GAO -- 

United States General Accounting Office 

Testimony 

For Release 

on Delivery 

Expected at 

9:30 a.m. EDT 

Tuesday 

June 28, 1988 

Competition Between Tax-Exempt 

Organizations and Taxable Businesses 

Statement of 

Jennie S. Stathis, Associate Director 

General Government Division 

Before the 

House Committee on Small Business 

136189 
COMPETITION BETWEEN TAX-EXEMPT 

ORGANIZATIONS AND TAXABLE BUSINESSES 

Summary Statement of 

Jennie S. Stathis 

Associate Director 

General Government Division 

U.S. General Accounting Offices 

Competition has become a major concern to both the taxable 

business and tax-exempt communities because they are increasingly 

providing similar services. Tax-exempt organizations are 

becoming more involved in activities traditionally done by 

taxable businesses, such as publishing services and tours. On 

the other hand, tax-exempt organizations see taxable businesses 

as becoming more involved in activities traditionally dominated 

by tax-exempt organizations, such as day care and physical 

fitness. 

Complete data do not exist to quantify the exact nature, extent 

and impact of competition between the tax-exempt and taxable 

business communities. The tax-exempt community has grown 

significantly over the years in terms of numbers of organizations 

and types of activities. It also appears that tax-exempt 

organizations have become more reliant on income-producing 

activities and less reliant on charitable and government sources 

of revenue to fund their activities. The tax-exempt community 

has attributed this shift in funding sources, in part, to a 

reduction in government support and the inability of other 

traditional funding sources, such as contributions, to compensate 

for this reduction. These income-producing activities may result 

in competition with taxable businesses. However, because of the 

lack of data, it is difficult to measure the impact of 

competition on the business sector. 

The business community is voicing increased concern about 

competition from tax-exempt organizations' income-producing 

activities. Although some representatives of tax-exempt 

organizations believe that income-producing activities further 

their exempt purposes, some representatives of taxable businesses 

view these activities as exceeding the traditional role of these 

organizations. Business representatives also view these 

organizations as having a competitive advantage by virtue of 

their tax-exempt status and other benefits. Our 1986 survey of 

businesses in six industries -- audio-visual, racquet sports, 

research and testing, tour, travel, and veterinarian -- revealed 

that a substantial number of the businesses reported experiencing 

competition from one or more tax-exempt competitors. However, 

the specific types of competitors and the extent and effects of 

competition that were reported varied from industry to industry. 
Mr. Chairman and Members of the Committee: 

we are pleased to be here today to assist the Committee in its 

inquiry into the issue of competition between tax-exempt 

organizations and taxable businesses. Our statement is based 

primarily on a 1987 report we issued to the Joint Committee on 

Taxation on the issue of competition between taxable businesses 

and tax-exempt organizations (GAO/GGD-87-4BBR). This report 

showed that competition has become a major concern to both the 

'taxable business and tax-exempt communities because they are 

increasingly providing similar services. Tax-exempt 

organizations are becoming more involved in activities 

traditionally done by taxable businesses, such as publishing 

services and tours. On the other hand, tax-exempt organizations 

see taxable businesses as becoming more involved in activities 

traditionally dominated by tax-exempt organizations, such as day 

care and physical fitness. 

I would like to highlight two major points about the competition 

issue. 

First, complete data do not exist to quantify the exact nature, 

extent and impact of competition between the tax-exempt and 

taxable business communities. The tax-exempt community has 

grown significantly over the years in terms of numbers of 

organizations and types of activities. It also appears that taxexempt organizations have become more reliant on income-producing 
activities and less reliant on charitable and government sources 

of revenue to fund their activities. These income-producing 

activities may result in competition with taxable businesses. 

However, because of the lack of data, it is difficult to measure 

the impact of competition on the business sector. 

Second, the business community is voicing increased concern about 

competition from tax-exempt organizations' income-producing 

activities. Although some representatives of tax-exempt 

organizations believe that income-producing activities further 

their exempt purposes, representatives of taxable businesses view 

these activities as exceeding the traditional role of these 

organizations. Business representatives also view these 

organizations as having a competitive advantage by virtue of 

their tax-exempt status and other benefits. Our survey of 

businesses in six industries -- audio-visual, racquet sports, 

research and testing, tour, travel, and veterinarian -- revealed 

that a substantial number of the businesses reported experiencing 

competition from one or more tax-exempt competitors. However, 

the specific types of competitors and the extent and effects of 

competition that were reported seemed to vary from industry to 

industry. 

I would now like to discuss these points in more detail. 

