The Charity Case


The Not-for-Profit debate

The friction in this industry is impossible to ignore. On one side, commercial-club operators say that they are forced to do business on an uneven playing field. YMCAs and commercial clubs offer the same services, the operators explain, yet YMCAs enjoy the benefits of tax exemption. That, they argue, creates unfair competition.

YMCAs counter that they are community centers, not fitness clubs. They note that their facilities do more than build healthier bodies: They build healthier spirits and minds through programs that put Christian principles into practice, serving people of all incomes and abilities.

John McCarthy, IHRSA executive director, disagrees. He believes that Ys don't really serve people of all incomes. According to McCarthy, "rogue" Ys with fitness centers have forgotten their mission: They are concentrating their efforts in affluent communities, not in impoverished neighborhoods. And McCarthy is not alone in his thinking. Commercial clubs have already pledged more than $1 million to an IHRSA campaign designed to challenge the growth of tax-exempt fitness facilities in affluent communities.

David R. Mercer, national executive director of the YMCA, maintains that Ys do serve all communities. He claims that YMCAs nationwide raised $599 million in 1998 to aid the 16.9 million Americans (more than half of them children) whom they serve with "scholarships, subsidies and other services so that everyone who needs a Y can participate."

Mercer classifies commercial-club operators who criticize the YMCA as newcomers with a vindictive agenda against the 150-year-old organization. "Their vision is to weep and wail when YMCAs serve the community in a much more meaningful and more holistic way than they can dream of," he says.

In the state of Tennessee, however, the YMCAs in the community came under scrutiny when the State Board of Equalization examined 13 facilities operated by the YMCA of Middle Tennessee and concluded that "anything relating to health, fitness and recreational purposes of the YMCA should be considered noncharitable."

According to McCarthy, the board toured the 13 Ys and spent a total of 30 months determining whether the facilities primarily provided charitable services or competed with taxpaying fitness centers. In the end, the board concluded that "there is no factual disputing that the YMCA is in competition with the taxpaying health and physical fitness centers of Nashville and Middle Tennessee."

"The Y rhetoric would have you believe that they are immensely involved with youth and teenagers and the disadvantaged, but the reality, according to the State Board of Equalization, is quite the reverse," McCarthy says. "What the state board said is that the primary purpose of all these Ys is the provision of exercise facilities for the general public, not the provision of charitable services for the disadvantaged kids."

Mercer retorts that the board's conclusions overlooked the charitable acts of the YMCAs. "The recent staff report within the Tennessee State Board of Equalization is at this point no more than the short-sighted and non-binding opinion of just one person," he says. "It implies no state action or final determination. It fails because it fails to take note of the myriad of services performed on behalf of the community by the YMCA of Nashville and Middle Tennessee: services such as teen leadership and senior adult fellowship programs, academic enrichment for school-age children and prevention programs for at-risk youths - as well as youth sports and swimming lessons. In 1998, the YMCA of Nashville and Middle Tennessee provided $7 million in charitable subsidies, with one of every three members on financial assistance."


While the state board can't revoke tax exemption, it does share its findings with tax assessors. Each town has its own assessors, and the board has advised them that "there is probable cause that the tax exemption of the YMCAs should be revoked," McCarthy says.

Whether the 13 YMCAs will actually lose their tax exemption is another story. The assessors will consider the tax exemption for the 13 YMCA facilities on a case-by-case basis, and this process will take time. Still, in McCarthy's opinion, the board's conclusions have placed the Ys in a defensive position. "It puts the burden of proof on the individual YMCAs in the individual towns to prove to the local tax assessor that it deserves its tax exemption," he says.

Mercer is confident that the assessors won't make the YMCAs pay taxes. "It should be remembered that the Internal Revenue Service and court after court have already upheld the mission of the YMCAs and their right to charitable tax exemption," he reminds. "I am confident that in the state of Tennessee, as elsewhere throughout the nation, the charitable purpose of the YMCAs will again be upheld."

No matter what the ultimate outcome is, McCarthy hails the board's decision as a "major victory." "My sense is that this in a important precedent," he says. "The era where the YMCAs can maintain their exemptions on rhetoric alone may be coming to an end."

If commerical clubs feel that they have won a victory in Tennessee, then the YMCAs may have won a victory of their own in Pennsylvania.

In the first test of the commonwealth's 1998 Purely Public Charity Law, David J. Cohan, owner of the Sports Club, filed a lawsuit against the Ridley Area YMCA, contending that the Y branch and its expanded fitness center competed unfairly against his private health club. Judge George A. Pagano recently dismissed the action. Cohan appealed the ruling.

