Trade secrets: industry tax-exempt organizations collectively take in more than $100 million a year. Where does it go?

Circuits Assembly, March, 2008 by Mike Buetow

Question: Which is the largest industry association? Answer: It depends on your definition of "largest."

If the number of members is measured, for instance, the International Microelectronics and Packaging Society is tops by a wide margin. If annual revenues are considered, Semiconductor Equipment and Materials International laps the field. And if computed by assets, SEMI and the now-split Electronics Industries Alliance leave the others in their tax-free dust.

Electronics trade associations took in more than $110 million in revenues during fiscal 2006. The growth of the sector has led CIRCUITS ASSEMBLY to look at the finances of the industry's leading tax-exempt organizations. In a first-of-its-kind study, we reviewed the IRS Form 990 filings from tax years 2004 to 2006 for a variety of not-for-profits, among them the American Electronics Association (AeA), American Competitiveness Institute (ACI), IPC, IMAPS, EIA, Electronic Components, Assemblies and Materials Association (ECA), the International Electronics Manufacturing Initiative (iNEMI), the Jedec Solid State Technology Association (Jedec), the Semiconductor Industry Association (SIA), SEMI and the Surface Mount Technology Association (SMTA). (Certain other trade groups and professional societies, such as the Surface Mount Equipment Manufacturers Association, were not reviewed, either because they have been absorbed into other entities, or have not been required to file because their income is less than $25,000.)

The entities, save for two, are classified by the IRS as 501(c)(6) tax-exempt organizations, which includes such entities as business leagues, chambers of commerce, and real estate boards. The exceptions, ACI and IMAPS, are listed as a 501(c)(3), Public Charity, a classification for organizations founded to support a host of practices involving religion, education, charity, science, or testing for public safety, among others.

Only one, SIA, publishes an annual financial report, although SEMI includes a report on its annual finances in its member magazine, and SMTA makes its report available at its annual member meeting or upon request. AeA follows a novel approach: It breaks its membership into 17 regional councils, with a director assigned to each council. Three times a year, AeA provides revenue, expense and asset information to the directors, whom "we expect to keep the members up-to-date," says AeA's senior vice president of domestic policy and congressional affairs John Palafoutas.

Going Up

The past three years have been good to very good for most electronics companies. The same can be said of the trade groups. In terms of annual revenues, almost each firm grew more than 10% in aggregate from 2004 to 2006. The trade groups reaping the most benefit? IPC, up 25%, SMTA, up 18%, and the AeA, up 16% (Table 1). The median growth was 12%.

Firms that failed to fare well include Jedec (down 1.5%) and the ECA (down 25%). However, each faced extenuating circumstances. Both are former units of the now-defunct EIA, which was "realigned" last summer and saw its assets split among its members. It is unclear how much of the former groups' revenues were tied to their EIA parent; both declined to respond to interview requests.

Most trade groups derive a large portion of their revenues from member dues. However, there are variations to that model. IPC, which relies heavily on revenues from trade shows and sales of standards, drew about 14% of its sales from dues. SEMI members ponied up less than 10% of the organization's $45 million in sales in 2005 (the latest year for which its figures are available). SMTA, which until 2007 did not have its own trade show, relied on dues for 47% of its overall income, while Jedec members were good for 70%. At the extreme, iNEMI's members footed 92% of the bill (Table 2).

Trade shows and conferences are clearly a boon to association coffers. Per its 2006 IRS filings, IPC netted $1.35 million on $4.6 million in industry program revenue. SEMI, which produces the prodigious SemiCon West show that occupies much of downtown San Francisco each July, earned some $28.7 million in 2005. Even stripped-down technical conferences are reliable profit centers: Jedec earned $185,000 on $396,000 taken in from such meetings in 2006; ECA declared $995,752 in revenues against $626,419 in expenses from conferences in 2005. SEMI and AeA reported $2.5 million and $2.7 million in revenues from conferences in 2005 and 2006, respectively. For SMTA and IMAPS, nearly half their respective 2006 revenue came from conferences.

For trade groups, unrelated business income--revenue from activities "not substantially related" to their business purpose--is problematic, with critics contending tax-exempt organizations use tax breaks to unfairly compete with for-profit entities. The debate rages in Washington, where the U.S. House Ways and Means Committee has held more than 10 hearings on the issue since 1987. Conventions and trade shows are among the exemptions from unrelated business income taxes. None of the electronics trade groups in this review specified significant amounts of unrelated business income during the past three years.