Taxes, Fees, and PILOTs (Payments in Lieu of Taxes)

Read our special edition of Nonprofit Advocacy Matters, 2011 Top Ten State and Local Policy Issues, to learn about the new trend among many state and local governments toward policies and practices involving taxes fees, and PILOTs that threaten the missions of nonprofits.

Why It Matters to Nonprofits

The nonprofit community recognizes the budget challenges that state and local governments are facing; we experience them every day. Like governments, nonprofits are struggling to maintain services to their communities. In so doing, they earn their tax exemptions every day. Governments cannot impose new taxes and fees on nonprofit organizations without diminishing the impact that the nonprofits have in their communities. As a nonprofit leader in Minnesota said: "Nonprofits have tax exemption for a reason — they provide service to the community that lessens the burden on government. We are partners with government and the community. But as these additional fees and assessments get assigned, it comes out of our donated dollars and resources." Below is a list of challenges to the work of nonprofits across the US. For even more up-to-date information on taxes, fees, and PILOTs, view the newest edition of Nonprofit Advocacy Matters.

New Property, Sales, and Other Taxes

• Pennsylvania: The Pennsylvania Supreme Court has given encouragement to local government efforts to tax nonprofits by ruling that a Jewish camp dedicated to faith-based education failed to qualify as a “purely public charity” under Pennsylvania’s Constitution and, thus, was not entitled to a property tax exemption. The ruling raises questions about the scope and validity of Act 55, the 1997 law that provided criteria to prevent haphazard interpretations of the Commonwealth Constitution and provide clarity and certainty in determining which organizations are eligible for tax exemptions.
• North Carolina: Local leaders have proposed placing a cap on the amount of sales tax refunds certain nonprofits can receive (25 percent for a request that exceeds $1 million).
• Montana: A committee performing an interim study on nonprofit exemptions from property, corporate, and other taxes has agreed to table the study, recommending that a summary concluding document be provided at the next committee meeting.
• Rhode Island: The Senate Majority Leader has announced that he is introducing a bill to allow municipalities to tax educational institutions and hospitals 25 percent of what they would pay in property taxes if they were not tax exempt. The proposal would also completely remove tax exemptions on properties those nonprofits use to produce income by means other than providing educational and healthcare services. 
• Washington: A bill that would create expiration dates for more than 200 tax exemptions, including nonprofit exemptions from taxes on sales, memberships, and fundraising revenues, effectively died in the State Legislature.
• Tacoma, Washington: The City Council rejected a proposal to place a five percent ticket tax on nonprofit museums, theaters, and performing arts groups, citing concerns that the proposal unfairly targeted a few nonprofits. However, the council recently approved a proposal to reduce the business tax exemption for nonprofit health care providers.
• Scranton, Pennsylvania, The City Council has instructed tax assessors to determine the value of tax-exempt properties in the community, and to report on whether certain nonprofit-owned vacant properties or properties used for non-exempt purposes should be subject to taxation. City leaders have indicated that they intend to seek voluntary payments in lieu of taxes (PILOTs) from large nonprofit property holders if new tax revenues are not sufficient to prevent the city from entering bankruptcy.  
• Richmond, Virginia: Nonprofits could focus more on their missions if the city council decides to remove a moratorium placed on nonprofit property tax exemptions in 2007 to help pay for police, fire, and trash services. Reinstatement of the deduction would cost city government $199,500, but return that same amount to the community. “It seems like this money can be better used by the nonprofits in the furtherance of their missions rather than being collected and redistributed by the city,” said a councilman who is cosponsoring the change.
• Maine: Governor LePage vetoed a bill that would have exempted nonprofit performing arts groups from paying sales taxes. “Performing-arts organizations are important to the cultural fabric of Maine. However, simply because something is good does not mean it should enjoy tax-free status. Exemptions from the sales tax should be saved for the necessities of life — food, shelter, medicine — as well as for important initiatives meant to foster growth and create good paying jobs in Maine industries, increasing our overall tax base,” wrote Governor LePage in his veto letter. Of the $45,000 in annual revenue that the tax is projected to provide to the state, as much as $16,000 comes from just one performing arts organization, the Maine State Music Theatre.
• New Orleans: Mayor Mitch Landrieu abandoned efforts to alter the state constitution to allow the city to impose property taxes on nonprofits. City officials warned, however, that they plan to study the issue further and expand the inquiry to other Louisiana municipalities. Shortly before the Mayor’s decision, the Louisiana Association of Nonprofit Organizations published the results of its New Orleans Nonprofit Property Tax Exemption Survey that highlighted the negative consequences that the proposal would impose on nonprofits and those they serve.

