Taxes are too often complicated and costly. No one likes to pay taxes, especially organizations and businesses trying to satisfy a budget. Certain entities falling under Section 501 of the Internal Revenue Service Code, called nonprofits, have special privileges that alleviate some of this tax headache.  For our purposes, I’d like to focus on what are known as 501(c)(3) organizations. Under IRS Code, these organizations must operate without the aim for excess profit and cannot be action organizations. Nonprofit organizations exist exclusively to serve others. 

The fact that a majority of 501(c)(3) nonprofits receive federal, and widely state, income tax exemptions is common knowledge. However, you might not know that every state does not offer sales and use tax exemptions for 501(c)(3) designated entities. Alabama is one of those states. 

Per the Code of Alabama, Sections 40-23-31 and 40-23-83, most 501(c)(3) nonprofits are not exempt from any sales tax and most use taxes. This is troubling, as anyone involved with nonprofit work knows how sales tax in a place like Alabama, where all 10 of the state’s biggest cities have a sales tax rate of 8.5% to 10.5%, can hurt the bottom line. The Alabama use taxes are admittedly low, but most nonprofit expenditures relate to consumption rather than usage. The logic would dictate, then, that Alabama’s tax code hurts nonprofits.

Many question the need for such exemptions. Shouldn’t nonprofits pay their fair share like everyone else? Why do 501(c)(3) organizations deserve exemption from state taxes if they already get a federal tax pass?

501(c)(3) nonprofits deserve state tax exemption because of their social benefit. Your local church, the Salvation Army, Habitat for Humanity and others all exist solely to serve and help the community. The list of ways that nonprofits serve their communities is extremely lengthy. Nonprofits multiply the efforts of normal people by strategically coordinating those efforts to touch millions of people. GivingUSA.org reported that Americans gave $427.1 billion in charitable contributions in 2018, and this number tells us that nonprofits pour billions of dollars and man-hours into places like Alabama every year. 

501(c)(3) nonprofits also deserve a state tax exemption because such a designation reduces replacement costs. For those services and goods not already provided by a government, there is demand. Yet the government does not have the capacity or specialization to meet all of a locale’s service demands. Therefore, the burden is passed to the public to provide for themselves through organized nonprofits. One would think tax exemption would be a positive tradeoff, as the government saves extensive hours of bureaucratic work and costs. Every single dollar taken from nonprofits equates to a detriment to the community affected. By allowing for 501(c)(3) tax exemption for all sales and use taxes, Alabama can shift public burden to private responsibility and lower the cost the government would be forced to pay.

Nonprofits do a great deal of good work in Alabama and the United States. Because of the social benefit and reduction of governmental costs nonprofits provide, they should be exempt from all state taxes. Alabama’s tax policy regarding nonprofits is stifling, and the legislature should revisit the tax code promptly. For the good of our communities, for the good of our neighbors and for the good of those who need a hand, change the law.