Excellence in Financial Stewardship

Issue 7 | Winter 2023

Stewarding our tax-exempt privilege

Stanford University’s education, research, and healthcare missions greatly benefit from its IRS 501(c)(3) tax-exempt charitable organization status, which applies to activities that occur within the United States. The university is exempt from federal and state income taxes on its primary activities and endowment income and does not pay local property taxes on buildings and property used to support its missions. These tax-saving benefits translate into incremental funding resources for the university. The university also has the ability to secure tax-exempt debt through the State of California at lower interest rates. Schools and units receive the benefit of lower borrowing rates when funding capital projects through the Budgeted Interest Rate (BIR). In addition, because of this tax-exempt status, donors, who provided almost $2 billion of gifts and pledges last fiscal year, may deduct the gifts they make to the university on their tax returns.  

To maintain these privileges and the trust of the government, our donors, and the public in general, the university takes our compliance activities seriously. Failure to comply with the IRS and state and local regulations may result in penalties, reputational risk to the university, loss of federal funding, and potentially jeopardize our tax-exempt status along with the related benefits.  

In this newsletter, we will explore:
  • Various benefits that Stanford enjoys as a tax-exempt organization. 
  • Risks and compliance requirements associated with these benefits.
  • Roles and responsibilities we each have as employees and key members of the financial ecosystem. 
Even though the university is exempt from taxes on certain types of transactions that support our mission, the university is subject to applicable taxes and regulations on other types of transactions, similar to for-profit companies, such as for payroll and independent contractors. We will dive deeper into that topic, compliance obligations that are required of all businesses, in an upcoming newsletter.

Thank you for the role you play stewarding our tax-exempt status so that the university can continue to use these benefits toward our non-profit mission.
Anne Sweeney-Hoy
Senior Associate Vice President of Finance

The background and purpose of tax-exempt organizations

Stanford University (the university) is a trust with corporate powers under the laws of the State of California. It is registered as a tax-exempt organization under both the California Franchise Tax Board (FTB) and the federal Internal Revenue Service (IRS).
The tax-exempt status is a privilege that has both benefits and stringent requirements associated with it. Note that this exemption is limited to the United States, and does not extend to the university’s activities in other countries.

Tax exemptions are often granted to organizations that engage in activities that the government wants to encourage. For example, organizations may be exempt from taxes because they provide important services to the community, thereby lessening the burden to the government. The tax-exemption is granted to organizations for a specific purpose, such as helping lower income communities, advancing education or science, or supporting at-risk youth. While the tax-exemption provides a benefit to the organization and the activities it supports, it also reduces revenue paid to the federal and state authorities. 

Because of this, tax-exempt organizations are subject to a complex set of compliance requirements. If these rules are not followed, organizations risk losing their tax-exempt status and may be required to pay back taxes. Additionally, reputational damage associated with non-compliance could result in loss of donor trust and donations to the organization, as well as loss of federal funding. Below is a review of some of the tax-exempt benefits Stanford enjoys, the associated requirements to maintain these, and a description of the role FMS and each of you plays. 

Federal and state income tax exemption

The Benefits
As a Section 501(c)(3) organization, the university does not pay federal and state income tax on activities that are in support of its education, research and healthcare missions.
In addition, ancillary businesses that directly support these missions, such as food and housing for students and revenue from athletic and arts programs, are also exempt from federal and state taxes.
The Risks and Requirements
However, when the university regularly engages in activities or businesses that are not substantially related to its tax-exempt purpose of education, research, and health care, the related income is subject to unrelated business income (UBI) tax. The purpose of this UBI requirement is to ensure that tax-exempt organizations are not using their tax-exempt status to unfairly compete with for-profit businesses and to prevent them from conducting activities that are beyond the intended scope of their tax exemption. A significant amount of UBI could jeopardize the university’s tax-exempt status. 

Examples of activities that do not align with the university’s tax-exempt purpose and may be subject to UBI taxes include income from advertising, use of university equipment by for-profit companies, and income from selling goods or services that are not related to the university’s mission of education, research, and healthcare. Administrative Guide Memo 1.5.3: Unrelated Business Activity prohibits schools and departments from engaging in activities that generate UBI tax without prior approval from the provost. Learn more on the Fingate Resource: Unrelated Business Income.

As a non-profit, the university also has to comply with additional regulations to maintain these benefits. For example, the university is prohibited from engaging in political campaign activities or endorsing political candidates and can only engage in lobbying activities under limited circumstances. See Administrative Guide Memo 1.5.1: Political, Campaign and Lobbying Activities. The university must also limit the compensation it pays to its executives and other employees to reasonable amounts and follow best practices for determining these amounts. To ensure transparency, the university must also make certain documents, such as IRS Form 990 information return, available to the public upon request and disclose information about the activities described above.
Your Role in Compliance
FMS, along with other central business partners such as the Office of General Counsel, provide the framework related to these tax-exempt organization requirements, including policies and procedures noted above. Our annual compliance assurance program, where FMS meets with senior finance officers in the schools and units, provides an additional opportunity to discuss these requirements and any new or contemplated activities in the unit, and review the unit’s compliance activities.  

Finance staff and administrators in the schools and units are responsible for: 
  • Understanding and complying with the university’s policies and processes noted above related to our tax-exempt status. 
  • Monitoring their unit’s business activity for compliance with the tax-exempt requirements. 
  • Escalating any potential questions or issues that arise related to this area to Supriya Pai, Director of Tax Compliance.

