Social clubs have long served as a defining characteristic of American society. While the nature of the hobbies, recreational interests, and other ties that inspire people to bond together continues to change significantly, the social club itself remains. For people wishing to join with others and carry out shared interests in an organized way, the group should understand the tax benefits afforded social clubs. Specifically, Section 501(c)(7) of the Internal Revenue Code provides an exemption from federal income tax if certain requirements are met.
In lawyer David Simon’s call to abolish property tax exemption for “rich” nonprofits, he argues stridently that Illinois property tax exemptions reflect another example of unfair privileges, this time for “wealthy” nonprofits like the University of Chicago and Northwestern University. He thus advocates for granting property tax exemptions only to nonprofits owning property valued at less than a million dollars. His bright-line rule seemingly eliminates the highly problematic political schemes such as those found in PILOTs (“Payments in Lieu of Taxation”) which some state and local governments have adopted. But his commentary ignores the long history of nonprofit tax exemptions, the extensive societal benefits (including both financial and intangible benefits) resulting from such exemptions, and other key policy considerations.
It’s no surprise to pay sales tax when buying goods at stores. But what happens when a nonprofit organization sells goods, through a website, at periodic conferences, or as part of its program activities? Must the nonprofit collect sales tax too on its sales of T-shirts, books, or other items made available to others, just like a store? Aren’t nonprofits exempt from taxes? If a nonprofit’s sales are not exempt, under which state sales tax law will it owe sales tax?