HD50 - Study of Ongoing or Permanent Commercial Activities of Not-for-Profit Organizations and Their Effect on State Revenues

Executive Summary:
There are over 19,000 known not-for-profit organizations operating within the Commonwealth of Virginia during the calendar year 2000. Each organization enjoys some type of tax-exempt status granted by the Constitution of Virginia or the General Assembly, whether it be sales and use tax exemption, real estate exemption, personal property exemption, business-professional occupational license exemption, etc. The Commonwealth currently ranks 11th in the nation in the number of not-for-profit organizations.

The 2000 General Assembly, through Senate Joint Resolution No. 219 and via a letter from the Speaker of the House of Delegates, requested the Commonwealth Competition Council to study the ongoing or permanent commercial activities of those organizations and determine the effects of commercial activities on state revenues. The Competition Council agreed to the study and elected to establish a taskforce to concentrate on this issue.

The Taskforce wishes to emphasize that its report, findings, and recommendations are not meant in any way to be a criticism of any free enterprise business or not-for-profit organization, both of which play an important part in Virginia society. Moreover, the Taskforce makes no judgment on the right or wisdom of either of these two groups to engage in certain activities.

The purposes of the Taskforce were to determine as a matter of public policy:

(1) whether there is indeed competition between not-for-profit and for-profit entities in similar types of commercial activities and whether competition is "fair" or "equitable" or whether it is "unfair" or "inequitable," and

(2) the effect on state revenues.

To this end, the Taskforce conducted five public hearings or fact-finding conferences around the state to gain input on the following:

What's Fair?

Your response to the following questions and your thoughts about what's fair are desired:

1. Alleged unfair business competition by charitable organizations,

2. Apparent advantages of untaxed commercial activities to charitable organizations,

3. Is there loss of public revenues?

4. To what extent should not-for-profit organizations be allowed to carry on primarily commercial activities in competition with private businesses (which are fully taxed) while receiving substantial tax and other benefits not available to private business?

At each of these conferences, the Taskforce noted a number of examples of not-for-profit organizations participating in activities which were essentially commercial in nature. The Taskforce questioned if some of these endeavors were valid charitable activities. Many of the taxpaying small businesses that appeared to be in competition with the not-for-profit organizations were family-owned, and represented families that had invested most of their available assets and all of their working time in their business venture. In effect, they perceived that some not-for-profit organizations were being granted an "unfair" advantage over their for-profit competitors because of their tax-exempt status.

The absence of a comprehensive database listing not-for-profit organizations and related factual information severely limited the Taskforce's ability to determine accurately the number of not-for-profit organizations in Virginia. The absence of data also raised issues on the degree in which unfair competitive situations impacted tax revenues of Virginia state and local governments and the for-profit businesses. This result calls into question whether existing state policy is adequate to provide for the proper oversight and monitoring of the various tax exemptions provided to not-for-profit organizations. Accordingly, the Taskforce makes specific recommendations on this matter.

Various State agencies have been assigned the oversight of not-for-profit organizations. However, each agency is restricted by its statutory mandate as it relates to data collection and the sources thereof. Technology available today makes it possible to establish a single comprehensive database that would serve all citizens, businesses, and governmental agencies.

Finally, the Taskforce found a number of other potential issues that ultimately need to be addressed. While this report mentions these items, they require further study before definitive recommendations can be made. The Taskforce recommends that the Commonwealth Competition Council, together with the other entities involved, examine the feasibility of these issues.

The Taskforce recommends that a central system and database be developed that that would identify all not-for-profit organizations and ensure that all such entities comply with any reporting requirements.

In conjunction with the development of this database, the Taskforce recommends that the Commonwealth Competition Council, through its existing statutory authority, continue to examine the issue of competition between not-for-profit and for-profit entities and how such competition is affected by the differences in tax treatment provided such entities. It is also recommended that the Commonwealth Competition Council study concentrate on developing a procedure whereby specific situations involving the possible presence of unfair competition can be raised, analyzed, and resolved.

The Taskforce further recommends that the Commonwealth Competition Council continue its work with a more thorough study of authorities and co-operatives in Virginia as well as such other quasigovernmental entities that may have an impact on state revenues.