At a time when he’s normally concentrating on the upcoming season of performances, Orchestra Kentucky Executive Director Scott Watkins is instead dealing with the impact on his ticket prices of a new state sales tax.
Meanwhile, Bowling Green International Festival Board of Directors President Angela Jones calculates her organization will take a hit of some $1,300 if it absorbs the cost of the 6 percent tax on admission to the annual event.
And in Glasgow, Barren County Family YMCA President Terry Bunnell is worried about both a potential loss of members and an increase in his administrative costs arising out of new state tax legislation.
Welcome to Kentucky’s new nonprofit environment, one that has unexpectedly been altered almost beyond recognition by first a state Supreme Court ruling in March that limited charitable exemptions and then by House Bill 487, which passed in April and will turn Kentucky’s sales tax landscape on its head when it goes into effect July 1.
The legislation’s new tax on such service providers as dry cleaners, veterinarians and automobile mechanics got the attention back in the spring, but the bill also contained language that makes nonprofits accountable for collecting and remitting sales taxes on items such as admissions to fundraising events, silent auctions and certain types of memberships or programs.
For nonprofits accustomed to being exempt from sales taxes, the bill hit them like a sucker punch to the gut.
“I’ve been in the nonprofit world for years, and it has always been that 501(c)(3) organizations are not taxed,” Orchestra Kentucky’s Watkins said. “Nobody expected this to happen. Nobody put it in their budget.”
Watkins is not alone in being surprised.
“I just found out last week that it’s a reality for us,” said Ashley Reynolds, executive director of South Central Kentucky Kids on the Block. “I was pretty shocked that it actually went through.”
Reynolds said the new tax law will affect the organization’s garden tour, tennis tournament and golf scramble, along with silent auctions. It will create some tough decisions for Reynolds and her board of directors.
“If we’re charging $50 for an event, do we now charge $53 or do we still charge $50 and just lose the three dollars?” Reynolds said. “Our board is going to have to decide what it means.”
Decisions on possibly raising event prices can be delicate, Reynolds pointed out, because of the potential of losing participants that are the lifeblood of her organization.
“If we don’t have events, we don’t exist,” she said. “We don’t get federal or state funding. We’re completely dependent on grants and events.”
Reynolds isn’t alone. While events with an educational purpose and historical sites appear to be immune from the new taxes, a Bowling Green certified public accountant says most nonprofits will be hit.
Pam Elrod, with the Carr, Riggs & Ingram accounting firm, said pancake breakfasts, charity running and walking events and other sports tournaments will be subject to sales taxes unless they’re promoted as free events that will accept donations.
“You’ll have to charge 6 percent, or you’ll have to eat it,” Elrod said. “The state has hit nonprofits with a whole lot of stuff very quickly. It’s going to be very complicated.”
And most nonprofits don’t have the accounting expertise on staff to navigate those complications.
Bunnell, with the Barren County YMCA, said he has already notified members that the sales tax will be added to their costs. Now he’s left to struggle with what impact that increase will have on membership while also dealing with the increased cost of complying with the new tax law.
“We don’t know how many people will cancel once the increase takes effect in July,” Bunnell said. “We’re in the process of putting in place systems for changing our record keeping so we can make sure we’re collecting what we’re supposed to collect.
“It creates another expense for us. It’s additional record keeping and more compliance expense on us. We want to make sure everything is tracked correctly.”
Because of the added burden on nonprofits and the uncertainty about aspects of the legislation, 20th District State Rep. Jody Richards, D-Bowling Green, said: “I voted against it. I’m certainly not in favor of taxing nonprofits.
“Some of the people subject to the tax realized it immediately and others didn’t. I don’t know how well it was communicated.”
Although any action relating to budgetary matters will require a two-thirds supermajority in the 2019 legislative session, Richards believes HB 487 should be revisited next year.
“If I were involved with a nonprofit, I would communicate with my legislators,” Richards said. “I just think it’s wrong to charge a sales tax on nonprofits.”
Richards will get no argument from Danielle Clore, executive director of the Kentucky Nonprofit Network. She said there is “a ton of confusion and frustration” among the nonprofits who are members of her organization, and she said the requirements of complying with the new tax law have diverted many nonprofits from their true mission.
“We will seek a legislative solution,” Clore said. “We’re working very hard to draft what we think would be the best solution. Our goal is to help nonprofits do what they do best.”
Like Richards, State Rep. Wilson Stone, D-Scottsville, is in favor of taking another look at tax legislation.
“There was no transparency (with HB 487),” Stone said. “Honestly, I didn’t know until the last few days about the impact on nonprofits. There’s already some pushback (against HB 487), primarily because of the low level of transparency. In these critical areas, we need more transparency.”
Stone doesn’t expect a special session to deal with taxes or any other issues, so for now nonprofits like the Bowling Green Country Club are scrambling to comply with the new law. BGCC General Manager Jarrad Miller said the club has notified members that they will be paying an extra 6 percent, but he said it’s too early to gauge the impact.
“We haven’t seen the impact of it (the sales tax) yet,” Miller said. “Any time you add 6 percent to your dues, you run the risk of it having an adverse effect. But what we have to do now is adhere to the law.”