MEMBER QUESTION

I found some information that may indicate that association libraries which charge patrons for faxes should collect sales tax.

This publication is the source of my inquiry: https://www.tax.ny.gov/pdf/publications/sales/pub843.pdf

On page 25, under "Sales and Utility Services" there is mention of telephony and a reference to section 1105(b) of the Tax Law. The section of the law specifically mentions facsimile services, but only intrastate transmissions would be taxable.

However, page 6 states: "Agencies and instrumentalities include any authority, commission, or independent board created by an act of the New York State Legislature for a public purpose".

Examples of "agencies and instrumentalities" include:
          • NYS Department of Taxation and Finance
          • NYS Department of Education
          • Association of Fire Districts of New York State
          • Nassau County Village Officials Association

Since association libraries are chartered by NYS Dept. of Education, I wondered if association libraries would be exempt from collecting sales tax on faxes.

Thank you in advance for clarifying whether association libraries are exempt from collecting sales tax on faxes.
 

 

WNYLRC ATTORNEY'S RESPONSE

There's a lot going on in this question, so I am going to be less fun and flowery[1] than usual as I answer it.

I am sorry to report that per NY Tax Law Section 1105(b), an association library must collect sales tax on sales of facsimile services for faxes sent and received within the state.[2]

In part, this is because association libraries, although chartered by State Ed, are regarded by the NYS Department of Taxation & Finance as not-for-profit corporations, not state agencies/instrumentalities.[3]

Now, as a not-for-profit, an association library is exempt from collecting and paying taxes on facsimile services per NY Tax Law Section 186-e--just like any other chartered library or museum would be.  But as the resource cited in the member's question[4] shows, exemption under 186-e doesn't equate to exemption under 1105 (b).[5]

Of course, legal guidance in "Ask the Lawyer" can supplement--but never substitute--guidance from your association library's tax professional or lawyer.  If the accountant or lawyer for your association library finds a way to avoid the obligation to collect tax on sales of intra-state faxes: 1) get that in writing from them before relying on it; and 2) please send us an update!

Thanks for a question that inspired frequent cross-checking of the tax code!  I wish I could offer a more helpful answer.

 

 

MEMBER QUESTION

Are special district libraries eligible for 501(c)(3) or other federal tax exemption?

I work at a special district public library, and we are not currently a 501(c)(3). Everyone I've asked from co-workers to administration to board members says no, we aren't eligible, but no one can answer *why* we wouldn't be eligible. First, we pretty explicitly meet the exempt purposes set forth in section 501(c)(3). Also, I have worked at different types of public libraries that have been 501(c)(3)'s. Based on my reading of the IRS's eligibility requirements and state education law, the important part as far as the IRS is concerned is the structure and authority of an organization's charter. The Board of Regents is responsible for chartering public libraries in the state, so why should it matter what type of library results from the charter? However, IANAL, so I may be misunderstanding or missing something important. That's where you come in!

 

WNYLRC ATTORNEY'S RESPONSE

In Greek mythology, the "chimera" is an intact, functioning animal boasting the features of other animals: the head of a lion, the body of a goat, and the tail of a serpent (or a dragon, depending on your source).

Libraries are legal chimeras.

In fact, not only are libraries legal chimeras, but depending on the "type" of library, they are each their own, special type of chimera.

For instance, a village public library/chimera would have: the head of a village, the body of a not-for-profit corporation with municipal fur, and the tail of an education corporation as chartered by the Regents.  An association public library, on the other hand, would have: the head of group of local library-loving people, a furless not-for-profit body...and more options for the shape of the tail.

Why all this chimera imagery?  Once we take the member's question out of the cold, harsh light of logic and throw it into the dappled sunlight of myth, it is easier to unpack the confusion underlying their question.[1]

Following our "hybrid mythical animal" analogy, a special district library has: the head of a three-headed dog[2], and, if the authorities determine that it has the power to tax, the tail of a scorpion, which could render it unable to be regarded as a 501(c)(3).

