Colorado's New Law: Are Your Favorite Nonprofits Really Safe from Federal Attacks? Find Out Now!

In a significant move to protect Colorado's nonprofit sector from potential federal political strife, Governor Jared Polis signed Senate Bill 9 on April 20, 2023. This legislation ensures that local charitable organizations can maintain their state-level tax benefits, even if they face challenges to their federal tax-exempt status.

Under the provisions of SB 9, nonprofits will continue to qualify for state tax exemptions as long as they possess a current or former letter from the Internal Revenue Service (IRS) confirming their 501(c)(3) status. The bill also prohibits the state from automatically assuming that an organization no longer qualifies for state tax benefits due to any change in its federal status. This legislative measure is particularly timely and necessary, as it responds to growing concerns over federal threats to the nonprofit sector.

The bill was championed by Democratic Senators Marc Snyder of Manitou Springs and William Lindstedt of Broomfield, along with House Speaker Julie McCluskie from Dillon and Representative Rebekah Stewart of Lakewood. McCluskie emphasized the bill's importance during discussions in the House, stating, “Think of any nonprofit in your community. This bill ensures that they will continue to qualify for sales tax and use tax exemptions.”

Lawmakers have indicated that SB 9 is a direct response to threats made by former President Donald Trump, who suggested that nonprofits could lose their tax-exempt status if they did not align with his administration's policy goals. The National Council of Nonprofits articulated this concern, highlighting a "broad attack on civil society by targeting nonprofit organizations on ideological grounds." They pointed to Trump's earlier threats against institutions such as Harvard, which included demands to alter hiring and admission policies related to race and national origin.

While the National Council of Nonprofits asserts that the president lacks the authority to direct the IRS to revoke a nonprofit’s 501(c)(3) status, the implications of political pressures in the nonprofit sector are unmistakable. Colorado’s legislation aims to mitigate these pressures by securing local tax exemptions.

During a committee hearing on the bill, Jack Murphy, government affairs director for the Colorado Nonprofit Association, which represents over 1,000 nonprofits statewide, highlighted that threats against nonprofits based on political ideologies can come from both sides of the aisle. He remarked, “While mission areas deemed ‘left-leaning’ have come under fire more recently, mission areas that are deemed ‘right-leaning’ have been targeted under previous federal administrations like the Biden and Obama administrations, and could be targeted again in the future.”

The bill received overwhelming support from state Democrats, and at least a handful of Republicans also voted in favor. However, there was some contention; House Republicans proposed amendments to introduce additional safeguards concerning how the state evaluates nonprofits for tax exemptions. Concerns were raised about the potential for fraud among nonprofits that could exploit these state benefits.

In response, Democrats agreed to one amendment which clarifies that the bill does not prevent the Colorado Department of Revenue from assessing whether an organization qualifies as a charitable entity. McCluskie reassured lawmakers and constituents alike that the bill maintains the Department of Revenue's existing authority to scrutinize and deny tax exemptions while still allowing for cross-checking practices with the IRS.

As political climates shift and the nonprofit sector faces increasing scrutiny, legislation like SB 9 may prove crucial. By reinforcing state-level protections against federal political maneuvering, Colorado is setting a precedent that could resonate with other states grappling with similar issues. The future of nonprofits could increasingly hinge on such legislative efforts, as communities look to safeguard essential services and support systems against the whims of federal policy changes.