the original list: personal property tax (which we still don’t have, thank goodness); tax on parking lots (we do have the GET hitting those); tax on office space (we have the GET on rents, which is almost as good); increase in the public utility franchise tax; privilege tax on telephones (these days even a cell phone seems more like a necessity); excise tax on realty transfer (we now have a conveyance tax which is orders of magnitude larger than it was in those days); increase in charges on licenses and permits (happens all the time these days); increase in tobacco tax (seems to happen often); increase in liquor tax (same); employer tax on the number of employees; and a payroll tax (those would be really bad, but we wonder if minimum wage increases are doing the same thing in terms of economic impact). “THE EIGHT tax sources remaining and listed in the apparent order of priority of the consultants are: 1) increase the passenger vehicle weight tax (we’ve done that); 2) increase the county motor vehicle fuel tax (we’ve done that, and we are bracing for more, as we reported last week); 3) increase the real property tax rate (we’ve done that); 4) levy a special one-time tax on autos (who’s going to bet that it won’t be one-time); 5) impose a hotel room tax (we did that, starting at 5% and now it’s up to 10.25% plus the counties can add on another 3%); 6) levy an additional sales tax on top of the present 4 per cent (attempted often and failed often, but a county surcharge did pass in 2006); 7) impose a surcharge on income tax (when this piece was written, the top income tax rate in Hawaii was 11%; it since went down somewhat but crept back up again, and our top income tax rate in Hawaii is 11% today as well); and 8) abolish the home owner’s exemption of real property valuations (probably political suicide then as well as now; we wonder what the consultants were smoking). “Also, the consultants’ report states study is going on in the area of a transit taxing district. They are studying the feasibility of securing revenues from special transit beneficiaries by taxing their gains due to close proximity to transit stations. (The Board of Education jumped on this one real fast, establishing an ‘impact fee district’ to let them tax developers in the area, as we reported on a while back.)” For those of you who were wondering, the original article was written by Fred Bennion, former President of the Tax Foundation of Hawaii, and it was published in the Honolulu Advertiser and Star-Bulletin on June 25, 1972, nearly fifty years ago. At that time the total project cost of rail transit was estimated at $700 million. Yes, with a “M,” not a “B.” In those fifty years, look how far we’ve come! Or not. If You Think Gas Prices Are Bad…
Many of us who drive cars now dread the day when we’ve got to go to the gas station. Between COVID-19, Russia vs. Ukraine, and other economic factors, gas prices have already passed the $5 per gallon mark and don’t appear to be falling anytime soon. What we might not know, however, is that there are a lot of different taxes that go into the price at the pump. Just looking at those imposed at the state and county levels , we start with the state fuel tax of 16 cents per gallon. Then there is a county fuel tax on top of it. The cheapest county fuel tax is here in Honolulu at 16.5 cents per gallon, and it goes up to 24 cents per gallon on Maui. Then there is a component called the barrel tax, which is imposed on any imported fuels. Its official name is the environmental response, energy, and food security tax, and it is imposed at $1.05 per barrel. A barrel is 42 gallons so that works out to 2.5 cents per gallon. And finally, of course, we can’t forget our state GET, the general excise tax, at 4% of the sales price, to which is added another 0.5% in all counties other than Maui. With a $5 per gallon sales price as an example, this adds another 22.5 cents per gallon. That brings us to about 57.5 cents per gallon, just in state and county taxes, so far. At our legislature, there is a fair number of people who think that gasoline taxes need to be raised, big time, to combat the environmental threat posed by fossil fuel burning. That’s why in the past few sessions they had proposed a “carbon tax” to pay for the societal costs of pollution, global warming, and so forth. In this past session, the bill was House Bill 2278. That bill proposed to change the barrel tax for gasoline to $5.27 per barrel initially, increasing in phases to $33.16 when fully phased in. That translates to 12.5 cents a gallon initially and 79 cents a gallon when fully phased in. That would change the state and county tax on a gallon of gas from 57.5 cents to $1.34 a gallon, at least, if adopted and fully phased in. And, of course, there are those who don’t think an increase of this magnitude is enough. The carbon tax proposed by House Bill 2278 started off at about $14 per metric ton of CO2 and increased to about $89 per metric ton, using the conversion factor (per the EPA website) of 0.00887 metric tons of CO2 per gallon of gasoline. Various groups have suggested that a higher tax would be needed to drive compliance with the state’s net zero emissions goal by 2045. In the meantime, the Department of Transportation hasn’t given up on its proposed Road Usage Charge, a project to distribute the cost of road maintenance more equitably among the users of our state’s highways and byways. The project has been proceeding under the assumption that the road usage charge would replace the fuel tax. But a road usage charge bill introduced this session, Senate Bill 3313, proposed the road usage charge on top of the fuel tax for electric vehicles, instead replacing the special $50 motor vehicle registration fee for those vehicles. That bill died this session, but it or something similar could always be introduced next year. Road usage charges, unfortunately, represent another possible revenue enhancement (translation: “higher tax”). Hmm, that bicycle in the window is looking pretty good right now! |
If you wish to further discuss blog posts, please contat our office directly or contact us via Contact page.
Categories
All
|