This "power to tax" part is at the heart of the question.

As set out on page 10 of the "2018 Library Trustee Handbook" posted at https://www.nysl.nysed.gov/libdev/trustees/handbook/handbook.pdf, the mythical creature that is a non-association public library (of any kind) can choose to register as a 501(c)(3):

"Public libraries (municipal, school district and special legislative district) are, by definition, a government entity under IRS code, and therefore tax exempt and not 501(c) (3) corporations. However, public libraries may receive a confirmation of tax exempt status from the Internal Revenue Service to use with grant makers and businesses."

But if a special district created by legislation has a scorpion's tail and can levy a tax, they might not even qualify for the "confirmation."

Why is that?  I'll let the IRS (mostly) do the talking[3]:

Examples of entities that may be considered "separately organized" [and thus able to qualify as a 501(c)(3)] include colleges and universities; hospital, housing, or development authorities; public library boards; water or park districts; public school athletic associations; charitable trusts; and organizations created by inter-governmental agreement.

...[But]..

Under Rev. Rul. 60-384, a government entity will not qualify for exemption if it has powers beyond the scope of section 501(c)(3). For example, where an instrumentality exercises substantial enforcement or regulatory powers in the public interest (such as health, welfare, or safety regulation), it will not qualify.

...[for example...]

Example (3): W is a public library board organized under a state statute authorizing it to determine the tax rate needed to support its operations within specific maximum and minimum rates. W does not impose or levy taxes, but submits the tax rate to the county auditor who certifies it to the county adjustment board. The library tax is collected in the same manner as other taxes by the county treasurer, who transmits to the library board its share of tax revenues. Since W does not itself have the power to levy taxes, but only to determine tax rates, it does not have a prohibited governmental power and may qualify for exemption under section 501(c)(3). Rev. Rul. 74-15, 1974-1 C.B. 126. [emphasis added]

On the flip side, the guidance quoted above confirms that once a "special district" has a substantial government power (like taxation), it does not qualify for exemption as a 501(c)(3).

Now, here's where I go out on a limb: most[4] special district libraries do not have the power to tax directly.  That said, there certainly are "districts" in New York that have the power to sting--I mean, to tax--or other powers the IRS has determined disqualifies the entity from qualifying as a 501(c)(3), so a library should assess this issue before deciding what it qualifies for.[5] But generally,[6] special district public libraries rely on municipalities and school districts (and perhaps other taxing authorities) to collect their annual levy...and per IRS guidance, that means they can qualify as a 501(c)(3), just like the Handbook says.

What is the magical formula by which a library can assess what type of chimera it is for tax purposes?  As of this writing[7], the IRS posts that at:

https://www.irs.gov/government-entities/federal-state-local-governments/governmental-information-letter

And since this ATL is all about the IRS, we'll give them the last word (taken from the link above):

As a special service to government entities, IRS will issue a “governmental information letter” free of charge. This letter describes government entity exemption from Federal income tax and cites applicable Internal Revenue Code sections pertaining to deductible contributions and income exclusion.  Most organizations and individuals will accept the governmental information letter as the substantiation they need.  

Government entities can request a governmental information letter by calling 877-829-5500.

So, you can call Charon[8]--uh, the IRS--and ask them to ferry you across into 501(c)(3)land, for free. 

Good luck crossing over the Styx...I mean, conferring with the IRS on your tax-exempt status!

 

MEMBER QUESTION

We are a library that is a hybrid government agency (special taxing district) and a 501(c)3. Does being a 501(c)3 override local gov’t agency status as far as applying for the CARES PPP? We've reached out to several attorneys and even the SBA and we get opposite answers. Help!

WNYLRC ATTORNEY'S RESPONSE

I have spoken with many public libraries about their experience considering and applying for the different aid packages currently being offered in the wake of the pandemic.  I also have the benefit of working with an associate attorney who once worked for the SBA, closing disaster loans.

So, in addition to the guidance being offered by New York State Library Development and the New York Library Association, which I encourage all libraries to pay ongoing attention to, I have two things to add:

First, as Mr. Rogers would say:

Remember, you are special.