The Purely Public Charity Law states that a charity may not fund, capitalize or subsidize a "commercial business that is unrelated to the institution's charitable purpose as stated in the institution's charter or governing legal documents." The law grandfathered in charity's existing facilities, according to Cohan, but prevents new facilities and expansions that threaten or compete with small businesses. For that reason, Cohan, who took part in writing the law, maintains that the Y acted illegally when it expanded its fitness center last year.

Joe Mattson, the YMCA's attorney, argues that the plaintiff hasn't set forth a viable claim under the Purely Public Charity Law. "The statute doesn't really define unfair competition," Mattson explains. "All the statute says is that an institution of charity cannot do certain things that are in violation of its charter." And, he adds, the Ridley Area YMCA hasn't violated its charter.

What of accusations that the YMCA is running a health club and that running a health club is not a charitable purpose as defined by the statute? "Our defense is that we are not just a health club," Mattson answers. "What we are doing is allowed by our charter."

As for accusations of unfair competition, Mattson's position is that the YMCA and Sports Club aren't comparable enough to be competitors. "We don't compete with the Sports Club," he stresses. "We are a community organization. Yes, we do fitness, but that's only a portion of what we do."


Cohan says he has evidence to the contrary. He claims he requested - and eventually received - documents from the YMCA proving that the facility is clearly competing against private health clubs. He says that minutes from the Y's meetings include discussions of scouting reports of local health clubs to determine the level of competition. The minutes also include discussions of how to limit the usage of Y members who aren't bringing enough revenue, as well as talks of strategy to sell memberships for the expanded facility.

"An independent observer looking at these documents would determine that [the YMCA is] in business with a tremendous advantage because they have over the last five years received over $2.5 million in public money and donations plus their tax exemption and given a pittance of charitable help to anyone," Cohan says.

Although Judge Pagano dismissed the lawsuit and a state arbitrator ruled against the Sports Club in October, Cohan believes that the local court and the arbitrator didn't look at the Purely Public Charity Law. He has higher hopes for the superior court, where he filed his appeal. He says that the superior court will look at, and interpret, this young law, adding the superior court, unlike the common pleas court, can set a precedent with its ruling.

Cohan is confident the superior court will look at the Y documentation and rule in his favor. Mattson is waiting for Judge Pagano to write out an explanation for granting the Y's motion to dismiss. Even though Pagano dismissed the lawsuit without comment, he must now explain his actions because of the appeal.

In Florida, the Southeast Health, Racquet & Sports Club Association (SEHRSA) is fighting a battle of its own over tax issues. In this case, however, the organization isn't trying to revoke the tax status of YMCAs; instead, the organization is attempting to overturn a sales tax that the state imposes on memberships sold at commercial health clubs.

Since its inception two years ago, SEHRSA has made elimination of the six-year-old tax a top priority. Legislators, lobbying groups such as the National Federation of Independent Business (NFIB), and IHRSA have lent their support to the cause. In fact, as state legislative sessions drew to a close in [month], SEHRSA officials felt they had the backing necessary to beat the 6-to-7-percent tax.

They didn't.

The case SEHRSA presented to the state House and Senate was that, by taxing health clubs, Florida was actually taxing health care. SEHRSA also argued that not-for-profit organizations, such as YMCAs and hospital-based wellness centers, provide the same services as commercial clubs, yet they are exempt from paying the tax.

The arguments did not sway legislators. Florida plans to give back $1.2 billion of a $3 billion surplus to taxpayers and small businesses, and commercial clubs won't receive any of that money.

Why? Bob Karshner, president of SEHRSA and secretary/treasurer of Shapes Total Fitness, a 12-club chain based in Tampa, has his theories. Health clubs comprise approximately 450 members in the large SIC category that pays this sales tax. The category, which includes martial arts studios, numbers 2,000 businesses total. The problem, according to Karshner, is that the SIC category fills plenty of tax coffers. That makes getting tax exemption difficult - even though, technically, health clubs only supply 25 percent of the money collected from this sales tax.

Despite the setback, SEHRSA is already working to get the tax over-turned next year. Still, the lack of support from commercial clubs has discouraged Karshner. He has urged health clubs in the Florida area to contribute to SEHRSA, but many have chosen not to participate.

SEHRSA may be suffering from a lack of support, but many commercial clubs have stood firmly behind IHRSA's lobbying efforts. And while these efforts may question the YMCAs, McCarthy stresses that his organization is not attacking charities. Charities deserve tax exemption, he says - as long as charity is their primary purpose.

"What we are seeing in hundreds of Ys across the country is that the charitable mission in now secondary, and the primary mission is the provision of athletic and fitness facilities for the general public," McCarthy maintains.

Then again, the YMCAs tell a different story. Who's right? Ultimately, it may be judges and politicians who decide.

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