Friday, March 11, 2005

Unfair Competition?

The Business Journal, Portland, Oregon, published an article today, "Foundation Says Credit Union Break Unjustified." They reported that "A new Tax Foundation study concludes the federal income tax exemption granted to credit unions is unjustified and will cost the government more than $31 billion over the next 10 years." The Tax Foundation's complete report is available at www.taxfoundation.org.

This raises a long-nagging issue for me. There are many not-for-profit organizations that are essentially competing head to head with for-profit companies. Is this fair? Several years ago the YMCA ran into this very issue and was sued by for-profit health clubs which claimed that the YMCA had an unfair advantage because they could charge membership fees, obtain donation revenue, and avoid paying taxes. You see the same thing with nonprofit hospitals and health insurance providers.

Recently in Portland a new nonprofit organization was formed to provide accounting services to nonprofit organizations. This organization will now compete head to head with for-profit accounting firms yet is tax exempt. There are also tax exempt management service organizations that compete directly against consultants and yet they can generate grant and other revenue to subsidize their efforts. In fact, one prominent such organization was in many ways operating for years in the manner of a for-profit entity. Until very recently, its Executive Director and top staff also served on the organization's board of directors and the organization rented space from a home owned by the ED. Do you consider that a fair playing field?

If you were going to provide management, consulting or accounting services to nonprofit organizations, would you incorporate as a tax exempt organization? Personally I long ago decided that it is better to err on the safe side and proudly pay my taxes as a for-profit consultant. But if the formation of these tax exempt management service organizations becomes epidemic, I may have to re-consider.

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