Listening to the different experiences, and most importantly, reading the law, regulations and guidance, I can say that each and every library, library system, and resource group in the state of New York is differently situated under these aid packages, including PPP.

The is because, while the State of New York has created uniform frameworks for fostering libraries, within those frameworks, there is great room for self-determination and autonomy.  That “room” means that every library has a different business structure, banking arrangement, budget profile, cash flow situation, grant and contractual obligations, approach to payroll, personnel policies, union obligations, commitments to the community, and plan of service. 

This array of approaches and obligations create a unique identity that will be uniquely impacted by the current crisis.

Which brings me to my second point, which is based on my favorite baseball phrase:

Run it out.

Run.  It. Out.

What does that mean?  For those of you who don’t play baseball, it means…

No matter how soft a pop fly you just hit--no matter how easily the pitcher just snatched the ball out the air and is sending it hurtling to first—once the ball is in motion, drop your bat, and run the bases.  Even if you think you can’t possibly make it home.  Even if you are pretty sure you’ll be tagged out before you take 5 steps.  Even if you suspect the catcher is laughing at you.  If your library’s budget or ability to operate is being negatively impacted by COVID-19, your board owes it to the library and its community to explore every avenue.  That includes PPP, and other emergency lending.

“Running it out,” of course, should not happen in a vacuum.  It should happen as part of a well-considered, diverse plan for dealing with the current crisis (to that end, see my “Ten Things” column about boards and emergency response).  But PPP and other aid should not be off the table until…they’re off the table. 

To do this, be ready to assess the library’s fiscal position.  Are you facing a pinch now, or more worried about next year?  You also need to work closely with your bank, and be ready for both of you to closely assess your special identity (charter, bylaws, policies, payroll, obligations, cash flow) vis-à-vis the SBA’s rules for application.[1]

For some of you, your library will get tagged out before you round first base.  Your bank may decide you don’t qualify, or your board may even assess that that PPP or other emergency relief aren’t for you.  But others of you just might make it home.

And if even only 5 libraries in the State of New York qualify for PPP and are able to help their communities recover from the impacts of a pandemic, because they did everything they could to get the aid they need to function, then the effort will be worth it.

Does your library qualify for PPP?  If you need it to stay in the game: run it out. 

 

MEMBER QUESTION

Is it legal for a Friends of the Library group to hold their funds and not to use those funds to support the library's mission? OR refuse to pay for library program and services when ask by library staff?
Can they lose their 501c3 status, if it is proven that the funds are not being used to benefit the library?

WNYLRC ATTORNEY'S RESPONSE

Before we address what may be the clear signs of a dysfunctional relationship between a library and its "Friends," let's explore the basis for the Library-Friends arrangement.

A public library, hemmed in by many laws, regulations and pressures governing fiscal operations, often enters into a cooperative agreement with a "Friends" group--an independent, usually "501(c)(3)"[1] corporation who can raise and spend money unburdened by such obligations.

Here's an example of how this works:

A town's library wants to create a special collection on "Local African-American Heritage"…a project that will be done in collaboration with a noted Black historian, the Black Studies department of a nearby college, and the archivist of a historically Black church in the town.  The initial $10,000.00 donation to kick off the collection was left to the Friends by a donor in their will.

The Library and Friends create a joint committee to make the special collection happen.  As envisioned by the joint committee, the project will involve renovation of a room in the library previously used for community meetings, as well as the acquisition of a wide range of books, museum-quality and ADA-compliant signage for the walls, and an oral history project housed on special interactive technology.  The library's staff will receive special training on the resources and the room.

The new section's "Grand Opening" will feature a keynote speaker who some town residents find controversial.  After the ribbon is cut (the Friends already own giant scissors) the Friends will host an off-site catered reception featuring a local rapper, which donors, trustees, project collaborators, staff and the media can attend for free.