2 
LIMITED DAT,A EXIST ON THE COMPETITION ISSUE 

Although there are data bases on segments of the tax-exempt 

community, such as hospitals and colleges, data on the overall 

community are limited, especially with regard to its involvement 

in income-producing activities and competition with taxable 

businesses. IRS routinely collects tax return and other data on 

tax-exempt organizations and is generally regarded as having the 

best data available on these organizations. However, these data 

do not encompass the entire tax-exempt community. For example, 

IRS does not compile information on churches because they are not 

required to file for tax-exempt status. In addition, the data 

may be unreliable because of inaccurate reporting by tax-exempt 

organizations when filing returns. Also, the data do not 

identify the type, specific nature, and extent of incomeproducing activity of tax-exempt organizations. 

Private researchers studying the scope and nature of tax-exempt 

organizations have also found data sources to be limited or 

inadequate. For example, two nonprofit groups, the Urban 

Institute and the Independent Sector, made major studies of 

charitable and social welfare tax-exempt organizations and noted 

significant information gaps. 

The limited data that do exist indicate that the tax-exempt 

community has grown significantly in terms of number of 

3 
organizations and types of activities. This growth could be part 

of the cause of the increasing concern of the business community 

with regard to competition. 

Internal Revenue Service statistics showed that as of 

September 30, 1968, there were 409,789 tax-exempt organizations 

on IRS's master file; as of July 31, 1987, there were 871,806, an 

increase of over 100 percent in about 19 years. Accompanying 

this growth in numbers of organizations has been an expansion of 

the activities in which they engage. In 1965, IRS listed 90 

different tax-exempt activities; currently, IRS lists over 260 

such activities. Further, many tax-exempt organizations engage 

in more than one activity. For example, 1985 IRS data showed 43 

percent of tax-exempt organizations were doing one activity, 30 

percent were doing two activities, and 27 percent were doing at 

least three activities. While many of these appear to be 

traditional charitable-type activities, such as missionary and 

fund-raising activities, others appear to be more similar to 

taxable businesses in nature. For example, some tax-exempt 

organizations offer publishing services and conduct travel tours. 

As tax-exempt organizations have evolved over the years in terms 

of number and activities, many appear to have become more 

reliant on income-producing activities and less reliant on 

support from contributions, government grants, and dues. Some 

organizations are now imposing fees for services related to their 

4 
exempt purpose which were previously provided at little or no 

cost, expanding services to new markets, and operating incomeproducing activities either related or unrelated to their exempt 

purpose. The tax-exempt community has attributed this shift in 

funding sources, in part, to a reduction in government support 

and the inability of other traditional funding sources, such as 

contributions, to compensate for this reduction. 

The trend toward less reliance upon contributions and dues is 

particularly evident among those organizations established for 

charitable, religious, and educational purposes -- the section 

501(c)(3) organizations. Contributions as a percent of total 

revenue for these organizations decreased from 36 percent of 

total revenue in 1946 to 18 percent in 1982. Other revenue as a 

percentage of total revenue increased from 59 percent to 81 

percent during the same period. The other revenue category 

includes such items as business receipts, interest, dividends, 

rents, royalties, and sales of assets. 

In sum, the overall statistics show that the tax-exempt 

community has grown significantly in terms of numbers of 

organizations and activities and is increasingly reliant on 

income-producing activities as a source of revenue. This 

reliance on income-producing activities has led to instances 

where some tax-exempt organizations are competing with taxable 

businesses to provide similar services. Instances of competition 

5 
between tax-exempt organizations and taxable businesses have 

become a frequent topic of discussion within these two 

communities, in the media, and even in Congress. While it is no 

doubt true that some competition occurs, complete data do not 

exist to quantify the nature, extent and impact of such 

competition. Simply put, we do not know how much of a problem 

this is. 

BUSINESSES VIEW COMPETITION FROM TAX-EXEMPT 

ORGANIZATIONS AS AN INCREASING PROBLEM 

Because information on the competition issue is largely 

fragmented and compiled on an informal basis, we solicited the 

views of representatives of selected tax-exempt organizations and 

taxable businesses to get more perspective on the competition 

issue. 

Not unexpectedly, tax-exempt and taxable business representatives 

have differing views on the issue. Tax-exempt organization 

representatives believe that income-producing activities further 

their exempt purposes and are important to generate needed 

additional revenue to fund their activities. Further, they 

believe that competition is the result of taxable businesses 

increasingly entering traditional tax-exempt activities, such as 

day care or physical fitness. Representatives of taxable 

businesses, on the other hand, believe that income-producing 

6 
activities of tax-exempt organizations exceed the traditional 

role of these organizations, and that these organizations are 

afforded a competitive advantage by virtue of their tax-exempt 

status and other benefits. 

In order to obtain more detailed information on the perceptions 

of competition by taxable businesses, in 1986 we sent a 

questionnaire to 1,738 randomly selected businesses in six 

industries -- audio-visual, racquet sports, research and testing, 

tour, travel, and veterinarian. We selected these industries 

because representatives from various businesses within these 

industries had written most often to the Small Business 

Administration voicing concern about competition. The 

questionnaire requested background information about the 

respondent's business and the respondent's perceptions of the 

extent, if any, of competition with tax-exempt organizations and 

its effects. More detailed information on our scope and 

methodology is contained in our 1987 report. Although 

perceptions on the nature and extent of competition varied by 

industry, some common themes also emerged. 

