The Playgoer: Nonprofits Beware!

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Tuesday, May 27, 2008

Nonprofits Beware!

Fascinating article in Sunday's Times, reporting a Minnesota State Supreme Court decision with possibly far-reaching consequences:

Authorities from the local tax assessor to members of Congress are increasingly challenging the tax-exempt status of nonprofit institutions — ranging from small group homes to wealthy universities — questioning whether they deserve special treatment.

One issue is the growing confusion over what constitutes a charity at a time when nonprofit groups look more like businesses, charging fees and selling products and services to raise money, and state and local governments are under financial pressure because of lower tax revenues....

In a ruling last December that sent tremors through the not-for-profit world, the Minnesota Supreme Court said a small nonprofit day care agency here had to pay property taxes because, in essence, it gave nothing away.

In other words: Uh-oh.

Now this story is pretty much exclusively about traditional "charities" (like health- and day-care). And also wealthy universities! But it won't take long for those local counties skeptical of these institutions to start looking at arts org's, too.

After all, as the article states: "The idea behind tax exemptions is that the organizations provide a public service or substantially reduce the burdens of government." (Notice how uniquely American an approach to public interest this is.) And it is the "tax-exempt" clause in the nonprofit social compact that is at issue here. Since, obviously, lots of state and local governments would like to now have some of that potential tax revenue. (One of the many revelations to me in the article was that it's each state that decides nonprofit status, not the federal IRS.)

The trap some nonprofits are falling into, of course, is that you'd hardly know a lot of these places are operating as a public service as opposed to a good old regular "business." As one quoted expert from the nonprof field pleads:
“The nonprofit sector is being pressed to be more business-like and to find new ways to fill the gaps between what government will pay and what services cost, but then assessors want to treat us like businesses, which pay taxes.”
Sound familiar?

It certainly does to anyone who's seen Mike Daisey's searing indictment of A-level nonprofit theatre world.

And it certainly would to a bunch of commercial producers currently griping how the Tonys will be "stolen" from them by supposedly not-for-profit behemoths who get to play in the same Broadway game but unhandicapped by taxes and helped out by lower advertising rates. (Hence Shubert chairman Gerald Schoenfeld's famous adage that the Roundabout and Lincoln Center should simply be called not nonprofit institutions, but simply "untaxed.")

Look, I'm not saying this is good news. Given the lust for tax dollars at the local level (thanks, of course, to the deceptive federal Bush tax "cuts") a lot of truly worthy and, yes, charitable institutions are going to be threatened. But--maybe this is a good moment to look to our nonprofit theatres and ask them: "So what are you 'giving' back to our community? Not just 'offering' (at $60-$75 a ticket). But truly giving. What public service do you provide than cannot be found on Broadway?"

For most theatres, the easy answer is: Education! Hence the busloads of middle-schoolers herded in for yet another 10am "student matinee" of The Glass Menagerie or The Crucible. Fair enough. (Although those schools usually do indeed pay for tickets.) But it's also why an often dumbed-down "Education Department" at the theatre far eclipses any genuine dramaturgy or new play development.

But given the philosophy of the founding of the tax exemption for Not For Profit'd think we're entitled to a number of free shows! All the time!

Of course, the economics of our times--and the pitiful lack of subsidy to supplement the tax-exemption--make this impossible. Hence, these institutions have to pump up their revenue enhancement, which usually means to maximize income from pure sales. Hence, this leads to increased revenues, which is great if you're a business. But bad, it turns out, if you're supposed to be a "charity."
Almost 88 percent of overall nonprofit revenues in 2005, the most recent year for which figures are available, came from fees for services, sales and sources other than charitable contributions, according to the National Center for Charitable Statistics.


“We’re all seeing the growth of revenue in this area we call earned income,” said Audrey R. Alvarado, executive director of the National Council of Nonprofit Associations, adding that the Minnesota court decision “is saying, ‘Wait a minute, charities are supposed to give things away for free.’ ”
Wait a minute, indeed.

Again, the article doesn't touch upon the arts at all. And maybe there are other clauses and loopholes that redefine "charitable" for their purposes.

