Expanded definition of fundraisers is puzzling nonprofits

Beware the Minnesota Department of Revenue’s “randomly selected audits.”

Such an audit concluded that the nonprofit White Bear Center for the Arts owes more than $5,600 in back sales taxes on four years of fundraising events. This conclusion is causing a lot of head-scratching — not only in White Bear but also in nonprofit circles and maybe even in the Revenue Department.

The art center is sending up warning flares, alerting other nonprofits to the threat of getting socked with tax bills based on Revenue’s expanded definition of what it means to “fundraise.”

State rules say nonprofits don’t have to pay sales taxes on fundraising events such as art sales or silent auctions as long as they don’t exceed 24 days a year. (Here is a PDF of a 1994 Department of Revenue sales tax publication that defines fundraising. See Page 3.)

White Bear Center for the Arts Executive Director Suzi Hudson said she thinks her organization stays well within the rule, staging one big fundraiser a year. In 2007, the event lasted three days. Artists created art at the center, and visitors watched the artists at work. The center then sold the artwork on the last day.

The problems started when the center’s name came up for one of the Revenue Department’s “randomly selected audits.”

Each class is a fundraiser?
As Hudson tells it, Revenue came to a very different fundraiser calculation. Auditors saw the center’s long list of art classes — oil painting, photography, ceramics, drawing, printing, framing, glass, fiber, dance and more — and counted each one as fundraising events.

The class tuition itself is tax-exempt, but counting classes as fundraisers puts the center over its 24-day limit. That means it owes sales tax for the money raised during its annual events.

During the audit’s four-year reach, the center’s fundraising events brought in more than $79,000. Revenue is charging 6.5 percent sales tax on that money, plus $500 in interest and a few miscellaneous items, for a total of $5,673.64. As Hudson counts it, that adds up to a loss of 100 average donations of $50 apiece.

It’s a small art center. Hudson herself only got a full-time position this year. According to a 2006 tax filing, the center brought in $191,431 in total revenue, including $131,487 in program fees, $31,264 in membership dues, $27,461 in donations and $1,208 in interest.

To Hudson, the center’s classes are not fundraisers, but a core part of its mission to bring art opportunities to the community. Further, some of the art classes lose money. The center uses the support from the annual fundraiser to subsidize its classes. Yet by Revenue’s interpretation, she says, the center is nothing more than a fundraising machine, holding fundraisers to support other fundraisers.

“Anything a nonprofit does now that generates any kind of revenue, whether it is a profit or a loss … it counts towards your fundraising,” Hudson said.

That’s the center’s version of events.

Revenue’s version seems to be evolving.

In an initial interview, Revenue Department spokeswoman Lisa Waldrup said the audit was consistent with past practices and not a test case. She could not comment on the audit specifics because of data privacy laws.
 
In a subsequent interview, she said Revenue was having internal discussions about whether or not classes held by nonprofits should count as fundraising events: “They should be coming to a conclusion within the next few weeks,” she said.

The murky state of affairs has many scratching their heads.

Significant deviation from past practice
Sheila Smith, executive director of the Minnesota Citizens for the Arts, says counting classes as fundraisers defies common sense. “It makes me think there is something that I don’t know,” she said. “We are doing some investigating and poking around and trying to figure it out.”

J. Hazen Graves, a partner with the Faegre and Benson law firm and a member of the Minnesota State Bar Association’s Nonprofit Committee, said that if the department counts classes as fundraisers, it would be a fairly significant deviation from past practice.

Diane Jensen, board chairwoman of the White Bear Center for the Arts, said the organization plans to appeal the decision before an April 29 deadline. Even so, it’s required to pay the back taxes first.

Jensen’s sense is that the state is trying to collect more taxes through existing laws rather than to pass new laws and new taxes. “We think this is an overreach,” she said.

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