While nonprofits are generally exempt from paying federal and state income tax, sales tax compliance can be a little more complex. It can be easy to overlook the importance of sales tax compliance in your operations but ignoring it could cause hefty fines and penalties which can put a serious strain on your budget. In this blog post, we share up-to-date sales tax information to ensure your nonprofit organization stays compliant now while avoiding potential issues later.
What Qualifies A Business As A Nonprofit?
As defined by the National Council of Nonprofits, a nonprofit is an organization that provides a way for people to work together for the common good, transforming hopes and beliefs into actions. If a nonprofit meets certain requirements and is officially granted nonprofit status by the IRS, it will be exempt from paying most taxes to federal and state governments.
For the IRS to grant a nonprofit a tax exemption, its articles of incorporation must state that it was formed for charitable purposes or limit its activities to those permissible under the Tax Code. To receive the exemption, a business must apply to be a registered 501(c) entity. Most are exempt under section 501(c)(3), which gives an exemption to charitable organizations and lets donors deduct their charitable contributions. But just because you are a registered nonprofit exempt from certain state and federal taxes does not mean nonprofits are off the hook from sales tax compliance completely.
Does Your Nonprofit Have Sales Tax Liabilities To Consider?
There are two sides to sales tax compliance that nonprofit organizations may face. The first is for items that a nonprofit may purchase. Are they exempt from paying sales tax on those items that other people would be required to pay? It depends on the state and the item. For example, in Utah, nonprofits are exempt from paying sales tax when purchasing items that directly fulfill their mission. In our home state of California, most items are subject to sales tax, although there are a few specific exceptions. In North Carolina, you must pay sales tax at the time of purchase but can file semiannually for a refund.
Similar to any other area of taxation, one key requirement is proper documentation of exemption. Each state has its own exemption certificate and requirements for accepting them. These certificates are presented to a seller by the nonprofit purchaser. The certificate proves to the seller that the buyer is a legitimate nonprofit and not required to pay sales tax.
The second area to consider is if the nonprofit is actually selling something, do they need to charge sales tax on those services or products? What are their liabilities? What are their filing requirements? This also depends on the state. For most states, any otherwise taxable products and services should also be subject to sales tax when sold by a nonprofit. For example, if a nonprofit sells T-shirts, they would be subject to sales tax collection for the T-shirts sold in states that subject sales of clothing to sales tax. Similarly to sales tax on items purchased by a nonprofit, some states will not require a nonprofit organization to collect sales tax if the proceeds are going toward funding their mission.
We often see sales tax questions come up related to a charity putting on an auction or selling raffle tickets to make some extra money. As the California article notes, the facts and circumstances are often very important in determining the taxability.
Common Sales Tax Issues For Nonprofits
As you can see, requirements vary by state, so challenges can arise even if you try to stay informed. A common issue that many nonprofit organizations face in general is more frequent audits. Nonprofits may face audits more often than other businesses since the IRS wants to ensure that they are being run for the right reasons, not for personal gain. As such, state taxing agencies may also be inclined to more frequently audit these entities. Note that while the designation for a nonprofit entity might be at the federal level, the question of whether the entity is subject to sales tax is a state matter. In our practice we often find that nonprofit companies assume they are exempt from all taxes because of that nonprofit status. As with so many other nuances from state to state, the laws around nonprofits and sales tax can vary significantly, so it’s very problematic to make those assumptions. To avoid this, we recommend reaching out as soon as possible to a team of multistate sales tax compliance experts like our talented team at Miles Consulting Group.
Do You Have Other Sales Tax Compliance Questions?
If you are a nonprofit organization with sales tax compliance questions, we would love to support you. We are a skilled team of multistate sales tax professionals, so if you have questions about your state sales tax obligations, please contact us today. We’re happy to clarify any multistate tax issues you’re trying to navigate.