New Fees & Charges

• Shawano, Wisconsin: The city plans to bill a local church for curb removal, a service the city usually provides for free. The committee responsible for overseeing the construction work is now questioning whether tax-exempt entities should be allowed to receive such services without payment.
• New York City: A bill before the City Council would block a recent effort by the Department of Sanitation to extract $17 million from the work of the city’s nonprofits by requiring them to pay garbage service fees. “This misguided policy amounts to kicking non-profit organizations while they are down…. They deserve our support and thanks, instead of new taxes they simply cannot afford,” said the bill’s sponsor, Council Member David Greenfield.
• Canyonville, Oregon: A nonprofit school is challenging in court a city ordinance that provides “churches, schools, and non-profits like our local YMCA and a non-profit senior residence will be charged double the normal water rates and substantially elevated sewage fees.” The city says the fee in lieu of taxes is necessary to cover the costs of police and fire protection.
• Berkley County, West Virginia: A councilmember is floating a proposal to require nonprofits and churches to begin paying fire service fees, arguing that it will avoid shifting costs to residents and businesses.
• Chicago, Illinois: The city is eliminating water fee waivers that have benefitted some local nonprofits for several generations. The nonprofit fee waivers – which were not automatic, but provided at the discretion of individual aldermen – will be phased out over the next three years, with smaller nonprofits (defined as organizations with assets worth $250 million or less) receiving a 60 percent discount in 2012, a 20 percent break in 2014 and no discount on water fees by 2015. Among the nonprofits most affected by the changes is the Roman Catholic Archdiocese of Chicago, which expects its schools and parishes in the city to see costs increase by an average of $10,000 or more each from the water fees.
• Greenwood, South Carolina: The city council approved an agreement to accept an alternative proposal from three entities rather than placing a business license tax on nonprofits that charge fees for services (such as church daycare and pre-school facilities, hospitals, and community health centers) and sell goods to the public (potentially including rummage sales and second-hand stores that fund program operations).

Payments in Lieu of Taxes (PILOTs)

• New Jersey: State and city officials in New Jersey are calling for the creation of a task force to examine how best to collect PILOTs from nonprofits.
• Scranton, Pennsylvania: A little more than a month after the Scranton City Council instructed tax assessors to calculate the value of tax-exempt properties, officials from the city’s three taxing bodies have begun meeting to discuss prospects for seeking PILOTs from local college, university, and nonprofit groups.
• Providence, Rhode Island: The Mayor of Providence is backing a bill that would allow the city to charge certain nonprofits 25 percent of the property taxes they would pay if they were not tax exempt. Making special exceptions for nonprofit hospitals, the Mayor has also said that these organizations may be given a deal in which they are allowed to take over government-provided services instead of making payments to the city. After repeated prodding and threats from local officials, Brown University announced that it will pay the city of Providence $31.5 million over the next eleven years.
• Madison, Wisconsin: The Mayor of Madison is creating a task force to study voluntary payments from nonprofits based on their would-be property tax values. The task force reportedly will be made up of representatives from the City Council as well as the nonprofit and private sectors.
• Haverhill, Massachusetts: The City Council of Haverhill is also considering a similar proposal to require some nonprofits to pay PILOTs worth 25 percent of their non-existent property taxes.
• Lowell, Massachusetts: The City Council voted 7-0 to seek home-rule power from the Massachusetts Legislature enabling it to charge some tax-exempt property owners 25 percent of the equivalent residential property tax bill. Churches and governmental entities would be exempt. The measure is being pushed by the Lowell City Manager, who is also chair of the Massachusetts Municipal Association’s fiscal policy committee.
• Hartford, Connecticut: Certain city leaders are seeking PILOT agreements with larger nonprofit property owners to close the city’s budget shortfall.
• Belmont, Massachusetts: Belmont leaders have sent letters requesting a total of $530,000 in PILOTs from the town’s 38 nonprofits. And farther west in Eau Claire (WI), one local official has proposed imposing PILOTs or fees on nonprofits that she asserts can afford to pick up the city’s tab.
• Red Bank, New Jersey: The mayor is asking state legislators to back a bill that would charge nonprofits payments in lieu of taxes (PILOTs) for purchasing any additional land that is currently on the tax rolls.
• Boston, Massachusetts: Despite a state law that exempts charitable nonprofits from property taxes, Boston’s nonprofits have contributed $9.4 million in PILOTs to the city since July 2011, after the city mailed simulated tax bills to charitable organizations that own property worth more than $15 million. Eighteen nonprofits, including the New England Aquarium, the Museum of Science, and Suffolk University, have refused to give any cash to the government, noting that they already provide various benefits to the city.
• Pittsburgh, Pennsylvania: An effort to demand “voluntary” contributions from nonprofits is now underway in Pittsburgh, where city officials have asked nonprofits to donate $3.2 million in “goodwill gestures in lieu of taxes.” Previous agreements for voluntary contributions from nonprofits to the city expired on December 31 of 2011.

National Council Special Report: State Budgets Threaten Nonprofits

As state governments across the country grapple with severe budget deficits, many are placing extraordinary burdens on nonprofits. The National Council of Nonprofits released a special report, State Budget Crises: Ripping the Safety Net Held by Nonprofits, documenting how states are delaying contract payments to their nonprofit partners, slashing funds for essential programs, and imposing new fees and taxes on 501(c)(3) organizations. The report encourages leaders of governments, foundations, and nonprofits to work together to address challenges posed by state budget crises.

What Nonprofits Can Do

Find your State Association and get involved to address these and other developing issues in your state. Tell your organization’s story and explain the impact that losing your tax exemption would have on your ability to meet your mission.