Senate Republicans' tax reform proposal has added a new worry for many colleges watching the progress of legislation in Congress: taxes on income unrelated to their core academic mission, including licensing royalties, which are significant at many institutions.
The proposal broadens the unrelated business income tax -- a tax on the activities of an exempt entity unrelated to its charitable mission -- to apply to a broader range of activities by colleges.
The Senate plan makes two key changes to the tax, known as UBIT, that are serious concerns for colleges. It would apply the tax to royalties generated from a university's name or logo, income that is currently exempt. And the Senate bill would require colleges with more than one business activity unrelated to their core academic mission to count them separately for tax purposes, a change with serious repercussions for those institutions, higher ed groups say. Those activities could include rental of lab facilities to users not connected to the university, athletic events, use of golf courses or rec centers by alumni, and sales from special events for the general public.
Under current law, both corporations and tax-exempt entities like colleges can use a loss in one business activity to cancel out a gain in another area and avoid paying taxes. General Motors, for example, could use losses on sales of Chevrolet vehicles to offset taxes paid on gains in its Cadillac division.
But the Senate proposal would require tax-exempt organizations to calculate losses and gains for each economic activity for the purposes of paying taxes -- a change referred to as a "basketing" proposal that higher ed groups say would make colleges' tax bills shoot up as they could no longer use losses from one activity to offset gains in another for tax purposes.
Liz Clark, director of federal affairs for the National Association of College and University Business Officers, said colleges and universities should pay taxes on business activities under federal law but said reporting guidelines shouldn't be made overly burdensome via tax reform.
"Any changes to such guidelines should not result in disparate treatment for nonprofit organizations by holding them to standards and rules not applicable to corporations," she said.
Accounting for various business activities under the new rules would also add a substantial regulatory burden for colleges, higher ed groups say. While the tax reform plan has been advertised by GOP leaders as simplifying and streamlining how individuals, families and corporations pay taxes, those higher regulatory costs could take money away from services to students, higher ed groups said.
Businesses like college bookstores would suddenly pose challenges for colleges keeping track of which items sold in a store would be subject to the UBIT and which wouldn't, according to the groups -- a coffee mug with a university logo, for instance, versus a textbook. And colleges that frequently make campus arenas available for wider community purposes could see negative incentives for doing so.
“They are creating, unfortunately, unintended consequences,” said Steven Bloom, director of government relations at the American Council on Education. “One is the increased cost to universities that ultimately is going to harm students.”
Although the UBIT wasn't part of the House tax overhaul plan released this month, it has been part of tax reform proposals going back to at least 2014.
Higher ed groups on Friday had just begun the work of calculating the cost to colleges and universities of the proposal. The Joint Committee on Taxation projected that the basketing requirement for tax-exempt organizations would generate $3.2 billion over 10 years. The committee projected that the licensing provision of the proposal would generate $2 billion over 10 years. While many nonprofits would be subject to the basketing proposal, colleges' projected tax payments would likely make up a significant chunk of revenue from the licensing tax.
The tax on royalties from licensing will have a larger impact at those colleges with large athletic programs and big alumni networks. But it will affect all universities that license their name or logo to third parties, including any trademark or copyright related to that name or logo, said Jessica Sebeok, associate vice president and counsel for policy at the Association of American Universities. University trademark licensing goes well beyond athletics and includes use of colleges' names and logos on products such as apparel, novelty items, collectibles, stationery products and affinity programs.
Sebeok said taxing licensing income would unquestionably have an adverse effect on financial aid and other academic spending.
Many of the biggest college brands have policies dictating that licensing income go directly to academic services. At Harvard University, for example, all royalties from licensing programs are required to support student financial aid initiatives. And at Ohio State University, a policy states that royalties from licensing of university trademarks directly benefit a variety of scholarship and financial aid programs.
"Licensing activity provides nonprofit universities with a source of revenue that unlike, say, donations that come with donor-directed restrictions, can be applied to the institution’s most pressing needs -- including scholarships, student activities, athletics programs, renovating out-of-date campus facilities and even scientific research," Sebeok said. "In fact, a typical university licensing policy requires that that all royalties accrue to the institution’s overall educational and operational budget, in furtherance of that institution’s charitable mission."