From the Kentucky Derby Museum to Dare to Care to the YMCA of Greater Louisville, many nonprofits are trying to adjust to a new reality — having to deal with sales tax.
The expansion of the state’s 6 percent sales tax to include nonprofits took effect July 1, as the result of a larger tax reform effort by the Kentucky General Assembly earlier in the year, and has been a source of consternation for some Louisville-area nonprofits.
“Every nonprofit around has been, ‘My gosh, how are we going to deal with this?’ ” said the Rev. Ron Loughry, executive director of Fern Creek/Highview United Ministries (FCHUM).
Some, such as the Kentucky Derby Museum, scrambled to get in a position to charge the tax, which applies to things like admission and gala tickets, and to communicate that information to supporters and the public.
FCHUM is among those expecting or fearing a fundraising hit, and the YMCA of Greater Louisville already is seeing an effect on membership.
“We have seen a few folks that have terminated (their Y membership) as a result of the extra burden of the tax,” said Steve Tarver, the YMCA’s chief executive. “What we don’t know is how many people have just not come in because of it. That’s bothersome to us.”
Tarver also worries about how the sales tax expansion could affect the overall health of Kentuckians as it applies to all Kentucky fitness centers (as well as several other kinds of facilities and services). And it applies to both the membership fee and the join fee.
Later, “as this settles in, we’re very concerned that people will just not get involved in healthy activity, and that’s very detrimental to our entire commonwealth,” Tarver said, noting the state has dismal health statistics and how crucial exercise and healthy living can be to avoiding illness.
Although Kentucky House Speaker Pro Tempore David Osborne has prefiled a bill for the 2019 session of the General Assembly to exempt nonprofits, organizations still have to figure out how to deal with the sales tax in the meantime.
More than 150 people registered for educational sessions the Louisville-based Center for Nonprofit Excellence held with the Department of Revenue July 26. The center also has featured the topic on its blog to help groups figure out how to apply the tax correctly.
“There’s a tremendous desire in our community to be compliant,” said Hannah Nitzken, the center’s director of communications. “We do not hear any nonprofits saying, ‘Well, we’ll just worry about this when we get in trouble.’ Everybody seems to want to figure out what the rules are so that they play by them.”
The Department of Revenue also has done work to educate the public. For example, it’s started a website, TaxAnswers.ky.gov, sent out email communications to various nonprofit groups and verbally communicated with them, said Pamela Trautner, a spokeswoman for the Finance & Administration Cabinet.
It also has sent letters out to certain groups, responded to tax practitioners representing nonprofit groups and took part in a statewide webinar hosted by the Kentucky Nonprofit Network.
But still there has been confusion. For example, initially, the Kentucky Derby Museum thought it would be exempt because of its educational programming and focus on Derby history.
“We really didn’t understand that we were going to have to pay sales tax,” said Patrick Armstrong, the museum’s president and CEO.
Then “we had to change all the software at the front desk for admissions in order to charge tax on that, and then several other internal things took place in order to start charging tax on July 1,” he said.
The group sales director had to call about 200 people telling them they’d need to pay more money to accommodate the tax unless they were able pay before July 1.
“Obviously, that’s never a great conversation to have when they’re expecting one price and then it’s affected like that,” Armstrong said.
The museum also worries about the effect the sales tax will have on its $500-a-ticket annual Kentucky Derby Museum Gala, and on people who rent space at the museum for events like weddings for whom the increased cost could be a hardship.
“I don’t know of any specific business that I would say we’ve lost because of it, but any relief that could be given, or consideration that could be given (by lawmakers), would be wonderful,” Armstrong said.
The museum is one of the organizations faced with charging tax on certain auction items.
According to the state, Trautner noted: “Fundraising through the use of auctions is taxable if the items being auctioned are normally subject to sales tax. For example, the auction of a set of golf clubs is taxable, but the auction of a country ham is nontaxable as the sale of an exempt food item.”
Armstrong said, “There are, at times, opportunities for us to do silent auctions, so it would impact us when we do those.”
In a recent opinion piece, state Senate President Robert Stivers wrote that, “it was never the intent of the Legislature to force nonprofits to charge sales tax on tangible items or admission to events” and that he thinks the General Assembly will move quickly “to provide relief for the nonprofit community in the Commonwealth.”
The Department of Revenue has determined that the tax must be applied in the meantime. It considered various factors, including “the recent Interstate Gas Supply case KY Supreme Court decision confirming the limitation of the Kentucky Constitution Section 170 exemption for charitable institutions to property taxes,” according to Trautner.
Dare to Care Food Bank has two fundraisers that the sales tax expansion could possibly impact. The organization decided to drop the registration fee for its Sept. 23 hunger walk and instead recommend that people make a donation, said a spokesman, Stan Siegwald. That could negatively impact how much is raised, he said, but Dare to Care is hoping that people are passionate enough about the organization’s mission — feeding the hungry — to give generously.
It hasn’t decided how to handle admission to its annual Taste of Derby Festival event, which like the walk, typically raises more than $100,000 for the nonprofit. Both “are critical to our ability to serve the community,” Siegwald said.
Fern Creek/Highview United Ministries, a safety-net organization that helps thousands of people each year, is lamenting that it will not be able to use all of the money from its fall fundraiser — The Loughry Legacy Soiree — because of the tax. The dinner-dance is being held to help raise money for a $250,000 legacy fund that the organization is building to cover the operating costs of the FCHUM facility. Three hundred people are expected to attend.
Because the tax is folded into the ticket price, “if we sell out at this event, which we hope to do, paying the taxes means we’re going to lose $900,” Loughry said.
FCHUM, which serves thousands of people a year, helps to prevent homelessness, feed the hungry, care for the elderly and stabilize lives.
Extending the sales tax on certain services means families of people who use FCHUM’s adult day center for frail older adults are now having to pay sales tax.
“These are people already with a lot of expenses” associated with caring for someone with dementia, Loughry said. This tax “is just an additional strain.”