Cash strapped state governments have started to depend more heavily on sales tax revenue; this decision has not only lead to increases in ad valorem tax rates, but also policies intended to expand the tax base.  With these changes, nonprofit sales tax exemptions have come into jeopardy, as some state governments question the “charitableness” of nonprofit organizations that increasing mimic for-profit organizations (e.g., reliance on fee for service and sales revenue). Recent statistics (NCCS 2011) indicate that charities, broadly defined, derive nearly 70 percent of their annual revenue from sales, fees for services, and unrelated business income. Considering these figures, some have argued that such tax subsidies not only reduce government revenue, but also create substantial market distortions and push tax burdens onto other nonexempt businesses (Hyman 1990). In opposition, charities have argued that tax exemptions provide necessary support for critical public services. Recent examples of such debates in North Carolina and Missouri have featured prominently in the news, which indicate both the timeliness of the issue and a significant public interest in the outcome of the debate.

Therefore, this proposed research investigates the impact of changing sales tax exemption policies on the density and extent of nonprofit service provision across twenty years and fifty states. We build on previous literature documenting the extent and rationales underlying exemptions (e.g., Mikesell 2009, Walker and Sipult 2010). We also extend previous empirical studies (e.g., Harrison 2009), which due to data limitations, had to assume a blanket sales tax exemption for all nonprofits. This expansion allows for a more acute picture of the potential effects of changes in tax policy.

This research contributes to field, theory, practice and the overall conference theme – global challenges and new perspectives. In recent years, we have seen an increase in government-nonprofit coproduction, which has led us to focus more on service provision challenges rather than the financial tensions and market impacts stemming from subsidies and exemptions. We help inform subsidy and resource dependency theory by exploring the dynamics of service provision and tax policy. Finally, this analysis helps inform local policy makers about the tradeoff between increased tax revenue and additional financial burdens on service providers.