Bill would tax nonprofits that bring lawsuits against government

SB 524 targets nonprofits suing over environmental, natural resource issues

By: - April 3, 2023 6:37 pm

Liz Moore, the Executive Director of the Montana Nonprofit Association, speaks against Senate Bill 524 on March 28. The bill would tax nonprofits that choose to spend funds fighting against rules, regulations or laws dealing with natural resources (Photo via Montana Public Access Network).

A bill being considered by the Montana Senate would upend the finances of nonprofit groups that bring a lawsuit against the state for violations of environmental and natural resources law..

Senate Bill 524, sponsored by Sen. Greg Hertz, R-Polson, would subject any nonprofit group to paying Montana business tax — equivalent to 6.75% — on any cost associated with litigation against the state for a host of natural resources and environmental law. The legislation would also turn state taxation on its head by taxing an expense or expenditure instead of income.

At a hearing last week, Hertz defended the measure, saying that nonprofits don’t have litigation as part of their missions, and nothing in the law stops them from filing suit.

“These 501(c)3 groups are disrupting our lifestyles and economy, and they want to make changes to our way of life in Montana,” Hertz said in committee. “If the IRS would be doing its job like it should be doing, we have a number of nonprofits and 501(c)3s that are operating outside of their scope and mission.”

The bill is narrowly tailored to only nonprofit groups that sue under certain areas or title of Montana law. The legislation would not change a nonprofit status, although Hertz said that was an option he could have contemplated. The bill passed second reading in Senate, 34-16, on Monday.

“If I really wanted to get vindictive, I’d say if you sue under these laws in the State of Montana, your nonprofit status is hereby revoked, and make all of their donations subject to taxes, but I did not,” Hertz said. “To me, it makes common sense. It is somewhat unique turning an expenditure into taxable income. But we are allowed to do what’s right under taxation.”

Hertz did not specify which groups were disrupting the state, nor did he elaborate on what he meant by Montana’s way of life on follow-up questions sent Friday and Monday by the Daily Montanan.

He said that nonprofits are designed to help educate and work as charities, not as organizations engaging in lawsuits.

Nonprofit status is a determination made by the United States Internal Revenue Service, but states also have their own respective definitions.


Which laws?

The following titles — or areas of law — would be affected by Senate Bill 524, if passed:

Chapter 75: Environmental Protection
Chapter: 76: Land Resources and Use
Chapter 77: State lands
Chapter 80: Agriculture
Chapter 81: Livestock
Chapter 82: Minerals Oil and Gas
Chapter 87: Fish and Wildlife

Hertz said that part of the aim of SB 524 is to ensure transparency.

“I want disclosure,” he said during a hearing last week. “We need to know if you’re coming into our state: Who is suing us? Where are you from?”

A similar measure failed in 2021 when Montana Gov. Greg Gianforte vetoed legislation.

During the hearing in front of the Senate’s Judiciary Committee, which passed the measure out of committee along party lines on Thursday, there were no proponents and nearly a dozen opponents, including the Montana Nonprofit Association, which has 720 member organizations.

The organization raised a concern that there is no similar rule or law in any other state, and it would require a whole new model of taxation: Taxing expenses instead of income.

“We were unable to find a precedent where expenditures are counted as income,” said Liz Moore, the executive director of the Montana Nonprofit Association. She also is the board chairwoman of the National Council of Nonprofits.

Mark Schoenfeld of the Montana Department of Revenue told lawmakers that SB 524 would create a new approach to tax law in the state.

“It would be difficult to track at this point,” Schoenfeld said. “At this point, it would be self-reporting.”

Senate Bill 524 would force the department to come up with a new way to track litigation expenses because those generally are not reported. Moreover, it would create a logistical challenge because donors to nonprofits often get tax write-offs for the donation in the full amount because of the tax status, but, if passed, the bill would mean a portion of the contribution may not be deductible.

“It would be very difficult on our part,” Schoenfeld said; he said that the department could not find a similar measure in another state.

Sen. Andrea Olson, D-Missoula, asked Hertz if the state constitution didn’t also require lawmakers to do more to protect the environment and natural resources.

