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.

COM Connect App Helps Residents Share Information with Maui County
Wailuku, Maui – The County of Maui announced the availability of a new app which will enable residents to participate in community-based reporting from their cell phones/mobile devices or web.

Powered by SeeClickFix Inc. technology, COM Connect (short for County of Maui Connect) is a place-based reporting platform which allows residents to document neighborhood concerns and improvements alike, ranging from litter and flooding to damaged sidewalks and malfunctioning traffic signals. The app is available for free through most iPhone and Android app stores and is already active.

COM Connect will allow residents also report community issues, as well as view, comment on and vote to fix problems submitted by their neighbors. Citizens can even create their own “watch areas” to receive notifications about all issues reported in their community, enabling them to follow the progress of all service requests – not just the ones they report.

Please call or contact the Office of the Mayor at (808) 270-7855 or Email Mayor's Office with any questions or concerns.

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.