Updated 7/14/21. To see the original post, please scroll down below.
QUESTION: When I was a club president, each sponsor was signed off by the General Manager with his signature. How can you say you were not aware of this?
ANSWER: All contracts are signed off on an annual basis by the General Manager. He was unaware of the impact the advertising revenue had on some of the individual clubs as they are responsible for their own financial filings and IRS compliance.
QUESTION: Is changing the RR&P requirement about people not selling items they make in clubs under consideration? Allowing people to sell through all means would be a relief and impact club rules.
ANSWER: Yes. Some proposed changes were brought to the Board in June, but the vote failed. We expect they will be brought forth again in September.
QUESTION: Is personal cost of labor to make things to sell on consignment taken into consideration? If so, I contend that any profit above the cost of material is offset by the time spent to generate a salable product. I would think that the time spent is worth far more than any profit realized. Also are consignment workers paid a salary to work, adding cost to sales?
ANSWER: The IRS is concerned with gross receipts. They do not take the cost of materials or your labor in creating a craft into consideration. When the Association operated the Village Store, we had some paid staff and some volunteers. While the 16 percent consignment fee covered some of the store’s costs, it operated in the red so not all costs were covered. PORA will likely be hiring staff and will have to cover that cost through their consignment fees.
QUESTION: Will I be allowed to sell outside of Sun City West? Like an art gallery in Scottsdale or Sedona?
ANSWER: That would be allowed if we are able to revise the RR&Ps to allow it, and that is the plan.
The Rec Centers continues to refine solutions to the various tax-status issues facing our clubs, and we’d like to take a moment to answer some of the thoughtful questions our members have posed to us over the last week.
In last week’s Enews, we gave a status report on where we’re at with most of the clubs. As we’ve said before, the vast majority (80 percent) of the clubs have no issues. For those who have seen their non-member revenue fall out of compliance with IRS regulations for 501(c)7s, we have found solutions that bring most of them back into compliance.
Since last week’s report, we’ve also learned Kiva West’s membership has voted to dissolve its 501(c)7 status and become a not-for-profit corporation that will rent space from the Rec Centers to continue their card playing and allow for the guest revenue. This is a great solution and we thank the club for their due diligence.
Also since last week, PORA announced they are working on the details of their new consignment store. We look forward to hearing more about their plans.
Since the last update, our members have brought up several good questions that we’d like to answer here. (Questions are consolidated to avoid redundancy). Here are some answers:
Question: If we couldn’t sell our items in the Village Store, how can we sell them at PORA?
Answer: The Rules, Regulations & Procedures (RR&Ps) that govern the clubs’ responsibilities under the Association do prohibit members from selling items created in the clubs. This violation will still exist, and we will need to modify the RR&Ps. An attempt to do that was made at the end of this fiscal year, but the changes were not approved. We will revisit it when the Board reconvenes in September. We are more concerned with a possible violation of IRS regulations than a problem with our RR&Ps, so we put most of our attention on resolving the IRS issue.
In our discussions with PORA, we’ve reminded them that any sales they make are between them and the individual consignors, not the clubs. Removing the clubs from the middle of this solves the issue of revenue running through their accounts and pushing them past the 15 percent limit on receipts that the IRS sets for social clubs.
Question: Why can’t the Village Store become a consignment store and remove the clubs from the middle, as PORA is doing?
Answer: The Association is a 501(c)4. We would have to apply for a “group exemption” to allow our clubs to operate as 501(c)4s under our umbrella. But the IRS is not taking any new applications for group exemptions for the foreseeable future as it tries to tighten down on these types of organizations.
There is a possibility that we could change the setup of the store to allow for consignments from individuals, rather than clubs. We would have to hire staff to handle the new accounting issues, including issuing 1099s to those who make more than $600 a year.
The real question is – if the clubs are removed from the equation, do we want to use Owner Member dues to subsidize a store that primarily benefits a few artists? We don’t believe that’s the best use of Owner Member dues.
There is truth to the comments that the store itself is a benefit to the community because it highlights all the fun clubs we have and the talent that those clubs inspire. We believe PORA’s consignment store will also accomplish that, and it makes sense that it will be located in the same building as the Visitor’s Center, which also attracts prospective residents. We will continue to highlight our clubs and their talents through the Rec News, the club websites, open houses and annual fairs.