“Who is supposed to do that if we don’t do our job and people need to organize to make sure it’s done?” she asked. “These individuals are raising money to sue the state to disrupt our livelihood, and the individuals making them are getting tax-deduction donations while the rest of us are using after-tax dollars to defend our way of life in Montana.”

Others raised concerns that Senate Bill 524 was only going to cost the state more money on lawsuits, and ultimately fail.

“This is counter to what we have in the Montana Constitution and the U.S. Constitution, and I don’t say that lightly,” said Derf Johnson who is an attorney with the Montana Environmental Information Center. “It singles out a class of folks and their speech. It’s meant to chill that right.”

The MEIC, a longtime Montana-based group, has sued the state repeatedly and successfully in the arena of environmental and natural resources.

Keegan Medrano of the Montana American Civil Liberties Union questioned whether the legislation was even more ominous.

“This is about the government trying to destroy its opposition,” Medrano said.

Amy Seaman of the Montana Audubon Society said the effect of Senate Bill 524 would be to freeze or stop discussion.

“This isn’t about opposing rules, but sometimes, it’s about having public discourse and debate,” Seaman said.

Opponents at the hearing also challenged Hertz and the committee, pointing out that lawmakers’ legislation has often been overturned.

“These groups which bring lawsuits that I’d like to point out are right more often than they’re wrong, and they’re pointing out unconstitutional parts of the law and courts are finding that,” said resident Nevin Graves. “It’s not a problem, except that I would recommend not passing unconstitutional laws.”

Makenna Sellers of the Montana Renewable Energy Association said not only would the bill hamper her organization, but it may tax activity that doesn’t make it to the courthouse. She pointed out that many nonprofit organizations and trade groups participate and use attorneys during the rule-making process. Rule-making happens after a bill is signed into law, and is designed to give guidance on how those new laws or changes are implemented at the state agency level.

Norane Appling-Freistadt, who said she’s been working in nonprofits for three decades, told lawmakers that nonprofits are effective at organizing people into a group, doing more than residents can do individually.

“Donors don’t give simply because of a tax deduction, they do it to be a part of a community which does something to enhance their own lives or the lives of others,” she said.

Others said that the legislature, which often refers to the rights of property owners, would be inhibiting the rights of residents to sue to protect their laws.

Ellen Pfister, a Shepherd rancher who was active from 1972 to 2019, said that in the early 1970s, nonprofits like the Northern Plains Resource Council, formed as a coalition of local property owners who were standing up to coal mining interests in order to protect their land and water.

“This impacts ranchers and their ability to protect their land, their water and their livelihood,” Pfister said.

Seth Newton, a fourth-generation rancher in Glendive, said that without nonprofits and their support, he and his neighbors could not hold the Montana Department of Environmental Quality accountable for regulating radioactive waste from the oil well.

“We lean heavily on the support of nonprofit,” he said. “The DEQ has been clear that it doesn’t have the time and the resources to inspect this radioactive waste down the road.”

Debate cut short?

During the discussion on SB 524, Judiciary Chairman Keith Regier kept comments from committee members and the public short — limiting time to two minutes. On Zoom, some testifying were cut off mid-sentence when the time expired.

Olson raised concerns that such a far-reaching bill was being held to an artificial time limit.

“This is our only ability to ask the sponsor questions, I think it is important to have more time,” Olson said.

“Sen. Hertz will be available after. You can talk to him,” Regier replied.

“Mr. Chair, this is the time set aside for the public hearing,” she said.

Regier said the committee had fallen behind and was double-booked.

“We are always double-booked,” Olson said. “When we have a bill that affects most of what we do in code and affects our rights and most of the organizations that come to lobby, that we might ask some more specific questions and understand what this bill is trying to do.”

“I understand and sympathize, but we are really behind as a committee,” he replied.

Editor’s note: This story was updated to correct the correct spelling of Seth Newton of Glendive who testified before the committee.

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Darrell Ehrlick
Darrell Ehrlick

Darrell Ehrlick is the editor-in-chief of the Daily Montanan, after leading his native state’s largest paper, The Billings Gazette. He is an award-winning journalist, author, historian and teacher, whose career has taken him to North Dakota, Minnesota, Wisconsin, Utah, and Wyoming.