Tax nonprofits, some say

RED WING, Minn. — 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.

The agency, the Under the Rainbow Child Care Center, charges the same price per child regardless of whether parents are able to pay the full amount themselves or they receive government support to cover the cost.

The tax-exempt status of charities costs local governments $8 billion to $13 billion annually, according to various rough estimates.

Congress, too, has threatened to impose a requirement that wealthy universities make minimum payouts from their endowments and raised questions about whether nonprofit hospitals are really all that different from their for-profit, taxpaying competitors. And, concerned about the way some churches are spending money, the Senate Finance Committee has called for detailed financial information from six evangelical ministries, asking them to justify their tax exemptions.

In Massachusetts, where Harvard's endowment has reached $35 billion, legislators are weighing whether to impose a 2.5 percent annual assessment on universities with endowments of more than $1 billion.

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. Nonprofit health-care providers, day-care centers and retirement homes, among others, are often difficult to distinguish from their tax-paying competitors.

This month, the Minnesota Legislature passed a tax bill that establishes a one-year ban on reversing property-tax exemptions held by existing nonprofits.

"We need to figure out what we mean by 'purely public charity' because, frankly, we can't afford as a state to lose nonprofits providing these kinds of services," said state Rep. Paul Marquart, chairman of the property-tax subcommittee. "But it isn't going to be easy."