Nonprofits adjusting to new sales tax requirements

Anyone who purchases a shirt at a Salvation Army store on the Kenai Peninsula now has to pay sales taxes on that purchase, under borough sales tax code.

The Kenai Peninsula Borough Assembly passed a set of tax reforms proposed by Borough Mayor Mike Navarre’s administration in September, reforming a number of code items and including several new sources of revenue. One of them was removing the exemption for sales by nonprofits operating regular storefronts, like the Salvation Army’s stores in Kenai, Soldotna and Homer.

The clause was included in an ordinance among a raft of other changes, submitted in July after Navarre’s administration spent approximately a year reviewing the sales and property tax codes. Some of the changes were largely administrative — allowing businesses completely exempt from collecting sales taxes not to file tax returns and clarifying an existing practice that all sales of pull-tabs, bingo cards and raffle tickets by charitable organizations are exempt from sales taxes, for example — others changes exemptions. One of the changes include requiring nonprofits with ongoing business locations to charge sales taxes.

“The intent is to eliminate an inequitable sales advantage over other businesses,” the memo attached to the original ordinance in July stated.

After a number of amendments and a scuffle over a provision requiring flightseeing tours to charge sales taxes — they’re exempt, under a resolution passed by the assembly on Jan. 3, 2017 — the assembly passed it and it went into effect Jan. 1. Another ordinance, passed Jan. 17, clarified that convenience stores not authorized to participate in the federal food stamp program did not have to charge sales taxes and admission fees charged by nonprofits are not subject to sales taxes. It also clarified that occasional or intermittent sales, which are exempt from taxes, do not occur for more than 14 days in calendar year.

Some nonprofits won’t be affected, like the Kenai Peninsula Food Bank. Others are preparing, like the Salvation Army. However, some nonprofit leaders were taken by surprise when they got notices from the borough in the fall that they might be required to charge sales taxes. Some got the notice and were unclear on whether they’d be subject to sales taxes, because the tax code still provides for a number of exemptions.

Lara McGinnis, the executive director for the Kenai Peninsula Fair, said if the fair were required to charge sales taxes on its sales — which include items like ticket sales and parking — it would destroy the event.

The fair is exempt under the clause that it’s an occasional event, lasting less than 14 days in a calendar year. The ordinance passed by the assembly Jan. 17 will allow events like the Kenai Peninsula Fair, Salmonfest, the Kenai Peninsula Beer Fest and Progress Days, among others, to operate as they always have because they are not continuously operating events.

However, the Kenai Peninsula Fair does have to charge sales taxes now for its facility rentals. The fair, which owns buildings in Ninilchik, rents them out to other organizations for use during the year for fees ranging from $100 to $1,500, not including setup fees. McGinnis said, by her estimates, adding the sales tax to the Kenai Peninsula Fair’s rentals would only bring the borough a few hundred dollars per year and will add a lot of work for her in processing time.

“Adding layers of work to the nonprofits isn’t helping,” she said.

Many nonprofit workers said they felt the change was not adequately communicated to them before the assembly passed it. There was little public comment on the change at the assembly meetings where it was being discussed, and some nonprofit leaders said they didn’t know about the change until October, when letters were mailed to them explaining the changes.

Joyanna Geisler, the executive director of the Independent Living Center, a nonprofit assisting the elderly and disabled with maintaining their independence, said she overheard the change while visiting a local Salvation Army. Her own notification from the borough never arrived, she said.

“We were never notified,” she said. “… I tried to search on the borough website and couldn’t find anything.”

She said as best she understood it, the Independent Living Center wouldn’t be affected, but she’d keep looking into the code to see if she’d missed something.

Other nonprofits in Homer have already found cause for concern, like the Homer Council on the Arts. Though the code provides an exemption for educational sales like classes, the arts-based nonprofit also rents space for local artists, which will now be subject to sales taxes, said Peggy Paver, the executive director.

One frustrating aspect of it is that the law is going into effect halfway through the fiscal year, which runs from July 1 through June 30, so the nonprofit is having to go outside its budget, she said.

“Now I’m having to pass that cost on to (the renters), and I’m not happy about it,” she said. “Plus the fact that we now are incurring extra bookkeeping fees … essentially, we’re scrambling to get everything in place to pay more money than we had intended to with the (new) tax law.”

The borough’s finance department scheduled workshops around the peninsula to help answer nonprofit workers’ questions about sales tax filing in November and December 2016, some during the day and some in the evening. However, leaders like Laurie Morrow of the Pratt Museum in Homer said she never found out about them until it was too late, and even if she had, she might have been too busy to go. Nonprofits, which often keep small staffs, are frequently busy, she said.

“I was never able to attend one of their outreach meetings because I never knew when they were,” said Morrow, who took over the role as executive director at the museum last fall. “(The borough finance department) seemed a little unsure themselves of the interpretations. I’ve relied a lot on my nonprofit colleagues (to help figure out the changes).”

Morrow said the Pratt Museum’s gift shop, the only part of it subject to sales tax, has already been voluntarily collecting sales taxes for years, so it wouldn’t be a major change for the staff there. If the borough had required admission fees to be subject to sales tax, it would have had a huge effect, she said.

Paver said her staff, which is very small, wouldn’t have the time to seek out extra grants to help cover the costs and will have to pass it along to the artists renting the spaces. She said she understood it may be a strategy to help cover some of the budget shortfalls common around the state at the moment, but it seemed to contravene the mission of nonprofits, to provide low cost services for the good of the community.

“It doesn’t seem to support what a nonprofit is and the services we’re trying to provide the community,” she said.

Larry Persily, who took over as Chief of Staff for Navarre after former chief of staff Paul Ostrander left in early January to take a job as Kenai’s city manager, said there was no estimate for how much the change would bring the borough in new revenue. It was more about fairness — even a well-intentioned business should collect tax like any other business, he said. There are still many exceptions left in the code as well, he said.

“It’s not like every dime that passes through the hands on a nonprofit is going to be subject to sales tax,” he said. “There are still a lot of exemptions.”

Reach Elizabeth Earl at elizabeth.earl@peninsulaclarion.com.

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