May 15, 2014

By Joe Haberzetle, JD, LLM

The ability of not-for-profit organizations to rent their tax-exempt property to others has long been an area of contention between such organizations and the Washington taxing authorities, as evidenced by last year’s uproar over the highly acclaimed Everett Sausage Festival. The rules in this area are detailed, varying and confusing, and the penalties for a violation can be severe – typically including the loss of the property tax exemption on the affected part of the property for at least the year in which the violation occurs.

Thankfully, the state legislature has brought much-needed simplification and uniformity to this issue with the enactment of Senate Bill 6405 during the 2014 session. Signed into law by Governor Inslee on March 27, this legislation provides the following rules regarding the rental or use of otherwise exempt property by third parties. These rules now apply broadly and uniformly to the various property tax exemptions existing under Washington law:

  • The rental income or donations received by the non-for-profit property owner must be reasonable, and may not exceed the maintenance and operation expenses attributable to the portion of the property loaned or rented.
  • Fundraising events are permitted if they are consistent with the purpose of the not-for-profit organization.
  • Exempt property may be used for nonexempt purposes for not more than 50 days during a calendar year.
  • Of the 50 days of nonexempt use, no more than 15 days may be for pecuniary gain or to promote business activities.
  • Activities related to farmers markets on exempt church property may occur no more than 53 days within each calendar year.

The story behind this legislation demonstrates how publicity around a single violation can spur much-needed change benefiting a wide variety of organizations. In early 2013, articles were published in the Everett Herald and other media outlets, suggesting that the annual Everett Sausage Festival was in danger of cancellation. The reported threat to the festival was its impact on the property tax exemption enjoyed by Our Lady of Perpetual Help Catholic School, on whose grounds the event had taken place for many years. Although the proceeds from the annual festival benefited the school, the festival had also traditionally included carnival ride operators, music entertainers and craft vendors who profited from their involvement. Technically, this for-profit use of the premises violated the exemption provisions, potentially subjecting the school to property tax.

Largely as a result of this perceived threat to the Sausage Festival, two state representatives from Everett cosponsored legislation in the 2013 legislative session to amend the nonexempt use provisions, and allow for-profit vendors and entertainers at the event. The 2013 legislation was not enacted; however, the Department of Revenue recognized the confusion in this area and agreed to work with the not-for-profit community to craft more comprehensive legislation to unify, expand and simplify the provisions around third-party use of exempt premises. The resulting 2014 legislation, informally referred to in Olympia as the “Sausage Fest bill,” was passed by unanimous vote of both houses and is effective June 12, 2014.

For more information on this legislation and its impact, please consult your tax advisor or Clark Nuber State and Local Tax representative.

© Clark Nuber PS, 2014.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.