But just look at the institution involved in the lawsuit itself (fittingly named "Under the Rainbow") and tell me if you don't see similarities:
The agency, the Under the Rainbow Child Care Center, charges the same price per child regardless of whether their parents are able to pay the full amount themselves or they receive government support to cover the cost.
And therefore:
The court concluded that because the center charged all families the same amount, regardless of their ability to pay, and because its rates were not lower than those of its competitors, it was not an institution of “purely public charity” under the law and thus was subject to thousands of dollars in property taxes — $16,000 in 2006 and in 2007.
Or, to put it another way:
The Oregon tax court denied property tax exemption to a residential substance-abuse treatment center because it catered to “addicted professionals” and, like Under the Rainbow, did not give away its services.
And so let us ask, are our theatres only for the "addicted professionals" in the audience, those who can afford to pay market-prices for tickets? What will they do to satisfy the fix of those drama junkies unable to afford their services.


Anonymous said...

Excellent, and perhaps unresolvable questions. I have often wondered why arts orgs qualify as non-profit, other than they are unable to pay their own bills (and I ran a 501(c)(3) org fo ra few years)!

A lot of this has to do with the perception of the public role of art. Is art for the people? Does it benefit a city, a region? Or, is it just an elitist enterprise? If, as you say, the "services" remain a "$60 ticket," then I can only see that trend encouraging greater exclusivity in the use of arts orgs and thus, the public identity of arts orgs.

I think non-profit arts groups should be non-profit, but perhaps they should be thinking more about their community? Any theatre office I have ever worked in that has had an outreach or education department uses it for 1. Revenue, i.e. have classes for $. 2. Get more audience in by going to a school and talking (or something like that). In no case have the theatres actually put anything like the cash or personnel into an education departments that would have significantly given much to the world.

But that's just my opinion.

Anonymous said...

This is a good article, and let's hope that it extends to arts orgs. There's nothing wrong with a little fire under the bum to get some reform going. Think about it:

If you wanted to build a multi-million dollar complex, use it tax-free, receive public money in the form of state and local grants, pay your executives six figures, sell tix at a premium, and then job in all the actors, designers and directors from New York (and pay to house them), are you giving to the community or receiving?

And of course, if a new show is a hit and moves to NYC or Bway, the AD may get a raise or better job, but how about the rank and file staff? How about the subscribers?

As arts enthusiasts, let's not fall into the trap of victimhood. Lots of people in our industry are taking advantage of the way things are run now, and too many of us tolerate it because we want to be where they are someday. But Mike Daisey is right, and it's about time somebody said it.

Anonymous said...

Isn't a lot of the 501(c)3 exemption all about not returning a dividend to the investors? Not-for-Profit companies are not allowed to return a profit to Board members, and thus will never rake in big dollars from venture capitalist or other investors, and thus will forever toll at the bottom of the capitalist model.

I'm not saying that some big N-f-Ps can't be doing things better (I'm no fan of the United Way for one), but me thinks there's a lot more to this than property taxes and free tickets.

If I had to price my tickets to cover overhead, salaries, and still provide a return on investment, hell, I couldn't afford to see my own plays, and we all work for free.

And if I took money from investors for an ongoing theater company wouldn't I have to be responsible to them to do the kind of plays that lots of rich people would want to see, so as to assure them that dividend on profits? I think I would rather do shows for an under-served population who might like the same kind of work I do.

Nick said...

Nice pick-up, Garrett. Related is this Times article from last year about enhancement money.

Nonprofit Show, but Money’s Riding On It
By Campbell Robertson

“As money has become increasingly scarce, the enhancement system, in which a commercial producer pays money to a nonprofit theater to help subsidize a production, is all but essential.

“’We don’t have out-of-town tryouts anymore,” said Susan Dietz, a producer who enhanced the recent Primary Stages production of “Adrift in Macao.” “This is the way we do it.”

“This kind of deal is decades old, though for years it was looked upon as a dirty secret in the nonprofit theater world. Some theaters still fear that widespread knowledge of enhancement could jeopardize their reputations, their donations or even their nonprofit status.”