Question: The RR&Ps have been in place for years. How is this issue only now coming to light?
Answer: Yes, the RR&Ps have been in existence for years. They are modified frequently, however, as times change. This includes the addition of the “Individual Participation Agreement” and “Club Participation Agreement” forms for the craft fairs. These were created several years ago in an attempt to gain control of the outside sales that crafters were engaging in. The number of items people could sell in the store also had been limited to keep some control over the profit-minded crafters. However, the growing number of outside sales, as well as the introduction of credit cards at the fairs, caused sales to increase dramatically. More crafters saw the income potential from the sales, and the problem increased.
Question: Why was the IRS issue not addressed years ago?
Answer: As mentioned, we did try to keep control over violations of our RR&Ps (“Clubs and their individual members should not have profit as a goal.”) However, the IRS violations did not come to light until just before COVID closed our facilities. Our clubs have their own Tax IDs and are independent organizations. Through the RR&Ps, we establish their responsibilities to us and our obligations to them. But they are independent and as such, the RR&Ps instruct them to follow IRS regulations (see the preamble of the RR&Ps for this explanation). That falls into their realm in this division of responsibilities.
In other words, the IRS issue did not come up until about a year ago – and was centered on one club. As operations got back into full swing after COVID, we took a closer look and realized several of our clubs might be affected. As soon as we received legal advice from our attorney and a tax attorney, we held three meetings with all 103 clubs to bring them up to speed.
Question: Why is the IRS going after small artisans like ours?
Answer: The IRS has not said one word to us about this issue. We are being proactive and solving it since we became aware of it, to avoid any future fines or issues that may arise if we ignore it.
Question: The Village Store and our craft sales have been this way for years. Why not just leave a good thing alone?
Answer: We have received guidance from our paid professionals, both legal and accounting specialists. They have informed us that the clubs earning more than 15 percent of their revenues from non-member sources is a problem. Now that we are aware of the full extent of this issue, ignoring this professional advice could put us in legal jeopardy.
Question: Why can’t you set some of the clubs up like Golf and Bowling? Those are subsidized, why can’t the clubs and sales be subsidized?
Answer: Yes, golf and bowling are subsidized. Fees paid by golfers (resident and non-resident) offset the cost of these amenities, to the tune of about $2 million a year. But remember, all of our other facilities are subsidized 100 percent. You do not pay a surcharge to use the pools, the pickleball courts, the tennis courts, the library, etc. If you join a club who meets at one of those facilities, you would pay the club membership fee – just as you would pay a club membership fee to join one of our golf chartered clubs or the bowling association club.
Golf and bowling are open to the public because the cost of running those amenities is so high, but the amenities themselves benefit all homeowners and their housing values. Additionally, those amenities cannot be used for anything else. You can’t play cards on a golf course or hold a dance in the bowling center. (Well, we suppose technically you could, but you get the idea.) A card room or a social hall, however, can be used for many different things. If one group that meets there doesn’t have enough members to exist without needing non-member revenue to keep them afloat, then it isn’t a valid chartered club and the space can be repurposed for other chartered clubs. This change in use does not lower home values or otherwise cause detriment to the community. Closing golf courses would most certainly be a detriment to home values.
All of our facilities are subsidized. They are subsidized by mandatory owner-member dues in accordance with state law (Title 33-1802): “Association means a nonprofit corporation or unincorporated association of owners that is created pursuant to a declaration to own and operate portions of a planned community and that has the power under the declaration to assess association members to pay the costs and expenses incurred in the performance of the association’s obligations under the declaration.”
Question: Sun City and Sun City Grand allow their members to sell for profit. Why can’t we?
Answer: We won’t speak for what our neighboring communities are doing, or why. What we can say is that their own governing documents also state that items made in their clubs should not be sold for profit. Please note Sun City is not a Planned Community under ARS Title 33 (read the exclusion in No. 2 under Title 33-1801), so we are vastly different from them in many ways. Neither Sun City nor Sun City Grand, nor any other age-restricted community we can find, has a consignment store operated for the benefit of individual crafters.
Members, we appreciate your questions as we continue to walk down this path, finding resolutions to these important issues. We hope this weekly Q&A format is beneficial to you. If it is, let us know by posting a comment, and we will continue to respond to questions this way. Thank you.