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Navigating the complex world of nonprofit sales tax exemptions can be daunting. While 501(c)(3) status exempts organizations from federal income tax, sales tax exemptions vary widely by state.
Understanding these nuances is crucial for nonprofits to maximize their financial resources and maintain compliance. This guide delves into the intricacies of nonprofit sales tax exemptions, covering eligibility criteria, application processes, and common scenarios.
Whether you're a new nonprofit or looking to optimize your tax strategy, this comprehensive overview will help you understand sales tax exemptions and their impact on your organization's accounting.
Sales tax is a percentage-based fee added to the price of goods and services at the point of purchase. Consumers typically pay this tax, while businesses collect and remit it to state and local governments. For nonprofits, understanding sales tax is crucial as it affects both their purchases and sales.
While 501(c)(3) status exempts organizations from federal income tax, sales tax exemptions vary by state. Some states offer broad exemptions for certain nonprofit categories, while others provide limited or conditional relief. Delaware, Montana, New Hampshire, and Oregon don't impose sales taxes at all.
Nonprofits must navigate these state-specific rules to maximize their financial resources and maintain compliance.
Eligibility requirements for sales tax exemption
1. 501(c)(3) tax exemption is key
The key to obtaining sales tax exemption is securing a 501(c)(3) nonprofit status under the Internal Revenue Code (IRC) in most states. You will have to submit the determination letter to show legitimate proof of your nonprofit status and receive an exemption.
For other types of nonprofits, state sales tax is much less certain and needs a careful review of each state's tax regulations.
Recognition by the IRS may not be enough in some states to exempt an organization from sales tax. Your organization must be registered as a nonprofit in the state where it seeks exemption.
You also need to apply for a sales tax exemption certificate in your state. This requires submitting the state-specific form along with all or some following supporting documents:
A fee is rarely charged, and the application is simple. Some states, like Maryland, Florida, or Virginia, require renewal filing every five years.
3. Multi-State Certificate of Exemption (SSUTA-COE)
Nonprofits operating in one state should apply for sales tax exemption in that state. Larger organizations conducting charitable work in multiple states will find it beneficial to secure sales tax exemption in each state.
SSUTA-COE simplifies sales tax collection, reporting, and exemption claims across different states. While the SSUTA-COE form simplifies paperwork for nonprofits, it isn't a complete solution. Nonprofits still need to:
Obtain sales tax exemptions from each state individually
Verify their eligibility for exemption in states accepting the SSUTA-COE form
This form doesn't replace the need to understand and comply with each state's specific sales tax exemption rules.
Note: Visit your state's website and verify the exact requirements, or consult a tax professional familiar with local nonprofit regulations.
Common scenarios for nonprofit sales tax exemptions
Sales of taxable goods and services made to nonprofit entities
Nonprofit organizations are often exempt from paying sales tax on items purchased for charitable activities. These include office supplies, program materials, and equipment.
For instance, a literacy nonprofit would be exempt from paying sales tax on books to help people learn to read.
You must present a valid sales tax exemption certificate at the point of purchase. This proves to the seller that the buyer is a legitimate charity and is not required to pay sales tax.
The sales tax on services purchased by nonprofits depends on their use. Some states exempt particular services organizations use, such as utilities, if used directly in the exempt activities.
Sale of tangible personal property through temporary shops
A nonprofit organization will not need to collect sales tax for items sold through temporary shops or stores. This means any place or establishment where products are sold without any degree of regularity.
Examples of temporary stores include stands or booths operated by an organization at the craft fair, flea market, or similar premises.
Some nonprofits are also not required to charge sales tax as long as they sell goods or services as part of their fundraising activities, such as at festivals, bake sales, or events.
Auction sales, whether they are in-person or online, are not subject to sales tax as long as the auction is held on a temporary basis.
Sales related to specific exemptions
Some states offer specific exemptions to certain nonprofit types, such as religious organizations, educational institutions, and healthcare providers. These exemptions might apply to purchases and sales related to their specific missions.
For instance, in Illinois, hospitals and nursing homes that qualify as exempt organizations are not subject to sales tax, particularly when selling food or medicine to their patients. However, if they sell candy, tobacco products, chewing gum, or razor blades, they will incur sales tax liabilities. This is because these items aren't meant for basic hospital service.
When do nonprofits have to pay taxes?
Sales through renting
Renting equipment such as chairs, tables, or audio-visual equipment for events is often subject to sales tax, which is applied to the rental fees charged to the guests.
If your organization also rents out its facilities, such as meeting space, and includes taxable services like security or cleaning, the rental fee is subject to sales tax.
Sales through thrift stores
When nonprofits sell through their operated thrift stores or second-hand shops, they are subject to sales tax. This is because these stores operate with a degree of frequency, regularity, or continuity. While they can receive in-kind donations, the sale of these items to customers is usually taxable.
For instance, in New Jersey, if a qualified organization has a gift shop or café open throughout weekdays or even weekends, it must collect sales tax on the goods it sells.
Sales of items bought for personal use
Purchases for personal use, such as electronics, gift cards, or clothes intended for volunteers or staff, are typically subject to sales tax.
A nonprofit will have to pay sales tax because tax exemption is meant to support the nonprofit's mission, not to offer tax-free personal benefits to individuals associated with the organization.
Sales of goods and services with a degree of continuity
Like any business, NPOs generally must collect sales tax on the regular sale of goods and services they offer, provided these are taxable in the state.