Through careful planning by the joint committee, the details, budget, procurement procedures, and contracts for the room and opening events have been determined, and the bills are being paid entirely by the Friends.  However, the contracts involved are not so simple.

The construction contracts were bid and had to follow all applicable procurement laws and regulations.  The invoices for the new books are only in the name of the library.  The off-site venue and catering contracts are only in the name of the Friends, but the contract expressly "holds harmless" the library.[2]  And although her speech will be in the new room, the contract for the speaker is only in the name of the Friends…a tactic used to avoid community accusations that taxpayer money was spent to generate controversy.[3]

How does a library and its Friends reach this high-functioning ideal of collaboration?  It takes a well-crafted (and periodically re-evaluated) Collaboration Agreement,[4] sound policies, and  routine, informed communication by both sides.  This isn't to say there won't be a spat or two.  But with a commitment to those things, a library-Friends relationship can be appropriately challenging, while reaching a productive ideal.

The questions posed by the member show what can happen when things are less than "productively ideal."  They sound like symptoms of a problem I call "Friends Drift."

"Friends Drift" is where a previously strong relationship (or perhaps one that was never so strong), leads a library and its Friends to drift so far apart, they cease to collaborate effectively.  As a result, the types of great programming and support the relationship was forged to create cease to materialize.

What does "Friends Drift" look like?  It can have any number of causes and symptoms, but here are some solid hallmarks:

• Collaboration Agreement doesn't exist;
• Collaboration Agreement is over 7 years old without any revision in the past 7 years;
• Collaboration Agreement can't be found by newer leadership and no one has initiated a step to draft a new one;
• Prior operations depended solely on personal relationships and not written policy, so new members don't have a roadmap to proceed;
• Lack of policy between the two groups for approving expenditures and fiscal planning;
• Lack of routine productive meetings between the two groups;[5]
• Lack of separate but coordinated strategic planning;
• Lack of clarity about payment and fund-raising procedures;
• Friends board making decisions that are the purview of the library board (or visa-versa);
• Distrust and questioning propriety of the other's operations (as seen in the member's questions).

In the example provided by the member, the "Friends Drift" is so serious, the library is even wondering if the Friends are in compliance with State and Federal laws. 

This is particularly worrisome because as not-for-profit, charitable organizations, the fiscal and operational integrity of both a library and its Friends should NEVER be something one has to speculate about.  In New York, a public library must file an annual report with the Comptroller, while its Friends group must file both a "CHAR500" with the New York Attorney General and a form 990 with the IRS.[6]

Those mandatory filings should provide everything needed for mutual assurance fiscal responsibility and transparency.  If there is uncertainly even if those things are done, something has gone astray.

Which brings us to the member's specific questions, which I need to modify a bit, in order to provide accurate answers.

The first question is about whether a Friends group can withhold money from the library when the library asks for it. 

The answer to that is: YES, that might be okay.  In fact, it is often perfectly appropriate (and sometimes, highly advisable) for a Friends group not to pay for certain things for its affiliated library.  For instance, while this is a critical factor to be decided only by the library and agreed to by the Friends, I would encourage any library to think twice (and twice again) before using a Friends group to routinely supplement an annual operating budget.  In that same vein, a Friends group shouldn't pay (at least, not before deep and critical policy and fiscal analysis) a regular cost-of-living adjustment for staff salaries. 

Why? Because this type of predictable, routine expense is something that should be built into the base operating budget, and supported by the sponsoring tax base(s).[7]  While community budget battles aren't always pretty, they are an essential connection to your area of service.  Having Friends underwrite routine expenses to meet the library's basic Plan of Service is a potentially bad habit.  In my opinion, it is something an experienced Friends group will meet with resistance.

So, what are Friends for?  To put it in baking terms, they are for two things: whipping up delicious and beautiful frosting, and going from cupcake to cake.

The "frosting," is all the "extras" that are really flavorful essentials: speakers, new collections, special programming, or perhaps a really cool new set of carts or 3-D printer.  They should be highly visible and make things better…just like lovely pink frosting on top of a chocolate cupcake (and just like the frosting, they could actually be a huge factor in the appeal of the cupcake, and have more calories - I mean, cost more money).