First, a substantial number of businesses in each industry 

reported experiencing competition from one or more tax-exempt 

competitors during the period 1980 to 1985. This ranged from a 

low of 45 percent of travel businesses reporting competition to a 

high of 90 percent of racquet sports businesses reporting 

7 
competition. (The attachment to this statement provides more 

detailed results by industry group.) 

Second, a majority of those businesses that reported experiencing 

competition thought that it was increasing. A majority of 

businesses in four of the six industries thought that the actual 

number of tax-exempt competitors had increased, while majorities 

in all six industries responded that the extent of competitive 

activities from tax-exempt organizations had increased. 

Third, the primary type of tax-exempt competitor varied by 

industry. Audio-visual and research and testing businesses 

reported the most competition from public universities. Travel 

and tour businesses reported the most competition from religious 

organizations, with public universities a close second in each 

case. Predictably, veterinarians reported the most competition 

from humane societies, and racquet sports businesses reported the 

most competition from YM/YWCAs. 

Fourth, representatives of the taxable business community said 

that tax-exempt organizations have an advantage when competing 

with taxable businesses. These representatives cited the 

following as contributing to this advantage: certain exemptions 

from federal, state, and local taxes; the availability of grants 

and free facilities; reduced mailing rates; volunteer labor; and 

the erroneous belief of some taxpayers that amounts remitted to 

8 
tax-exempt organizations for goods and services are fully 

deductible as charitable contributions. The extent to which 

these various factors are considered to contribute to an 

advantage varied among the six industries we surveyed. For 

example, our survey results show that subsidy through government 

grants and facilities was seen as contributing to an advantage to 

a moderate, great or very great extent by 89 percent of the 

estimated 177 research businesses who said they were experiencing 

competition, and 47 percent of the estimated 10,540 veterinarians 

who said they were experiencing competition. 

Fifth, over half the taxable businesses in each of the six 

industries reported that the presence of tax-exempt competitors 

decreased profits for their businesses and reduced a current or 

potential market. Many businesses in each industry also cited 

tax-exempt competition as necessitating price reductions on their 

part in order to remain competitive. A smaller number of 

businesses reported that tax-exempt competition resulted in 

layoffs or other curtailment of activities. 

It should be noted that the responses I just discussed represent 

the views and perceptions of the businesses in the six 

industries and not necessarily those of the entire taxable 

business.community. While we have no reason to doubt the 

sincerity of these particular respondents, we did not have the 

time or resources necessary to verify the existence of alleged 

9 
competition or document the validity of the effects reported by 

the respondents. 

In any event, it seems clear from these data that businesses are 

becoming increasingly concerned about competition from the taxexempt community. The increasing variety of activities of taxexempt organizations and their increasing reliance on incomeproducing activities may be primary sources of this concern. 

However, in specific terms, there is no complete data to 

quantify the nature, extent and effects of competition between 

the tax-exempt and taxable business communities. For example, 

what and how many businesses are affected by tax-exempt 

competition? Is it a local or a national problem? What are the 

actual effects on the businesses? Without such detailed 

information, it is difficult to determine whether legislative or 

regulatory changes are needed to address the competition issue. 

Mr. Chairman, this concludes my statement. I would be pleased to 

answer questions. 

10 
IrdLlstry 

Adio-visual 

QqetAorsby Bmnemes 

Sel~IndustrieSa 

Ft-O-j&X-d N3 anptitors Q3e axptitmres+rdents nuherperaznt n&xx 

356 128 36 25 

PercJent 

7 

sitor 

nurbxpxcmt 

203 

462 47 10 89 19 326 

fh3searcharrd 

tf=tbl 215 34 16 

!tbur 28 16 57 

TYavelazJent 7,349 4,016 55 472 6 2,861 

Veterinarian 18,444 7,191 39 3,733 20 7,520 

%9mmtqehwebeenranddtothemarest&olermnber. 

2 

6 

177 

11 

57 

71 

82 

39 

39 

41 

thiversity or college - pblic 63 

Gxermmt- stateorlocal 52 

Uliversityor college - private 43 

85 

65 

41 

thiversity or aLkqe - pblic 79 

ccrrree- stabe or loml 60 

I&?seu-d-l organizatiarts 56 

l+ligious organizati~ 

Uliversity or college - plblic 

EWhessorprofessioml 

60 

56 

associatim 55 

Rzligious organizations 67 

Lhiversity or wllege - phlic 63 

ZciaI/fratemaloqanizaticx 60 

Fkn-kmoranirralwlf~ 

oqanization 

C?bverm- sta@orloml 

Lhiversity or dltqe - pdiLic 

60 

24 

15