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Sponsored by: A Service Of: Sales and Use Tax Exemptions for Nonprofits Ron Barrett February 8, 2012

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It is well known that most nonprofits are exempt from federal and state income tax. They are also frequently exempt from real property tax, but one tax exemption that even nonprofits sometimes find elusive is “sales and use” tax.With sales tax rates approaching 10% in some jurisdictions that combine state and local sales taxes, it’s an important exemption not to overlook. However, some nonprofits fail to take advantage of these exemptions because of the complexity of determining in which states an exemption exists and because of the lack of uniformity from state to state.Though several states provide a variety of sales tax exemptions to various industries and organizations, most only make an exception for certain groups or types of nonprofits. In the majority of states the key to a sales tax exemption is the designation as a charitable, 501(c)3 nonprofit organization. For the other types of tax-exempt nonprofits, a state sales tax exemption is much less certain, and requires a careful reading of each state’s tax code and regulations.Even with a 501(c)3 designation, charitable nonprofits in some states are still not exempt from sales taxes and, even if they are, procedural requirements must be strictly followed to actually receive a sales-tax exemption. This is true in nearly all states that offer an exemption from sales tax to nonprofit organizations.This program will give you a broad overview of sales tax exemptions available to nonprofits; clarify how to obtain, manage and maintain these exemptions, and provide valuable reference information.

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Page 1: Sales and Use Tax Exemptions for Nonprofits

Sponsored by:A Service

Of:

Sales and Use Tax Exemptions for Nonprofits

Ron Barrett

February 8, 2012

Page 2: Sales and Use Tax Exemptions for Nonprofits

Sponsored by:A Service

Of:

Advising nonprofits in:

• Strategy

• Planning

• Organizational Development

www.synthesispartnership.com

(617) 969-1881

[email protected]

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Page 3: Sales and Use Tax Exemptions for Nonprofits

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Page 4: Sales and Use Tax Exemptions for Nonprofits

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Today’s Speaker

Ron Barrett Vice President of Nonprofit Services

National Corporate Research, Ltd.

Hosting:

Sam Frank, Synthesis PartnershipAssisting with chat questions: April Hunt, Nonprofit Webinars

Page 5: Sales and Use Tax Exemptions for Nonprofits

5

Presented by:

Ron Barrett

Page 6: Sales and Use Tax Exemptions for Nonprofits

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• Ben Franklin wasn’t talking about most nonprofits…

• Nonprofits are immortal

• Nonprofits are exempt from taxes

• The elusive tax exemption

Page 8: Sales and Use Tax Exemptions for Nonprofits

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Sales Tax Exemptions for Nonprofits

– Keys to Tax Exempt Purchases

– Sales Tax Exemption Requirements

– Multistate Exemption Projects & Certificates

– Not Tax Exempt Sales

– Not Resellers Certificates

– Not Sales Tax Registration

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Page 9: Sales and Use Tax Exemptions for Nonprofits

9

• Nonprofit vs. Tax Exempt, 501c3,

Charitable Organization:

Nonprofit status is a matter of state law, which governs the

organization and creation of the entity

Tax exemption is mostly a matter of federal law

All tax-exempt organizations are nonprofits

Not all nonprofits are tax-exempt

Not all nonprofits are charitable organizations

Not all tax-exempt organizations are charitable organizations

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Page 10: Sales and Use Tax Exemptions for Nonprofits

10

• How do nonprofits obtain sales tax

exemptions?

• What documents are required?

• Do exemptions expire?

• Are there any fees?

• Where are filings required?

• Must you be located or have a presence in a

state?

• Which states offer sales tax exemptions to

nonprofits?

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Page 13: Sales and Use Tax Exemptions for Nonprofits

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• Incorporated as a nonprofit organization

• IRS Determination Letter

• 501(c)(3) Status

• Certificate of Exemption

• 4 Ps: Exempt Purpose, Purchaser, Proof, Payment

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Page 14: Sales and Use Tax Exemptions for Nonprofits

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Problems at the Point of Sale…

Exempt purchaser meets clueless cashier

Prior arrangements with merchants

Cashier’s manager usually needs to approve

Merchant is often liable for any incorrectly removed sales taxes

Buyer’s recourse…file for a refund

Many nonprofits don’t bother with the sales tax exemption

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Page 15: Sales and Use Tax Exemptions for Nonprofits

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(in millions as of 2009)

Total expenses of reporting nonprofits (source: NCCS) $1,400,000

Percent subject to sales tax (estimate) 15%

Sales taxable expenses $210,000

Limited or no state exemptions – by spend (estimated) -35%

Expenses subject to exemption $136,500

Average U.S sales tax rate – 2009 (source: Vertex, Inc) 5.48%

Total exemptible taxes $7,480

Percent of exemptions unclaimed (estimated) 20%

Estimate of total unclaimed sales tax exemptions $1,496

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Page 18: Sales and Use Tax Exemptions for Nonprofits