Garrett, will you or have you reviewed Mike Daisey’s piece? I’d be interested in what you had to say in full review. Your characterization of it here as “searing indictment of A-level nonprofit theatre world”, is at odds with other reviews I’ve read.

“Daisey insists nonprofit theaters are not just faceless institutions but collections of human beings with universal problems.” –-Variety

“The title of this new piece, like his angry first impression, is misleading. The show is not a tirade but a gentle remembrance of how Mr. Daisey came to love theater, combined with some very funny stories about his professional misadventures …” --New York Times

I haven't seen the reworked piece yet, but I saw Mike's debut performance at the Public and I'd agree with these reviews characterization about both the tone and the content. I saw something quite different, if not converse, to a "searing indictment."

Anonymous said...

Ah, yes, "dumb down"--the cry of the ivory tower intellectual elitist snob Communist homosexual who hates ordinary people who works for a living and giving the public what it wants--and wants the taxpayers to pay for it instead of getting off their lazy butts and working for a living. Maybe if you started giving the public what it wants instead of your Communist homosexual propaganda, you might be successful.

Playgoer said...

This blog has been called many things, Anon. But never "communist homosexual propaganda." Bravo. I won't even begin to unpack that phrase and confirm which if any of those three epithets are true.

Let me also point out to fair-minded readers that--by my check--my only use of the phrase "dumb down" in the above post was to refer to theatre company education departments. Maybe "watered down" would have been more appropriate. And certainly I don't mean to bunch together all theatres. Sorry if I did.

All I meant is how great plays often have to be neutered in a company's "education" materials to appease nervous school boards and principles. People who have worked in such capacities know what I'm talking about.

As to the implied general charge of elitism...well, if by "successful" you mean "lucrative in the marketplace", we should all contemplate if we would be satisfied living in a world where the only art is that which has profited in the marketplace. I'll leave it at that.

Malachy Walsh said...

- All I meant is how great plays often have to be neutered in a company's "education" materials to appease nervous school boards and principles. People who have worked in such capacities know what I'm talking about. -

I saw this problem in action on the West Coast recently. A scene from TAMING OF THE SHREW was considered too lewd for 8th graders and was cut from the eduction program.

It was pretty ridiculous.

PeonInChief said...

Much of this comes from the desire of state and local governments to nickel and dime non-profit groups (of whatever kind) for business fees and personal property taxes (office computers and the like). A couple of years ago I had a talk with one of these tax collectors and had to explain that some of our office furniture had been found on the street and was therefore difficult to value.

Anonymous said...

What is really fascinating here is the fraying of a unified criteria for the multple tax-exemptions that non-profits have generally enjoyed in toto.

The IRS grants exemption from federal corporate taxes based on the 'charitable purpose' of a NP. But a few years ago they began getting very serious about collecting taxes on 'Unrelated Business Income' from activities that are not part of that purpose. I am not aware of any serious threat to the core exemption on a Federal level, but perhaps I am just ill-informed.

State and local goverments provide exemptions from state corporate taxes, property taxes, and sales taxes and traditionally organizations have recieved these exemptions almost automatically with their federal exemption. This is what might change with the Minnesota ruling.

Although it would be a headache to NP managers, it is interesting to consider that different criteria for different exemptions might actually provide a structure for understanding the grey area of NPs' differing levels of 'charitableness'. One could make the argument that both a theater and a food bank deserve federal corporate exemptions, but that only the food bank should be exempt from property taxes. I would disagree, but I can see the logic of it.

As noted, the NYT article does not really deal with arts organizations, but I suspect that very few come anywhere near the national NP average of 88% earned income. Most theaters I have worked with are lucky to get to 30% earned income. And furthermore, most NP arts organizations are very cautious not to let that ratio fall too low. Many philanthropic granting organizations see earned income as a handy substitute metric for the value of the art in the community. The logic is that if no one is willing to buy tickets, why should you be subsidized?

The most terrifying thing is that we may be entering an extended period in which ongoing tax-exemption is in flux. How can mangers make good decisions if at any moment a court ruling could increase their expenses by 15% or even 30%?