And the journey from "cupcake to cake"?  That's a capital campaign.  Need a new building?  Hoping to expand?  Want to build a green roof with solar?  One-time physical upgrades are great candidates for "Friends" generosity and work, where the money can supplement a state grant or bond issue, or even take on the whole nut.

That's what Friends are for.[8]

Which bring us to the next (slightly modified) question: what if "Friends" funds aren't being released at all?  Can that risk their status at a not-for-profit?

Although there are some things Friends might not pay for, I can say with just as much assurance that any organization built solely around the well-being of a library, that does not use its resources for its not-for-profit purpose, is going to have some serious concerns.  And yes, those concerns could impact its charitable and 501(c)(3) status.

To diagnose those concerns, an attorney for the library (or the Friends) would need to review the group's charter, bylaws, recent CHAR500's and 990's, and (if possible) board minutes and correspondence with the sponsored library.  If there is a Cooperation Agreement, that should be reviewed.  The method of requesting funds, and the basis for the refusal should be assessed.  And of course, any exigent circumstances (were the Friends the victim of a theft?  Did they not meet their fund-raising goals?  Did they not yet conduct their audit?) would have to be considered.

Depending on what was found, legal action based on a violation of the Agreement could be threatened/brought by the sponsored Library, or a complaint to the New York Attorney General Charities Bureau or the IRS could be lodged.  If things get to that point, it's likely the relationship is highly adversarial, and each party would have brought in a lawyer. 

Now, I like lawyers.  Being one, I see their value, and I never hesitate to recommend when I think a party needs to consult one.  After all, it's how I make my living.

That said, if a library and their Friends are experiencing "Friends Drift" of the type discussed above, and its looking like things will get ugly, I recommend after initially working with their lawyers, the two groups consider using a mediator, not two adversarial lawyers, to help sort things out.

Now, when I say "mediator," I don't mean just any nice, neutral person who is willing to listen to both parties and help out. I mean a trained professional who knows the law and the obligations faced by both sides (likely a lawyer with not-for-profit experience), who can help them assess their mutual goals, and get their relationship on the right track. 

In some cases, the mediation could be a respectful, productive "airing of the grievances" used to diagnose the problems and craft a new (or a first) Cooperation Agreement.  In simpler cases, it could mean merely solidifying the functions of the groups' committees or developing some healthy new policies and procedures.

How does a mediation get set up?

A mediation is always conducted per a written "Mediation Agreement" that sets out the obligations of the mediator and the parties (a big one being confidentiality of the proceedings, another being the neutrality of the mediator and the willingness of the parties to proceed "in a spirit of mutual problem-solving").  The Mediation Agreement should also establish clear goals for the process (such as "…in furtherance of the mission of both parties, a session to discover and confirm shared procedures for the planned payment of certain library expenses") and defined results ("…the final product shall be a new/revised Cooperation Agreement to meet the needs of the parties for the next five years.").

A county's local bar association usually maintains a list of trained mediators.  That said, for an exercise like this, not only mediation experience knowledge of libraries and not-for-profits is essential.  The price tag for such a session could be anywhere from $1000-$50000 (with costs shared equally by the parties), but when compared with the costs for one party to hire a lawyer to go on the offensive, and the other to play defense - with nothing created but bad feelings and complaints in the end - as an investment, it may be worthwhile. 

This is especially true since--unless something truly nefarious[9] is suspected - "Friends Drift" is generally the result of good people caught up in the complicated web of not-for-profit operations, and not knowing quite what they can and should do.  But good intentions don't automatically translate into knowing how to run a compliant not-for-profit.  And when people try to wing it, trouble can start.

This is why the library-Friends relationship[10] can be fraught with fiscal drama, and "Drift," even when all good people are involved. 

