Commercial Nonprofits, Untaxed Entrepreneurialism, and "Unfair Competition"

The controversy over the federal tax treatment of the commercial activities of tax-exempt organizations stems from the charge of inherent unfairness of business competition when one group of competitors enjoys a government-subsidized competitive advantage. The claim of unfair competition presently being made by the small business community against the nonprofit sector is based on an alleged inequitable distribution of competitive advantages and a breach of trust arising from abuses of the tax-exempt status of nonprofit organizations engaged in commercial enterprise. While it is generally believed that the charitable organization tax exemption is a subsidy for the goods and services provided by nonprofit firms, the subsidy theory fails to account for the fact that for-profit firms providing similar goods and services are denied the exemption. The unrelated business income tax has been the primary policy response to the possibility that tax exemption might cause unfair competition.