Do Non-Profits Have an Unfair Advantage in Business?

Scott Barnes developed a pilot program in Oregon to help teenagers in trouble with the law gain job skills, earn a little money, and do good things for the community.

During his career with the Oregon Youth Authority, Scott’s ideas were acknowledged nationwide, prompting other organizations to model the program he established.

Many community leaders applauded the work, but there were others who took issue with it. For-profit businesses who lost bids to Barnes’ crews were sometimes outraged.

They claimed he had an unfair advantage, since he didn’t need to make a profit, and the organization he worked for did not pay taxes.

Should non-profits or government-sponsored crews be allowed to compete with for-profit businesses?

Let’s talk about it.

Do Non-Profits Have an Unfair Advantage in Business?

Few would question the value non-profit businesses provide to a community. From soup kitchens to health clinics, many who would have a tough time getting a hot meal or medical treatment find the care they need.

Some non-profit businesses, though, compete with their for-profit counterparts for market share. And many times, that fuels resentment and complaints from those who must compete against a business that gets special treatment — especially in the area of taxation.

How Could You Compete Against This Used Car Lot?

In Southern Virginia, Michigan, and the Washington D.C. metro area, there are used car lots where you can get quality vehicles at an amazingly low price.

Vehicles for Change, a non-profit organization, receives donated vehicles from the public, repairs and details those vehicles in their own facilities, then sells them at deep discounts.

That’s good news for people who may not otherwise be able to afford reliable transportation, but bad news for other automobile dealers in the locations Vehicles for Change serves.

Yes, there are eligibility guidelines that apply, but many car lots offer special financing for those who don’t have a large down payment or who have credit hurdles to overcome.

Put yourself in the shoes of a business owner. You have to pay for the cars you sell, and it’s a constant struggle to keep the gap between your buying price and your selling price high enough to cover expenses.

Your competitor down the street, though, gets free vehicles — meaning it’s easy to undercut the prices you have to charge. Then, to top it off, you pay taxes on your income, but your competitor doesn’t.

You be the judge. Is that fair?

Could You Compete Against This Brand Name Gym?

The YMCA has been a fixture in many communities for more than a century. They do great work, there’s no doubt about that, and many folks couldn’t afford access to state-of-the-art workout equipment if the YMCA wasn’t there to help.

How would you feel about the YMCA non-profit status, though, if you owned a local gym and saw many of your patrons drop their monthly commitment to you and move to the less costly and better-equipped new YMCA recently opened just a few blocks away?

You might feel like the grinch who stole Christmas if you spoke out against one of the most admired non-profit organizations on the planet, but what else could you do?

After all (and this is key), the YMCA no longer serves ONLY the disadvantaged. Most YMCA members today have never been down on their luck, and today’s YMCA facilities are superb. ABC Financial rates the YMCA as one of America’s top 10 fitness clubs.

How Can You Compete Against a Non-Profit?

Do non-profit organizations have an unfair advantage in business?

You bet they do.

Should changes be made on behalf of businesses adversely affected by non-profit organizations?

Speaking before the House Ways and Means Committee, the president of the Business Coalition for Fair Competition made that case.

He offered these five proposals for tax reform, primarily centered on regulations concerning unrelated business income tax (UBIT):

1. The Department of Treasury (DOT) should have to estimate lost revenues from UBIT avoidance each year
2. The DOT should have to inform the public of how much new tax revenue could be generated by a fair share enforcement of UBIT
3. Legislation should be enacted to provide a way for UBIT to be collected on all commercial activities of non-profits
4. Standards and oversight are needed to determine where charity is necessary and where it becomes UBIT
5. Non-profits should be required to play by the same rules as for-profit businesses

John M. Palatiello, the man who delivered those proposals, went on to describe ways the federal government could save hundreds of billions of dollars “by simply utilizing tax-paying private sector firms for commercially available goods and services currently performed by a government or taxsubsidized entity.”

Do Non-Profits Have an Unfair Advantage in Business? – Conclusion

The purpose of this article is not to downplay the role of organizations like Vehicles for Change and the YMCA in helping people who might not otherwise find help. They both do exemplary work, and both have their hearts in the right place.

When non-profits threaten the existence of for-profit business in a community, however, it would seem prudent to take a closer look at the situation and determine whether the playing field is unreasonably tilted towards for the non-profit.

It is likely that soon-coming tax reforms will address those apparent inequalities.

What do you think, though? Do you see examples like these in your own community? Do you operate a business you feel is given an unfair edge in the marketplace?

Let’s talk about it in the comments below.

Read more: How to Make Money Running a Nonprofit