For instance, if you're residing in New Jersey and providing newspapers, magazines, or clothing items, you will not charge taxes on them as they fall under non-taxable items in the city.
The same applies to services or admission. In Georgia, for example, admission to attractions like historic houses is taxable, so nonprofits must collect sales tax when selling tickets to such sites. In other states, historic tours may be non-taxable, so nonprofits won't be required to levy a tax on the transaction.
Arizona offers limited sales tax exemptions in specific circumstances. Contact the Arizona Department of Revenue for a list of the few available exemptions.
Arkansas
The state does not offer general exemption applications for nonprofits, but charitable sales can be exempt under certain conditions.
Some nonprofits are eligible for sales tax exemption. These include religious organizations, veteran's organizations, volunteer fire departments, qualifying youth organizations, and a few others that may be eligible for exemption.
Nonprofits can apply for sales tax exemption with the IRS determination letter. Once approved, you will secure a Certificate of Exemption.
Connecticut
Upon receiving an IRS determination letter, nonprofits are automatically exempt from sales tax liability.
District of Columbia
To qualify for exemption, an organization must be physically located in DC and apply. Its purchases must be related to a charitable purpose, made by someone associated with the exempt organization, and paid for by that organization.
Some nonprofits are exempt from sales and use tax on rentals and purchases of tangible personal property if the property is used for exempt activities.
The state does not offer general sales or use tax exemption, though a few exemptions exist for hospices, nursing homes, hospitals, and other organizations.
Idaho
There are no general sales tax exemptions for nonprofits. Some nonprofits, such as churches, soup kitchens, and nonsale clothing retailers, may qualify for exemptions on specific items.
A charity operating entirely for a charitable, educational, or religious purpose can apply for an Illinois exempt (E) number. This number provides an exemption from sales tax on purchases related to charity.
Kansas
Nonprofits can file for exemption but not all will be exempted.
Kentucky
Nonprofits with 501(c)(3) status are exempt from paying sales taxes when purchasing for exempt purposes.
The state provides automatic exemption from state sales and use taxes. Simply fill out Form 3372 to make tax-free purchases.
Massachusetts
No application is required for sales tax. Send your IRS determination letter with an explanation, and the Department of Revenue will review the request.
To qualify for sales tax exemption, a nonprofit must be “formally organized,” which means a certificate of incorporation or similar document and bylaws must govern it.
The state permits 501(c)(3) exemptions and various other types of organizations to be exempt from paying sales tax.
Washington
Nonprofits must pay sales tax on all goods and services they purchase as consumers. They must collect and remit sales tax on their sales of products and retail services.
Concluding thoughts on nonprofit sales tax exemption
Figuring out your nonprofit's sales tax exemption status can be tricky. Each state has its own regulations and specific charitable use requirements, making it hard to determine how, when, and where a nonprofit qualifies for tax exemption.
Researching state laws and consulting with an experienced attorney can help your nonprofit navigate complex tax regulations effectively. This ensures compliance and supports your organization's financial health and mission fulfillment.
As you navigate the world of nonprofit tax laws, stay updated with Zeffy’s resources and blogs. We help nonprofits grow without spending a dime on fundraising tools.
To secure tax-exempt status for your nonprofit organization, you will have to apply with the Internal Revenue Service. Depending on your organization, you will have to fill out form 1023 (larger nonprofits) or form 1023-EZ (smaller nonprofits). Once your application is processed and approved, you will be exempted from paying federal income tax.
Your nonprofit will have to apply at the state level to obtain a sales tax exemption. Applications and processes vary significantly between states, so it's important to check specific state guidelines.
When a nonprofit doesn't need to pay federal income or sales and use tax, it can use that money for its mission instead. This means access to more funds to direct towards your fundraising activities, programs, or initiatives rather than tax liabilities. Reduced tax burdens simplify financial management, allowing you to operate more efficiently.
Tax exemption also makes it easier for nonprofits to secure donations. For instance, if supporters had to pay sales tax on fundraising merch, it could reduce the amount they are willing to contribute. This can ultimately impact your nonprofit's ability to serve its mission.
The following are the most common categories of nonprofit organizations that can qualify for a state sales tax exemption in Texas:
Chamber of Commerce: A nonprofit association primarily made of people in business, promoting the common economic interest of all trades in the country, city, or areas it represents.
Charitable Organization: A nonprofit that focuses on easing pain, suffering, poverty, or disease by providing medical treatment, food, shelter, and more to the needy or poor.
Conventional and Tourist Promotional Agency: An organization organized or sponsored by at least one Texas county or city.
Educational Organization: A nonprofit solely dedicated to teaching that has a regularly scheduled faculty, curriculum, and enrolled students attending a place where the educational activities happen.
Federal Income Tax Exemption: Nonprofits with a federal tax-exempt status under IRC Sections 501(c)(3), (4), (8), (10), or (19).
Religious Organization: A nonprofit made of a recognized group of people meeting regularly at the same location to hold and sponsor religious services according to their beliefs.
Volunteer Fire Department: An association that answers fire alarms, extinguishes fires, and can also offer emergency medical services.
Youth Athletic Organization: An organization that organizes athletic competitions among people under 19 years old.
In Pennsylvania, 501(c)(3) organizations are not automatically exempt from sales tax and must apply for an exemption certificate. Nonprofits must demonstrate that they meet all of the following requirements to qualify for the state sales tax exemption:
Advance a charitable purpose
Have no private profit motive
Donate a large part of its services
Benefit an indefinite and substantial class of people who are legitimate subjects of charity
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