INTRODUCTION "I believe that reporting to the public is a good thing; accountability is important." "It stinks-we could donate a lot more to the community without it." "Can't you make it easier?" -Responses of three nonprofit organizations asked to comment on their tax reporting experiences. U nder Section 501(c)(3) of the United States Internal Revenue Code, organizations devoted to certain kinds of activities are eligible for exemption from the federal corporate (or trust) income tax and for permission to accept tax-deductible contributions. 1 State laws frequently also offer organizations tax benefi ts, exempting them from sales, property and income taxes. However, nonprofi ts wishing to take advantage of these benefi ts face a web of both federal and state eligibility rules and procedures that impose additional costs: lawyers and accountants must be hired, employees educated, records 1 The range of qualifying activities is broad, including producing and displaying art, culture and music; generating knowledge through education and research; protecting consumers, the environment and animals; promoting health; preventing and treating diseases; providing housing, food and clothing; promoting international understanding; providing international aid and relief; creating community, social and economic infrastructure; advocating for and against public policies; transmitting values and traditions; and providing solidarity, recreation and other services 3 Until now, very little systematic knowledge about these compliance costs has existed. This paper's contribution is to construct the fi rst estimates, separately for federal and state requirements, of the compliance costs experienced by nonprofi t organizations in order to maintain their tax-exempt status. In addition to breaking the expenditures down into four components, we include a multivariate analysis that considers the infl uences of an organization's size, type of work, its use of electronic filing and of the state Unified Registration Statement (URS, an alternative registration form that consolidates the information and data requirements of all states that require registration of charitable organizations). Finally, we place these costs in the context of several relevant measures of the nonprofit sector. Our results provide one baseline against which the costs and benefi ts of future changes in nonprofi t regulatory policy can be measured. They are also useful in informing the wider discussion about the return to society from the tax benefi ts provided to nonprofi ts. 2 The provision of tax exemptions also imposes administrative costs, as both federal and state agencies must enforce the tax provisions. Administrative costs, while important, are not explored in this study. 3 As suggested in the preceding paragraph, nonprofi t organizations also incur compliance costs in the process of obtaining tax-exempt status. In that context, one might expect regulatory attention to focus on whether granting a tax-exemption for an applicant's proposed activities enhances societal welfare. In a separate project, we will study that process in order to construct a measure of the costs of obtaining tax-exempt status. The Compliance Costs of Maintaining Tax Exempt Status 237 LITERATURE The U.S. nonprofit sector is fairly large. Adding civic leagues and the other 501(c)(4) organizations operated exclusively for the promotion of social welfare 4 to 501(c)(3) organizations, the so-called Independent Sector in 1996 produced 6.7 percent of national output, owned about fi ve percent of private sector net worth and, counting the full-time-equivalents of volunteers, employed 11.7 percent of the labor force. Contributions to Independent Sector organizations then accounted for about two percent of personal income, roughly 25 percent of government social welfare spending In the compliance cost literature, researchers have focused on the burdens of particular taxes. For example, in the United States, estimates have been calculated for the costs of complying with the individual income tax THE SURVEY Sample Selection A stratifi ed random sample of 2,000 organizations was drawn from the "Core File" of the National Center for Chari- The sample was stratifi ed along three dimensions: size, NTEE code, and home state reporting practices. Size was measured on the basis of total revenue: small (100,000orless),medium(between100,000 and 500,000),andlarge(over4TheIndependentSectorexcludesother501(c)(4)nonprofitssuchascemeteries,laborunions,clubsandotherformsofmutualbenefitorganizations.5Availableathttp://nccs.urban.org/.6EliminatingorganizationsresidinginU.S.territoriesorpossessionsandrecordswithoutmailingaddresses,235,792recordsremained.NATIONALTAXJOURNAL238500,000). The 26 major NTEE codes were grouped into three broad types to obtain comparable numbers of organizations in each. 7 Home state reporting practice was based on the registration form required by an organization's headquarter state. In 1997, the National Association of State Charities Offi cials and the National Association of Attorneys General organized an effort to consolidate state information and data requirements, drafting an alternative registration form. In 2000, 35 states and the District of Columbia accepted the Unifi ed Registration Statement (URS). In order to explore whether use of the URS impacts nonprofi t compliance costs, we wanted to increase the likelihood that the sample would include organizations that did and did not use the URS. Therefore, we stratifi ed our sample to refl ect three home state reporting practices. In one category (URS) are those states accepting the URS. 8 A second category consisted of those states requiring registration of nonprofi t organizations but not accepting the URS (NURS), 9 and the third category contained states without a registration requirement (NR). 10,11 The home state for each organization was determined by the address reported on the Form 990. Our 3×3×3 stratifi cation yielded 27 sampling strata. To ensure suffi cient sample sizes in each stratum, we varied the sampling rates, over-sampling in the NR and NURS strata, and under-sampling in the URS strata. 12 Survey Methodology The Minnesota Center for Survey Research sent each organization in our sample a survey questionnaire by U.S. mail. The instrument included questions about which federal and state reports were prepared, the size of the organization, the amount of personnel time devoted to these tasks and their expenditures on professional assistance, other reporting costs (such as training, computer software or supplies) and state fees. A copy of the instrument and the accompanying cover letter is available from the authors. 13 A week after the initial mailing (March 11, 2003), a reminder postcard was sent, followed on April 1 by another letter and a second copy of the questionnaire, to those organizations that had not yet responded. Of the initial mailings, 184 were identifi ed by the Post Offi ce as non-deliverable. For 138 of these, it was possible to locate a more current address in the Guidestar database, 14 (2001). 12 The sampling rates were 0.0179, 0.0388 and 0.0044, respectively. 13 During the summer of 2002, we conducted a pilot, in-person survey of a small sample of non-profi t organizations in the Twin Cities. The results of this test informed the development of the mailed survey. To refi ne the mailed survey instrument, we asked the Chief Financial Offi cer of a Wisconsin nonprofi t to complete a draft version of the survey, and we solicited comments on the draft from members of the Minnesota Non-profi t Accountability Collaborative (MNAC). 14 The Guidestar National Database of Nonprofi t Organizations is available at http://www.guidestar.org/