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Sales tax breaks for nonprofits: New rules in the works

The Minnesota Department of Revenue deserves a tip of the cap. It is drafting a new rule covering sales tax breaks for nonprofit organizations’ fundraising events, and it started conversations with nonprofit groups early in the process to work out the kinks.

The department expects to release the proposed rule for public comment in October, but it invited several individuals and organizations to review and make comments on an early draft. They included the Minnesota Council of Nonprofits, the Northern Star Chapter of the Boy Scouts of America and Gina DeConcini, who heads the legislative committee for the Minnesota State Bar Association’s tax section.

The invitation wasn’t unprecedented, but such opportunities seemed to be happening more frequently, said DeConcini, an attorney with Oppenheimer Wolff & Donnelly. “It is an excellent trend of the Department of Revenue to be trying to include community comments before they are officially required to,” she said.

The rule will flesh out the gray areas in the statute. This is complicated stuff.

Fundraising nuances
For instance, state law says nonprofits get the sales tax exemption on “fundraising events” as long as they don’t exceed 24 “fundraising events” a year. Seems straightforward enough. But what is a “fundraising event”?

Consider the Boy Scouts’ Christmas wreath sales. Do you count the number of days the Scouts go door-to-door selling (which would easily blow the 24-day limit), or do you only count the number of days the Scouts deliver wreaths? (The draft rule says only count delivery days.)

Next, does the state view each Scout troop as “a separate legal entity” with its own 24-day limit, or does it consider the Northern Star Chapter and its 1,800 Cub Scout packs, Boy Scout troops and Venturing groups as one single entity?

The rule will try to sort out those and other issues and give examples. Revenue is now rewriting the rule based on the comments it received. It will take public comments when the proposed rule is officially released this fall. If there is no significant opposition, it could go into effect next spring at the earliest.

A win for the little guy?
Michal Garber, an attorney with the Department of Revenue’s legal services, said the rule is supposed to be revenue neutral. “We are not trying to fix anything,” she said. “We are trying to interpret the law. There hasn’t been anything published interpreting this statute.”

Still, the draft rule seems to be a boon to at least one small organization. More than a year ago I wrote about an audit of the nonprofit White Bear Center for the Arts. It offers art classes and holds one fundraiser a year. The audit counted the art classes as “fundraising events.” While the art classes themselves were sales tax exempt, counting them as fundraising events broke the 24-day limit and triggered a sales tax bill on the center’s annual silent auction.

As the draft now stands, that wouldn’t happen again. The draft proposed rule gives the example of a nonprofit organization that exists to further art appreciation and offers art classes for children three days each week. “The art class is not considered a fundraising event since the activity is offered on a regular basis,” the draft says. “Thus, the class days do not count toward the 24-day limit.”

(In contrast, if a nonprofit with a tree-planting mission offers cooking classes as a fundraiser, that event does count toward the 24-day limit. That class is not part of the organization’s normal activities.)

The Department of Revenue had no information on how the draft rule could affect the White Bear Center for the Arts audit and pending appeal. Suzi Hudson, the center’s executive director, said the draft rule validates how the center had interpreted the law all along.

“I am thrilled,” she said. “I will be doubly thrilled if we actually get our $5,175 back.”

Limited scope
The rule can only go so far. It can interpret the existing law, not change it.

John Andrews, Scout executive for the Northern Star Council, said he doesn’t think the law’s 24-day limit on fundraising events has any equity or bearing on how an organization spends its time on fundraising versus mission delivery.

“For a larger organization with a lot of operating units, 24 days is a completely different matter than for a little storefront operation,” he said.

Andrews attended the meeting with Revenue to discuss the rule. His questions went beyond the scope of the meeting, he said.

“My concerns would have to be raised to a legislator as to whether the law itself has any value,” he said. “The rule making to me is perhaps not that important in context to whether or not the law itself is working.”

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