A public charity or private foundation with activities in more than one state may find it has tax and/or regulatory compliance issues of which it was unaware.
Most state attorneys general have a legislative mandate to monitor the activities of charities that solicit contributions within the state and have created reporting regimes to implement this mandate, often imposing filing fees. Unrelated business activities that are taxable by the federal government are usually also subject to state income tax. Real property may be subject to state and local property taxes — sometimes even if it is used for exempt purposes. And while some states exempt sales by nonprofits from sales and use taxes, this is by no means always the case.
The problem is, it is not always easy to tell whether your organization has a sufficient nexus with a particular state to bring these issues into play. But it is a question that needs to be asked, because the penalties for noncompliance can be severe.
States and municipalities are hungry for revenue, and you may be assured that if you have not done the research to find out what your obligations may be in a particular state, the state attorney general and/or the director of revenue will do it for you.
And they do not have to look far. The federal tax Code requires a public charity to make its annual information return, Form 990, readily available to the public. Most of these are republished on a number of websites, easily researched by the organization’s name and/or taxpayer identification number. Large donors, journalists, and watchdog groups search these sites all the time.
Similarly, the Code and implementing regulations require a private foundation to file a copy of its Form 990-PF with the attorney general not only in the state in which it was established and has its principal office, but also in any state in which it has state reporting obligations or in which it holds or intends to hold property for its exempt purposes.
And the IRS has mechanisms in place for sharing this information with state enforcers.
If a state requires an exempt organization to file a copy of its Form 990, the organization should be careful to provide only the “public disclosure copy,” with information identifying substantial contributors redacted from Schedule B. Some states repost these filings to the internet, and they are not always careful to see that what they are posting is the public disclosure copy.
In recent years, some states — notably California and New York — have begun requiring nonprofits to file not only the public disclosure copy of Form 990, but also an unredacted copy of Schedule B. Some advocacy organizations have pushed back, but with mixed success.
In 2015, the 9th Circuit federal appeals court let stand a district court order denying a preliminary injunction to the Center for Competitive Politics, saying the requirement to submit an unredacted Schedule B did not on its face burden the First Amendment rights of the Center’s members to freedom of association. The Supreme Court denied certiorari, and the case has been remanded to the district court for findings on an “as applied” challenge.
Meanwhile, a second, similar lawsuit brought by Americans for Prosperity has followed a somewhat different course. The trial court did grant a preliminary injunction, but the 9th Circuit vacated that ruling in light of its earlier decision in Center for Competitive Politics. On remand, the trial court entered a permanent injunction, finding not only that the state’s interest in requiring disclosure of donor information was not compelling, but also that contributors to AFP had very real concerns about possible retaliation if their identities were publicly disclosed.
Following the lead of the 9th Circuit, a federal district court in New York denied a preliminary injunction to Citizens United to prevent disclosure of its unrelated Schedule B information to that state’s attorney general. That case is still pending at the trial level.
The professionals at Klein Hall, a Naperville accounting firm, have extensive experience with these matters and stand ready to help your nonprofit navigate these treacherous waters.