We are a 501(c)(3) nonprofit high school band booster organization. We charge fair share fees to cover the huge operating costs. We also provide limited scholarships to struggling families. The parents sign a contract acknowledging they will pay the fair share fees, but many families have failed or refused to honor their agreement, which has caused undue hardship for the entire organization. We have been unsuccessful in getting these parents to pay what they owe. If we choose to use a collection agency to try to recover this money, will we jeopardize our 501(c)(3) status?
Using a collection agency to try to collect binding obligations that people actually owe is not likely to jeopardize your 501(c)(3) charitable exempt status. Hospitals and other fee for service organizations frequently do so without jeopardizing their federal income exemption.
You are much more likely to get pushback from your other supporters if they perceive that you are being overly aggressive and unfair in your collection efforts. You may also get pushback from a state or local government that provides sales tax or real estate tax exemption if you don’t provide sufficient “charity” in your operations. (See Nonprofit Issues®, Tax Matters, 4/1/10) Under some state exemption standards, there is a specific requirement that you provide a certain amount of free or subsidized service. (See Ready Reference Page: “Act 55 Defines ‘Charity’ Eligible for Exemption”) If you are in one of those states and are entirely fee for service, you may not be eligible for certain state tax exemptions. But if your fees cover your scholarships, you may provide enough discounted participation to qualify.