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March 26, 2009, 9 a.m.

Non-profit news outlets deserve a tax exemption for ad revenue

In 2007, I wrote about a sport known as Internet hunting that had been prohibited in 33 states with a national ban pending before Congress. All that, despite the fact that no one actually hunts animals over the Internet. “It’s pretty easy to outlaw something that doesn’t exist,” said a lobbyist for the NRA, which supported the bans.

I thought about Internet hunting Tuesday when Sen. Ben Cardin, a Maryland Democrat, introduced the “Newspaper Revitalization Act,” which would ease the tax burden on newspapers that operate as non-profit organizations. (You can read the full text here.) Sure, newspapers could use some hefty revitalization, but this earnest piece of legislation addresses a societal problem that does not exist.

The most important thing to know about Sen. Cardin’s three-page bill is that it would only apply to printed, ink-on-fiber newspapers that incorporate as non-profits — not sites like MinnPost and Voice of San Diego that have actually shown promise in this realm. Existing newspapers aren’t particularly interested in 501(c) status when they’re still losing money. People forget that non-profit does not mean unprofitable, and a broken business model works just as poorly in the public sector as the private one.

Sen. Cardin’s spokeswoman, Susan Sullam, told me that the bill is narrowly focused because “the senator believes and a lot of us believe that newspapers are the ones that do the actual reporting on issues.” Susan, I’m sorry for my terse reaction to that comment when we spoke, but it’s hard to imagine the future of non-profit journalism is in print.

The other thing to know about this bill is that it will probably languish and die in the Senate Finance Committee. But it’s still worth discussing because, despite the flaws noted here — and in similarly critical posts by Tim Windsor, Rick Edmonds, Steve Yelvington, and Jeff Jarvis — the Newspaper Revitalization Act touches on some crucial questions around non-profit news that better legislation could address.

At issue here is the ability of news organizations to incorporate as charities under section 501(c)3 of the tax code. That means the IRS is involved, and that means we’re about to get complicated. So I turned to Marion Fremont-Smith, a researcher at Harvard’s Hauser Center for Nonprofit Organizations, which is a partner of the Nieman Journalism Lab. She’s just finishing a study on these very issues.

Plenty of news outlets, from The American Prospect to The Harvard Crimson, are already 501(c)3 non-profits, which means they can accept tax-deductible contributions and enjoy other financial breaks. They usually qualify by serving an educational — or, in some cases, literary — purpose. Sen. Cardin’s bill would create a separate 501(c)3 category for “qualified newspapers,” but Fremont-Smith told me that’s both unnecessary and unhelpful. In fact, the legislation’s definition of a newspaper — “contains local, national, and international news stories of interest to the general public” — could serve to exclude some publications that might already qualify.

However, even existing non-profit news organizations are required to pay corporate taxes on their advertising revenue, which is considered “unrelated business income” by the IRS. Though sponsorships and underwriting are generally exempt — hence, public television — the tax on ad revenue has survived a barrage of challenges. Medical journals, for instance, unsuccessfully argued that their ads should be exempt because they are educational to doctors.

Sen. Cardin proposes to exempt non-profit newspapers from the tax, which amounts to roughly 35 percent of advertising revenue, so long as ad space in the publication “does not exceed the space allotted to fulfilling the educational purpose of such qualified newspaper corporation.” Fremont-Smith, in criticizing that caveat, questioned whether comics or Sudoku would be considered educational by the IRS.

“You don’t want the IRS to be judging what’s good content and what’s bad content,” she said.

But eliminating the ad tax is a good idea, if it were applied to all non-profits with appropriate restrictions. That would ease the financial strain on news startups like MinnPost, which now relies heavily on foundation support but hopes to replace that revenue with more individual donations and advertising. In an essay for Nieman Reports that we published last week, Joel Kramer, editor and publisher of MinnPost, wrote, “Membership is challenging, but advertising is more so.” This would make it just a little easier.

So if I were rewriting the Newspaper Revitalization Act, I’d scratch everything but the exemption for ad revenue, which would apply across the board, and rename it the News Revitilization Act. At least then we’d be on the hunt for a problem that needs addressing.

ADDENDUM

If Sen. Cardin’s bill ever passed, it would be good news for Ted Venetoulis, a politician-turned-businessman who “has bought and sold more newspapers than most people have read” and currently has his eye on The Baltimore Sun.

“Under those circumstances, non-profit is certainly a model that we would look at,” Venetoulis told me, referring to the 20-member, private investment group he leads, which first expressed interest in buying the Sun from Tribune Co. three years ago. With Tribune now in bankruptcy and the newspaper industry collapsing, the investors may be able to purchase the Sun at a fire-sale price.

Venetoulis said he discussed the Newspaper Revitalization Act with Sen. Cardin several times and urged that it be introduced — “as, I’m sure, did many other people.” He also contributed $1,000 to the senator’s 2006 campaign against Michael Steele, according to the Center for Responsive Politics. Another investor in the group, philanthropist Robert C. Embry, gave $5,000. Still another, Walter Sondheim Jr., donated $2,000 to Cardin from 2003 until he died in 2007.

The other members of the investment group are anonymous, so it’s impossible to know if they have any ties to Sen. Cardin or the newspaper bill’s creation. Sen. Cardin spokeswoman’s, Susan Sullam, confirmed that the senator discussed the bill with Venetoulis but said the campaign contributions had nothing to do with it.

POSTED     March 26, 2009, 9 a.m.
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