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.
ORIGINAL POST:
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.
Perhaps the club members should not be selling things at a profit at all. Perhaps they should be allowed to use facilities to make things because they enjoy making them, but then have a selling venue that donates all monies to charity. Then people who want to make things can, but would not be over-using the facilities for profit. And we could assist some very needy charities
Very informative Q&A. Thank you.
Could the store be run by a individual and still have our items for sale and the rec center would not be involved. All the club’s could sell.
Louise, so long as the Village Store is on our property, it remains one of our amenities. We could outsource it, but in a sense that is what PORA is doing, and they are eager for the opportunity. It’s a good solution that benefits PORA, allows artists to continue selling, and removes us from liability with the tax issue.
Did the Governing Board vote to approve the relocation of the Village Store to PORA?
No, John. This was an operational decision to handle the IRS issue. The former and current Board president were aware of the plans.
The Governing Board should have voted on whether to close the Village Store. Your “operational decision” was autocratic. In the future such important decisions should be made by our elected Governing Members.
Thank you for your comments John. We are working to get our clubs into compliance with the IRS. If there had been a sustainable way to do that while keeping the Village Store open, without subsidizing the increased costs with member dues, we would surely have done that.
What is PORA being paid annually to host and operate the Village Store?
I do not find my comments of several weeks ago or an answer to them?
Dudley, your comments were posted on 6/30 under the GM report. In answer to your question – palm tree trimming is outsourced.
Keep up the Q & A. We appreciate it. Thank you.
Does this also go for goods from the craft class, displayed in the wondow?
Is removing the RR&P restriction for club members not selling their products under consideration? Educational/Training non-profits allow students to profit from their learning. Streamlining the new approach to clubs, consignment store, etc. would be easier without this restriction.
At this time, are sales to anyone other than club membes allowed or prohibited? There is still confusion in out club about that. I understand that you hope to change the R,R, & P’s, but I would like a clear answer on what is allowed now.
Teresa, at this time while things are still in flux, we are not enforcing this prohibition since, as you stated, we are trying to modify the RR&Ps. If an individual wants to sell items they have created, they may do that but are responsible for their own tax filings, 1099s etc. The clubs should not encourage this, and should not organize the sales or allow the sales to flow through the clubs. Also, if the clubs see individuals mass producing items that are clearly for sale (this includes monopolizing equipment and supplies), that should be stopped immediately. Thank you for the great 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?
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. Some clubs are contacting tax specialists now. This would be important information before clubs change rules.
This is a great idea, we need to keep informed instead of spreading rumors! I like that you also give answers with the complete details and regulations from which department. Now we have a source to go to and look up things for more information!
Thanks again and keep up the great work, this is a way for all to keep informed!!!!!
i like this question & answer format – it gives members a way to commutate with the rec center
I appreciate the Rec Center Board dealing with this issue proactively. thanks for your dedication!
How will the craft clubs make any money to buy equipment?
Money can be raised from members, or from nonmembers so long as total receipts from nonmembers remain below 15 percent. For major capital purchases, the Rec Centers would consider the purchases.
When I was president of tennis, each sponsor was signed off by Bill S with his signature. How can you say you were not aware of this. This was true for the past president as well.
Hi Lee. Yes, 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.
Is there a maximum a crafter can earn through PORA sales before the IRS is involved?
PORA will determine how its operations are set up. But from a very basic standpoint, individuals may earn up to $600 before a 1099 must be filed.
Is there any provisions in the IRS codes that would permit clubs to become incorporated and pay applicable taxes with proceeds from their sales as any business would. If such a proposal would not violate IRS rules, perhaps this is an option. This would require additional bookkeeping at clubs that produce items and issuance of 1099’s, but might be another way to comply. Additionally, if it were possible, the burden of compliance would be shifted to the clubs and not SCW.
Just a thought – Thanks.
Tom, if we start operating for-profit clubs, it is counter to the RCSCW purpose of operating our clubs and amenities for the social benefit of members. We are not here to facilitate private businesses.
