Small business gripes about growing competition from charities
Washington — For two years, Chuck Cook has been getting threatening phone calls from an unlikely source: the local hospital. Mr. Cook, who owns Cook's Ambulance Service in Columbus, Miss., beat the hospital out of a contract to provide emergency ambulance service to the county two years ago. Since then, he says, the hospital has waged a dogfight against him: ``verbally harassing us'' on the phone, telling the news media it would win the next contract ``if it took them charging the county a dollar a year to do it,'' and - most damaging - undercutting his price on non-emergency ``transfer'' business, ``which is my bread and butter.''
Now Cook, who concedes that part of the enmity might arise because he takes all emergency patients to the other local hospital in town, is struggling financially; cut-throat competition has reduced his profit margin from $20,000 a year to zero. And Cook is crying foul.
``I don't mind competition,'' he says. ``What I mind is their using tax dollars, federal funding, and basically unfair competition to put my people out of work.''
Cook's words are being echoed by hundreds of other small business owners who provide the same services as non-profit, tax-exempt organizations, including hospitals, churches, universities, even the YMCA. Now Congress is investigating the issue, with the House Subcommittee on Oversight hearing the last of five days of testimony from both sides on Tuesday.
The issue has been a sore point between business and charities for several years, as deregulation has encouraged private business to expand into heretofore unprofitable realms serviced by non-profit organizations. Meanwhile, non-profits like hospitals have been exposed to the rigors of the marketplace, and have started providing more goods and services to cushion their bottom line.
But the dispute has garnered little attention until recently. In part, that's because the competition is on the local level, and small business had never before organized a campaign. Perhaps a larger reason for the new interest, though legislators deny it, is that ``Congress is desperate for [tax] money,'' says Donald Berno at the Small Business Administration.
Under current law, tax-exempt organizations pay taxes only on ``unrelated income,'' that is, money they make on goods or services that don't relate to their primary mission. A university, for example, pays state sales taxes and federal income taxes on football ticket sales. But that leaves them free to engage in a whole range of commercial activities, and, their taxed competitors say, compete with unfair advantages.
Before 1976, Robin Holm, president of Washington Hearing Aid Center, had 15 tax-paying competitors selling hearing aids and other products to people in Seattle. Since then, four tax-exempt organizations (three hospitals and a United Way agency) have entered the business, and several small businesses have closed their doors.
The hospitals' tax-exempt status cuts their costs and gives them free advertising in the form of public service announcements (for free testing). Moreover, Ms. Holm says, they don't act like charities: their ``slickly trained sales force'' roams from fair to shopping center, ``anywhere a potential hearing aid purchaser may be found,'' to push their products.
``Beneath the veil of tax-exempt status,'' she told the subcommittee, ``there dwells a commercial, moneymaking business which pays no taxes.''
John Maher, managing director of the Northwest Speech and Hearing Center and Holm's chief rival, dismisses her arguments as sour grapes. He may get free public service announcements for hearing tests, ``but I also give away many thousands of dollars of services'' at those tests. ``What she would like is no competition whatsoever.''
At the bottom of Holm's arguments, Mr. Maher says, is the ``halo effect'' - the public goodwill because a hospital is perceived as existing to provide a service, not to make a profit. In the case of hearing aids, he says, that ``halo effect'' is well deserved: before his clinic began selling hearing aids in 1976, he says, ``consumers were getting ripped off.''
In attacking the likes of hospitals, small business doesn't mention who was providing the service first, says Harrison Wellford, who represents human service organizationsl like Goodwill, United Way, and the Boys Club. ``Non-profits frequently see a need, create a market, and then, when [commercial] businesses find a way to make money in the market, they say non-profits are competing unfairly.''
Peter Pellerito at the University of Michigan makes the same argument when deflecting criticism from travel agencies. Last week, Earlene Causey, national director of the American Society of Travel Agents, charged that by booking trips for alumni, universities were taking commissions away from travel agents. The University of Michigan and a couple of other schools alone booked $12.5 million in tours, depriving agencies of $1.25 million in commissions, she said.
Mr. Pellerito counters that they gave travel agencies the business, though the competition for the tantalizing commission bid the prices down. Moreover, he says, ``without us, the business [i.e., commissions generated by Michigan's trips to the South Pacific and other places] would not have been there in the first place.''
Where universities dominate the local economy, however, a simple decision can crush nascent businesses. In 1984, four retailers were selling computers to students at Washington State University in Pullman. Then the university began selling them - but at lower costs.
For example, the university store gets space in a building that was likely built with government funds, and doesn't pay market rent. It gets lower-cost labor: kids on the work-study program. And it can buy computers in bulk, since it is assured of a large chunk of the sales to students and faculty, which comprise 80 percent of the population. The town's last commercial computer company filed for Chapter 11 bankruptcy a year ago.
Churches have not escaped business ire. Travel agents and transportation companies, and particularly bus companies, complain that churches provide their own transportation. They not only deprive commercial lines of business, but often provide commercial services in direct competition with the lines. Meanwhile, they pay no federal, state, or local taxes, nor workmen's compensation or unemployment insurance.
Church-related organizations, like the Young Men's Christian Association, are a thorn in the side of commercial racqetball clubs, aerobics centers, and other taxed athletic facilities.
To date, the courts have favored tax-exempt organizations in deciding what activities are and are not taxable. Recent decisions have said that if the purpose of the activity (publishing literature, for example) is related to an organization's mission (spreading a religious message), then the activity is tax exempt, even if it goes beyond the immediate bounds of the mission.
Small business is urging Congress to tighten up the rules, and look at whether the activity is commercial, whether it generates substantial revenue, and whether it has commercial competitors which are taxed.
If so, then the activity should be taxed, they say, even if its purpose is in line with the mission of the organization.
Small business also wants to beef up compliance. Currently, only 500 Internal Revenue Service agents monitor charitable organizations. Of the 850,000 tax-exempt groups, only 27,000 pay taxes on ``unrelated income;'' moreover, their declared income totals only $27 million, a suspiciously small amount given that the revenue generated by tax exempt exceeds $300 billion.
``It's perfectly legitimate to argue that the existing system needs to be more rigorously enforced,'' says Mr. Wellford, who represents charities. But the system needs only ``fine tuning,'' not an overhaul, he says,something both the Treasury Department and the IRS said earlier this year.
Change may be in the wind, however. ``We're still at least one Congress away from real action,'' says John Satagaj, president of the Small Business Legislative Council. ``But I think they recognize something must be done.''