TAX MAN: General excise tax on non-profit organizations Lynn A. Saleh June 12, 2022 Island business Many of us have had the good fortune of working with nonprofits, whether as board members, volunteers, or paid staff. It’s not clear to many people how our tax laws, in particular our GET, apply to these associations, so I’m presenting a simplified guide to how GET works. A nonprofit can earn three types of income, which I call green, yellow, and red income. These three categories cover most, but not all, of the revenue a nonprofit can earn. Green revenues are donations, grants, contributions and membership dues. Green income is exempt from GET. This type of income is exempt from GET because it is a donation, and it does not matter whether the recipient is non-profit, for-profit, or an individual. If the donor receives something substantial in exchange for their contribution, it is not a donation and therefore not green income. Yellow income is what some people call “exempt employment income”. To qualify for exempt employment income, the recipient must be registered as a tax-exempt organization. An organization registers with the state Department of Taxation on Form G-6, which is nowadays submitted online. If registration is approved, exempt employment income is income from the conduct of an activity that contributes significantly to the reason the organization is exempt. For example, if the exempt organization is a school, the tuition is exempt employment income. If it is a museum, the entrance fees are exempt from the service income. For a hospital, medical care costs are exempt employment income. There are other restrictions on certain types of organizations. For example, for a hospital, the law stipulates that the exempt professional income must come from the operation of a hospital “as such”. There was a court case which decided that if a hospital provides parking for patients and visitors and charges a parking fee, the parking fee is GET taxable because although visiting relatives and friends a patient can hasten the patient’s recovery, a parking lot is not a hospital “as such”. Yellow income is exempt from GET if all of these conditions are met. This is the type of income reported on the GET statement as exempt and listed in the second column of the statement. Again, an organization cannot have any yellow income unless it is registered on Form G-6 and approved by the state. A determination letter from the IRS recognizing him as exempt from federal tax is not enough. Red revenue is most of the other revenue a nonprofit receives. Red income is fundraising income. Whether it’s a bake sale, fundraising dinner or silent auction, any income from an activity whose main purpose is to raise funds is taxable at the GET. There are a few other categories of income that are generally not important. A non-profit organization that derives income from dividends is exempt from GET because all dividends are exempt from GET. If it earns interest on the custodial funds at the bank, it is exempt because it is not considered a “business” subject to tax. If he gets a few dollars from the occasional auction of used goods or other physical assets, there is an “occasional sale” exemption that kicks in. There are, of course, more complex nonprofits with different types of income. This article cannot, and does not cover everything. This illustrates that GET, as applied to nonprofit organizations, is more complex than some would like to believe. We encourage nonprofits to hire a qualified tax professional if they have income they don’t know how to report or classify. ••• Tom Yamachika is president of the Tax Foundation of Hawaii.