IT READS AS YOU ARE MAKING A MOUNTAIN OUT OF A MOLEHILL. NO PROBLEM SINCE 1983 AND NOW UNDER YOUR LEADERSHIP OR LACK THEREOF IT IS A PROBLEM. I JST CAN’T BELIEVE THE IRS IS GOING TO PUT A LITTLE OLD LADY IN JAIL OR FINE HER FOR SEWING A QUILT AND SELLING IT TO GET HER COST OF MATERIALS BACK.
Sam, the store brings in about $700,000 a year. The artisans pay no taxes on those receipts. That is not insignificant.
This is a great opportunity to address another problem. I go to the Hobby shop to work on my one item at a time, on machines and in a building that I have paid a fee, to the rec center, for the preservation of assets, and annual Recreation fee. It is a problem when my hobby use has to sit and wait, repetatively, for a person cranking out “stock” on a production scale for personel gain. Incidential sales of hobby stuff is fine, running a business is not, Regardless of 501 C whatever status. My question is: “Can this also be addressed now”? I understand it is important to address the legal questions first and as soon a possible… but “the iron is hot”. Thx
Scotty, this is a great point. Thank you. We have already started meeting with clubs to address this very issue. The clubs need to ensure their equipment and supplies are not monopolized by high-production sellers.
Do youneed the space at the Village store for some other purpose? If not, I don’t see the purpose of using the visitors center instead. You still need to hire employees and use volunteers.
Wyonne, we do not need the space at the Village Store for another purpose. It was closed to resolve the IRS issues. No other Sun City-like communities have a store like this for the same reason. The Visitors Center is operated by PORA, which is independent from RCSCW. They will have to determine what consignment fees are appropriate to offset their costs.
There is wide spread speculation that management plans to put offices in the area where the village store is, for future employees and possibly the Board of Directors. Is there any truth to these speculations?
Roger, since it became clear the store wasn’t coming back, we have looked at options including moving Board offices to that location, creating new meeting space, creating an exhibition space, or moving the CC&R Department there. Space has been short in the Association for years, so something will be placed there eventually. What that will be has not been determined. To the rumors, we want to be very clear that the store was not closed to create space. It was closed due to the IRS situation.
Its crystal clear from reading these answers that there was NO problem with the Irs. The Scw BOD are not being proactive they have created a problem where none existed. The IRS is not interested in harassing a few clubs in SCW – – they have bigger fish to fry. We need a new BOD that is NOT trying to destroy what has worked here for so many years.
Mr. Turner, the Village Store brings in about $700,000 a year. That is not a trivial amount. Our attorney, tax attorney and financial advisors have all advised us we need to resolve the issue. Ignoring it would be a huge problem.
Per the meetings that were held, Kiva brings in a large percentage of non-residents to play cards. I trust we are receiving sufficient rental to more than cover ALL the expenses surrounding the facilities they use. If were going to become a landlord, then we need to behave like one.
It appears the crafters are all concerned about selling their wares. I thought the clubs were there for the enjoyment of the residents, not to turn it into a conduit to sell large volumes of mass produced items tax free. As previously stated, if you want to sell your created wares, rent a store front on Bell Rd. and sell away or go to the internet like millions have.
Terry, previously the club was getting the facility at no charge, as they were a chartered club. As a non-chartered organization sponsored by a resident, they will rent the facility at the going rental rate however many times they choose to use the facility. It will likely amount to more than $10,000 a year, which will cover costs.
As it seems the financials must be in alignment with a club’s tax status, it makes sense for the Rec Centers to be the treasurer for the clubs they house. This would make only three officer positions to fill each year and allows a Rec Center position on the club’s board.
This sentence was in answer (in part) to the question about subsidizing the clubs…:
“. 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.”
I would like to know why… in the first place …if this club did not have enough members to be a chartered club…
why why did the rec center decide they could allow non SCW owners to enjoy our amenities ????
If they did not have enough members, they could play bridge in their homes…etc..
It seems that the powers that be..? on the board?? at the time this happened, iust gave this club permission to allow outsiders to be a part of one of our clubs. Was there ever a vote by owner members….or a change to our RR&Ps to decide whether this was what the member would like to have happen or legal?
I am hoping that this problem will be solved by NOT ALLOWING ANY OUTSIDE PEOPLE TO BE PART OF OUR CHARTERED CLUBS…if they want the amenities, they can move here, like the rest of us.Eleanor