A Coke, a Smile … and a Tax Bill? A Look at the Tax Treatment of Exclusive Provider Agreements in Higher Education

• Published in: The ATA journal of legal tax research 2005-01, Vol.3 (1), p.49-65
• Main Author: Cowan, Mark J.
• Format: Article
• Language: English
• Subjects: Agreements; Beverages; Business income; Colleges & universities; Higher education; Income taxes; Studies; Unrelated business income tax
• ISSN: 1543-866X; 1543-866X
• DOI: 10.2308/jltr.2005.3.1.49

The purpose of this article is to critically analyze the tax treatment of amounts that colleges and universities receive under exclusive provider agreements (also known as “pouring rights contracts”). Under these agreements, beverage companies pay millions of dollars to institutions of higher education for the right to be the exclusive provider of beverages at campus points of sale. There is no bright-line rule indicating whether revenue from such agreements is subject to the unrelated business income tax. Colleges and universities must therefore dissect the revenue they receive from these contracts and apply the general rules of the unrelated business income tax to separate the taxable amounts from the nontaxable amounts. The article reviews this process and then looks at whether there is any policy justification for taxing revenue from exclusive provider agreements. Based on a review of the policy underlying the unrelated business income tax, the article concludes that exempting exclusive provider agreement revenue from taxation would greatly simplify the law without violating the spirit or purposes underlying the unrelated business income tax.