Commercial Nonprofits, Untaxed Entrepreneurialism, and "Unfair Competition"

By Gomes, Glenn M.; Owens, James M. | Journal of Small Business Management, April 1988 | Go to article overview

Commercial Nonprofits, Untaxed Entrepreneurialism, and "Unfair Competition"


Gomes, Glenn M., Owens, James M., Journal of Small Business Management


COMMERCIAL NONPROFITS, UNTAXED ENTREPRENEURIALISM, AND "UNFAIR COMPETITION"

In August 1986, delegates to the White House Conference on Small Business alleged that "unfair competition" was being waged by nonprofit and governmental organizations that provide commercial services in direct competition with the private sector. Delegates called for the prohibition of (or, at minimum, protection from) such practices and demanded the passage of new legislation embodying a strict governmental policy of reliance on private enterprise for the performance and provision of commercial activities.(1) More recently, in the summer of 1987, the Subcommittee on Oversight of the U.S. House of Representatives Committee on Ways and Means held hearings to review the federal tax treatment of the commercial activities of tax-exempt organizations.

The controversy stems from the alleged inherent unfairness of business competition when one group of competitors enjoys a government-subsidized competitive advantage. In this case, the competitive advantage in question is the tax-exempt status enjoyed by most nonprofit organizations. The income tax exemption is a crucial competitive issue when nonprofit organizations pursue commercial (i.e., for-profit) activities--"untaxed entrepreneurialism"--in direct competition with private enterprise.

The current spirited debate over "unfair competition" involves emotional rhetoric on both sides. On the one hand, the small business community and its lobbyists (e.g., Office of Advocacy, Small Business Administration; Business Coalition for Fair Competition) (1)R. Blackman and J.H. Thompson, "The 1986 White House Conference on Small Business," Journal of Small Business Management (January 1987), pp. 3-10. Dr. Gomes is an assistant professor of management in the Department of Management, College of Business, California State University, Chico. Dr. Owens is an associate professor of business law in the Department of Management at the same university. claim that nonprofit organizations are destroying the very fabric and strength of the domestic economy by taking unfair advantage of existing public policy.(2) The nonprofit sector and its lobbyists (e.g., Independent Sector), on the other hand, claim that nonprofit organizations contribute important and indispensable services that would not be provided if public policy did not support and protect nonprofit enterprise through tax exemptions and other privileges.(3)

To claim that competition is "unfair" immediately raises legal and ethical questions. What constitutes unfair competition? Does present public policy unfairly provide nonprofit organizations with an artificial competitive advantage over for-profit organizations? If so, what public policy changes are required? If not, how can present public policy be justified? To clarify these issues, this article: . briefly surveys the legal interpretation of "unfair competition" and traces the statutory response to it; . examines the economic role of nonprofit organizations, including the increasing commercialization of their activities; . identifies rationales for tax exemption and the implications of tax-favored status; and (2)See e.g., U.S. Small Administration, Office of Advocacy (hereafter cited as SBA), Unfair Competition by Nonprofit Organizations with Small Business: An Issue for the 1980s, 3rd ed. (Washington, D.C. Office of the Chief Counsel for Advocacy, U.S. Small Business Administration, 1984); SBA, "Ideas in Action...The States and Small Business," Conference Handbook, The Sixth National Conference for State and Local Officials on Small Business, San Diego, California, December 5-7, 1984; K. Burch, Unfair Competition in the States (Washington, D.C.; Business Coalition for Fair Competition, 1985); T.J. DiLorenzo, "Crowding Out Small Business: The Unfair Competition of Nonprofits," Contemporary Issues Series 24 (St. Louis: Center for the Study of American Business, 1987).

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