Panel advances bill to preserve state sales and use tax exemptions for nonprofits amid federal revocations

A Colorado House Finance Committee advanced legislation on Monday designed to shield nonprofit organizations from automatic loss of state sales and use tax exemptions when their federal 501(c)(3) status changes.

Supporters said Senate Bill 9 creates a presumption that organizations with active or prior federal nonprofit status qualify for Colorado sales and use tax exemptions, while preserving the Department of Revenue's authority to investigate and deny exemptions for entities that have engaged in fraud or other misconduct. Representative Stewart, a sponsor, asked the committee for a favorable recommendation.

The bill drew testimony from nonprofit advocates who said losing state exemptions would meaningfully harm operations. Marla Crumbar, a tax policy fellow at the Colorado Nonprofit Association, cited two case studies: "losing the state sales and use tax exemption would result in approximately $210 in new annual tax expense" for one museum and "roughly $150,000 in new annual sales tax expense" for another organization, each representing about "2.1% of annual revenue." Jack Murphy, government affairs director for the Colorado Nonprofit Association, said the change is a "common sense measure" to clarify state tax code and stressed that the presumption retains the state's power to deny exemptions for bad actors.

Opponents on the committee raised concerns that a statutory presumption could have the effect of easing state-level reviews and urged safeguards against rubber-stamping organizations that had engaged in wrongdoing. Representative Brooks said he worried about "subjectivity" in determinations of what is "fair and consistent," and Representative De Graaf warned that fraud has been a reason some organizations were previously stripped of federal nonprofit status.

Legal witnesses and counsel clarified that the bill does not change the existing complaint, investigation or appeal processes. Tom Downey, who runs a regulatory affairs practice and formerly worked in the attorney general's office and the Secretary of State's charities unit, described federal 501(c) recognition and state nonprofit designations as separate licenses and said complaints and revocations are handled through administrative procedures with appeals available to the courts.

Sponsors offered and the committee adopted an amendment replacing the bill's safety clause with a petition clause. After discussion, Representative Stewart moved SB 9 (as amended) to the Committee of the Whole with a favorable recommendation; the committee polled and the motion passed 8—to—3.

What happens next: SB 9 will be considered by the Committee of the Whole. If passed there, further floor action would follow. The Department of Revenue will continue to have authority to review and deny exemptions in individual cases, supporters and legal witnesses said.