The Colorado General Assembly has a chance to offer targeted, commonsense protection to the charities in our state by decoupling Colorado’s nonprofit status from federal 501(c)(3) determinations through Senate Bill 9.
Across the country, there is growing concern about the politicization of federal tax-exempt status. Federal officials have openly discussed using revocation of nonprofit status as a tool to influence policy outcomes or curb programs they view as controversial.
Whether one agrees or disagrees with any particular cause, the broader question should concern all of us: Should decisions made in Washington automatically determine whether Colorado organizations can operate as nonprofits under state law?
A federal 501(c)(3) designation is a license by the Internal Revenue Service to treat money differently. This determination by the IRS allows organizations to operate as tax-exempt charities: 1) Exemption from paying federal taxes on most revenues, and 2) Donors being able to take a deduction on their federal tax returns. There are many categories of taxes, including income, sales, property, inheritance, specialized excise taxes, etc.
Colorado’s nonprofit status is tied to the IRS’ 501(c)(3) designation in many of those categories. If the IRS were to revoke a Colorado charity’s 501(c)(3) status, it could also lose its state nonprofit status, even if that federal action were politically motivated, which would be devastating.
Historically, the IRS has only revoked a charity’s 501(c)(3) status for engaging in actual criminal activity or failure to disclose the necessary financial documents. Now, charities are under real threat of losing their federal nonprofit status for politically motivated reasons, like serving sensitive missions or populations, rather than failure to comply with the federal tax code.
For decades, Colorado has generally aligned its nonprofit eligibility standards with federal determinations. But alignment does not mean abdication. When Colorado ties its own tax policy entirely to federal decisions, it leaves our charitable sector vulnerable to shifting political winds in Washington.
In addition to providing essential services to communities across our state, Colorado’s nonprofit sector is an economic juggernaut. Home to more than 16,000 organizations, the sector generates approximately $62 billion in annual economic activity and supports more than 262,000 jobs. Losing nonprofit status would be an existential threat to nearly every charity in the state.
We believe Senate Bill 9 would provide a narrow but important safeguard by clarifying the decoupling of Colorado’s nonprofit status from the federal 501(c)(3) designation for the purposes of sales and use tax.
For example, if the IRS revoked the federal nonprofit status of a Colorado museum or hospital, meaning they would have to pay taxes on their purchases of goods and services, they would still retain their exemption from state sales tax, saving them thousands of dollars per year.
This is not a radical proposal. Nor is it a blanket shield. The bill preserves Colorado’s authority to deny tax-exempt status to organizations that lose their federal designation for legitimate legal reasons, such as fraud or misuse of funds. What it prevents is automatic collateral damage resulting from politically driven federal action.
This is sound public policy for another reason: Colorado should exercise its own judgment when determining which organizations qualify for state tax treatment. Our tax code should reflect Colorado’s laws and values — not fluctuate based on federal enforcement priorities.
Nonprofits do not exist to generate profits for shareholders. They exist to serve communities. They are governed by volunteer boards, supported by donors and staffed by people who have chosen purpose over paycheck. At a time when demand for services is rising and costs are increasing, the last thing Colorado nonprofits need is uncertainty about whether their state tax status could disappear overnight.
This is a prudent and measured first step in protecting Colorado’s charitable community, and in preserving the state’s authority over its own tax policy.
The bill has advanced through the Senate and is being debated on the House floor. Please encourage your state legislator to support this bill to help those who help us, and then ask Gov. Jared Polis to sign it into law.
Paul Lhevine, of Denver, is the president and CEO of the Colorado Nonprofit Association, which has strengthened the nonprofit sector through education, connection and advocacy since 1986.
Tom Downey, of Denver, heads the regulatory affairs and government relations practice group at Ireland Stapleton Pryor & Pascoe, PC, and is the outside general counsel and former board chair of the Colorado Nonprofit Association.
The Colorado Sun is a nonpartisan news organization, and the opinions of columnists and editorial writers do not reflect the opinions of the newsroom. Read our ethics policy for more on The Sun’s opinion policy. Learn how to submit a column. Reach the opinion editor at opinion@coloradosun.com.
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