I was honored this morning to have the opportunity to testify before the Minnesota House Tax Committee on behalf of the Minnesota Council of Nonprofits in support of House File 1154; a bill that would ensure Minnesota does not conform to the federal UBIT changes impacting nonprofits.
Minnesota usually signs on to tax law changes made at the Federal level, but it chose not to after tax reform was passed by Congress in late 2017. There are many changes impacting nonprofits in tax reform. House File 1154 seeks to prevent Minnesota from conforming with changes that would require nonprofits to pay a tax on certain transportation benefits they provide to their employees, as well as changes that would require nonprofits to calculate tax from each separate unrelated business (instead of combining them together).
Video of section covering HF 1154 begins here, my testimony starts at approximately the 16:00 mark in the video, and the following is a transcript of my remarks:
Minnesota House Tax Committee – Testimony 2/21/19
Good morning, Chair Marquart and members of the committee. For the record, my name is Emily Robertson and I’m the nonprofit and exempt organization partner at Rubric Legal in Minneapolis. I’m also testifying on behalf of the Minnesota Council of Nonprofits.
I appreciate the opportunity to testify in support of House File 1154, a bill that would ensure Minnesota does not conform to the federal UBIT changes impacting nonprofits.
I spend much of my practice advising nonprofits on tax issues because I appreciate that tax law is meant to ensure that an organization’s funds are used for certain purposes. Since the vast majority of organizations are charities, that means that tax law is meant to ensure that funds are used for charitable purposes.
Before UBIT, as long as an exempt organization used the revenue from an unrelated business for their mission, that revenue was not taxable. However, this resulted in an advantage to businesses that were otherwise indistinguishable from their taxable competitors, and UBIT was introduced as an attempt to level that playing field. The policy rationale behind UBIT is important to understanding why these new provisions are problematic.
So at the Federal level we have a new provision, 512(a)(7), which places a TAX on the EXPENSE of providing parking and transit benefits to a nonprofit’s employees.
What is taxable is not the value that an organization provides to its employees, but instead merely on the expenses that the organization incurs. In the parking context, this means that the organization is not only taxed on amounts it pays to a third party for specific spots for its employees, but also in situations where the organization owns or leases all or part of a parking facility, and the expenses the organization must include span a wide range of maintenance and upkeep expenses.
This change is clearly going to impact large organizations and employers – like hospitals, colleges and universities. Those organizations know they will be paying significantly more in UBIT. The vast majority of organizations, which make up my client base, are smaller and less savvy, and this change is largely flying under their radar. I am talking about organizations that have 1-10 million a year in revenue and don’t realize there is a new tax on their expenses. A great example of this is a church in an urban area or location where parking is at a premium and they reserve spots for their employees.
The other new provision we are talking about today is 512(a)(6).
Under prior law, a nonprofit could use losses from one unrelated business to offset profits from a different unrelated business.
This provision, which requires putting activities in “silos,” is complex, but more importantly, it imposes a different standard on the nonprofit sector. For profit companies are not required to separately calculate their income on different activities – so this is not only not leveling the playing field – it is putting exempt organizations at a distinct disadvantage.
Like 512(a)(7), this change is going to obviously significantly affect larger organizations, but also a lot of smaller organizations. For example, imagine a theater company that sells t-shirts, mugs, and other similar items at all of its performances to raise money. Imagine that same organization makes these items available for sale online. Add to that advertising that it sells in its playbills. Under prior law, these all grouped together and could offset each other, but now the organization may be calculating each separately.
These two changes are complex, will result in significantly more organizations filing a M4NP and paying tax, and will result in less money and time going towards their missions.
If you want Minnesota to maintain its reputation as the land of 10,000 lakes and 10,000 nonprofits, then as you are putting together your tax bill, I urge you to not conform to these federal changes.
Thank you for giving me the opportunity to testify.