The member's questions show how this drama - and Drift - can take up a lot of staff and volunteer energy, and cause a lot of stress.  Working to maintain good relations, and perhaps using a mediator when relations are strained, can be the best way to harness that energy for the library and its Friends…and thus, for the entire community.

Thank you for a difficult question on an under-discussed topic.

MEMBER QUESTION

A member asked if there are any legal issues to consider when using GoFundMe to fund-raise, especially for association libraries.

WNYLRC ATTORNEY'S RESPONSE

The lawyer answers…

Fund-raising in the current climate (or any climate) is tough.  There are state and federal accounting rules, bylaws, “best practices,” and internal policies to abide by, while at the same time there is pressure to make sure the campaign is well-executed, fun, and most of all: productive. 

The various online options for fundraising enhance productivity.  Online fundraising can bring a new array of donors into the mix, can reinvigorate current benefactors, and can make giving as easy as sending a text message.  It is also becoming a necessity…for some (mostly under age 35) donors, not offering these options can mean your fund-raising effort doesn’t exist! 

What does a library have to coordinate when getting into the world of online fund-raising?  There are a host of legal issues.  Our member asked about GoFundMe, the current site du jour, so we’ll use that one.

First of all, for those libraries that are registered 501(c)3’s and charitable not-for-profit corporations, no matter where the fund-raising takes place, the solicitation, donor acknowledgement, accounting, and reporting are governed by the same rules as your “analog” fund-raising.  So, first, when evaluating whether or not to use a GoFundMe, make sure your treasurer and accountant are part of the set-up, and you check your policies, so internal awareness and regulatory compliance can be assured.

GoFundMe (and others) wants you to use their utility for your “Campaign” (as they call it in their “Terms” as of 10/23/2017) so they have thought about these things.  That said, there is a catch.  Here is how they support efforts by charitable entities:

Charitable Giving: Campaigns are not charities to which you can make tax-deductible charitable contributions. However, in addition to the Services described above, GoFundMe permits Donors to contribute directly to certain charitable organizations ("Charities") through the Platform. Any donation you make to a Charity through the Platform will be subject to a Services fee as described at http://www.gofundme.com/pricing. You understand and acknowledge, however, that GoFundMe is not a charity. If you or your charity would like to register to be listed as a charitable organization on the Platform, please contact us at support@gofundme.com and we can help facilitate that process. As used in this Agreement, the term "Campaign" does not refer to a Charity, and you acknowledge that contributions to Campaigns are not deductible under your jurisdiction’s applicable tax laws and regulations.

See what they do there?  They put the tax issue on your organization, while making sure they still get their fee!  --And considering that these fees can be almost 8% of the money donated, it can add up.

So, second, do the math: does the potentially broader audience and ease of donating warrant the payment of the fee?

That said, this is the USA and GoFundMe provides a service for this fee.  For smaller libraries without big advancement, marketing, and IT departments, sites like GoFundMe can provide an easy-to-use “front end” for your campaign.  You can tell your story, use their various resources for promoting the campaign, and get a polished-looking product entirely supported by the vendor’s structure.  Of course, the content in that “front end” still has to be supplied by you, and it should be coordinated with the library’s website and social media presence.

So, third, ask: does the library have the technical and outreach ability to make the best use of the utility?  If no one on staff is confident about gracefully integrating the link on the library’s website, and using social media outreach to drive donors to the site, other avenues might be a better use of resources.  In other words: for some places, online is the way to go, while for or others, up close and personal could still be a winning strategy (with no fee!).  This is a question only your internal team can answer.

And finally, does the type of library or archives you are affect this issue?  Absolutely, but there is no categorical rule on this. The minutia of a library’s bylaws, IRS status, policies, and the goals of the fundraiser govern the use of online fundraising. 

Generally speaking, if an institution can fundraise for something in the “real” world, they can do it online.  Just make sure your solicitations, accounting, and reporting follow the usual rules…something that starts (and ends) with making sure your team is in the know, has designed the campaign before it is launched, and has the capacity to solicit, acknowledge, account for, and report to donations as required.

As offline, so online!  Good luck.