California property tax exemption

The Benefits
Under California law, the university qualifies for property tax exemption on much of its over 8,000 acres of land as well as academic buildings and equipment in Santa Clara and nearby counties (e.g., Stanford Redwood City in San Mateo County).
This exemption results in significant savings to the university each year and a corresponding loss in tax revenue to the counties.
The Risks and Requirements
One of the basic requirements for the property tax exemption is that the property must be used exclusively for educational purposes by the university. Activities that are incidental to and reasonably necessary for the accomplishment of educational purpose may also qualify for the exemption (e.g., student housing or a university-run cafeteria), but must be evaluated in advance by the Tax Department. 

However, university property that is leased to for-profit vendors does not qualify for exemption (e.g., space used by Coupa Cafe in various university buildings). Similarly, property used by the university for commercial purposes does not qualify for exemption (e.g., if the university were to use its facilities for commercial manufacturing, the university cannot claim exemption on the space). 

These compliance responsibilities require careful planning and enforcement to avoid penalties, lawsuits, reputational risks, and more. Each year, the university files exemption claims with the counties that includes an affidavit attesting that the parcels for which we are claiming the exemption are used exclusively for educational purposes.
Your Role in Compliance
These distinctions between what qualifies for property tax exemption and what does not qualify are not always easy to make. FMS and Land, Buildings, and Real Estate (LBRE) work closely with outside advisors to navigate this complex set of tax rules. FMS also provides additional guidance to schools and units during their annual outreach activities. 

Finance staff in the schools and units are responsible for: 
  • Being generally aware of property tax requirements.
  • Monitoring and identifying any changes in the use of existing property where they operate. 
  • Identifying any property that their unit disposes of or acquires.
  • Educating and reinforcing appropriate usage of space throughout their unit (i.e., no personal or non-related activities).

Tax-exempt bond financing

The Benefits
As a section 501(c)(3) organization, the university issues tax-exempt debt through the California Educational Facilities Authority (CEFA) often at lower interest rates than taxable bonds.
Tax-exempt debt can only be used to finance buildings and equipment that support the university’s tax-exempt mission and meet certain State regulations. Schools and units experience this benefit through lower borrowing costs that they pay when financing buildings and equipment (through the BIR).
The Risks and Requirements
Like other privileges that Stanford enjoys, tax-exempt debt is associated with certain requirements, including tracking and demonstrating that the bond proceeds are used for qualified purposes that support the university’s mission and that the university has sufficient resources to complete the project, including gifts and university reserves. California state law also restricts the use of tax-exempt financed facilities for sectarian instruction or as a place of religious worship. 

In addition, the university must comply with various federal tax rules and regulations governing tax-exempt bonds such as “private business use” and arbitrage. There are strict limitations on how much of the tax-exempt bond proceeds can be used for “private business use,” activities that are unrelated to the university’s tax-exempt purpose. Examples of private use include: 
  • Conducting research solely for the benefit of a private corporation.
  • Displaying corporate names on a named space, building or outdoor facility. 
  • Other activities giving rise to unrelated business income (UBI).   
If the “private use” exceeds the limits, the bonds may lose their tax-exempt status, potentially impacting bondholders and our ability to borrow funds in the capital markets at favorable rates. If the bond proceeds are invested and generate earnings that exceed certain limits, the issuer may be required to pay additional monies to the federal government. 

Annually, the university is required to provide annual certification to the state, IRS and, if necessary, public postings, that the university is abiding by terms of the bond documents. Each year, as part of this process, representatives from schools and units complete a Debt Covenant Attestation where they certify that their units are in compliance with bond covenants, including that there is no private use and no religious use in facilities financed with tax-exempt bonds. The list of specific conditions that schools and departments attest to is on the Annual Bond Compliance Schedule.

Compliance Guidelines for Tax-Exempt Debt contains additional guidelines and practices, including roles and responsibilities, recordkeeping and other compliance requirements.
Your Role in Compliance
FMS provides outreach and resources that explain Compliance for Tax Exempt Bonds on Fingate.  

As a financial administrator in your organization, your responsibilities with respect to tax-exempt debt are to:
  • Be aware of how your unit’s buildings and property are financed and which use tax-exempt debt.
  • Monitor and identify any changes in the use of existing buildings or property that are financed with tax-exempt debt and communicate those changes to the Capital Accounting Bond/Tax Compliance Analyst. 
  • Work with FMS to identify buildings that will be financed with new tax-exempt debt and ensure these buildings comply with the various requirements.
  • Complete the bond compliance attestation annually, if your unit uses tax-exempt debt.

Reminder: Change to iProcurement Access


To equip purchasers with the knowledge and resources to choose the purchasing method that meets their needs as well as key compliance requirements, Financial Management Services (FMS) developed a new course, FIN-0420 Preferred Purchasing Methods, which is now required to access iProcurement. The course takes approximately 35 minutes to complete and does not require recertification after successful completion.

Before this change, all new employees were automatically granted access to iProcurement. This change now establishes a process and opportunity to provide foundational knowledge on preferred purchasing practices prior to receiving access. This aligns with our standard practices around access to financial systems like Expense Requests and PCard, reserving system access to those individuals who have received training and for whom purchasing is a primary responsibility of their role with the university.

On March 20, FMS reached out to existing iProcurement users within the last 24 months with instructions on how to take the course within the next 90 days. Learn more in the Fingate news article: Change to iProcurement Access.
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