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Exemption Certificate Use

Applies to purchases used exclusively by an organization for its mission (or purpose for which it is organized)

– May not be used for:• Personal purchases

• Purchases of items for resale

• Other affiliated organizations

• Activities that are mainly commercial enterprises

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Page 19: Sales and Use Tax Exemptions for Nonprofits

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The 4 Ps of Point-of-Sale Perfection…common requirements among disparate laws

Purpose

Purchaser

Proof

» Payment

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Page 20: Sales and Use Tax Exemptions for Nonprofits

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Exceptions: The Exclusive Tax Exemption

■ Legislative (e.g. AL)

■ Industry-based (e.g. hospitals, universities)

■ Geographic limitations (e.g. DC & MD)

■ Tax exempt status - other 501cs

No reciprocity

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Page 21: Sales and Use Tax Exemptions for Nonprofits

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• Most states and DC exempt religious

organizations

• States require an exemption

application, filing or

certificate

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Page 23: Sales and Use Tax Exemptions for Nonprofits

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Questions to consider when considering a sales tax exemption…

Does the state require an application filing?

Are renewal filings required?

Is the level of spend sufficient to warrant the effort?

Are out of state or non-charitable nonprofits eligible for exemption?

What methods are available to establish a sales tax exemption or to make tax exempt purchases?

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Page 25: Sales and Use Tax Exemptions for Nonprofits

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Procedures vary by type of purchase (e.g. Connecticut)

Goods and Services vs. Meals and Lodging: point of sale vs. preapproval from state

CERT-119: provided to sellers (with attached exemption permit or determination letter) at point of sale (limit 5 days/events per year) for tax exempt purchase of goods and services

CERT-112 or CERT-123 (Blanket Certificate): provided to state in advance for approval of tax exempt purchase of meals and lodging and then provided to seller

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Page 26: Sales and Use Tax Exemptions for Nonprofits

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• Supporting Documents:– Articles of Incorporation and/or Bylaws

– IRS Determination Letter and/or IRS Form 1023 or 1024

– Financial Reports and/or Form 990

• Usually Not Required: – Corporate Formation, Qualification or Registered Agent in

states where an exemption is needed

• Forms: – Exemption Application

– Certificate of Exemption

– State-Specific vs. Multistate (SSUTA-CEO or Uniform Sales Tax Certificate)

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Page 27: Sales and Use Tax Exemptions for Nonprofits

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• Annual or Periodic Renewals (FL, MD, MA, MO, PA and SD)

• Due Dates

• Status/Search - Verify sales tax exemption, certificates & documents (about 20 states offer online searches)

• Amendments - Few states require amendments, but states should be updated (name, address, tax exempt status, merger and corporate conversion changes)

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Page 30: Sales and Use Tax Exemptions for Nonprofits

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• Who should file? An organization described in NYS Tax Law

section 1116(a)(4), 1116(a)(5), 1116(a)(7), 1116(a)(8), or

1116(a)(9) on Form ST-119.2 (NYS and Local Sales & Use Tax

Application for an Exempt Organization Certificate)

Requirements:

No part of the organization’s net income can benefit private

shareholders or individuals

The organization cannot, as a substantial part of its activities,

attempt to influence legislation

The organization cannot participate, directly or indirectly, in

political campaigns

The organization’s assets must be dedicated to its exempt

purposes

501(c)(3)s need only include Determination Letter

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Page 31: Sales and Use Tax Exemptions for Nonprofits

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Requirements cont’d:

Branches and chapters of parent organization must include the

Determination Letter, and a letter from parent organization or a

copy of the parent organization’s directory of subunits

Supporting Documents Required [if not a 501(c)(3)]

Determination Letter

Organizing documents with any amendments

Statement of activities, receipts & expenditures, and assets &

liabilities

• Where to file? NYS Tax Department, Exempt Organizations Unit

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Page 32: Sales and Use Tax Exemptions for Nonprofits

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• Who should file?

Exclusively charitable, religious or educational not-for-profits or organizations described in Illinois Administrative Code; Title 86, Sections 130.2004, 2005 and 2007

[501c3 not-for-profit not necessarily qualified]

• Who should NOT file?

Civic and fraternal organizations, such as: American Legions, AmVets, Chambers of Commerce, Elks Clubs, Lions Clubs, Rotary Clubs, Veterans of Foreign Wars, unions and trade organizations

• How to file?

Letter Application for Exemption Identification Number, up to 90 days to process by the Illinois Department of Revenue

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Page 33: Sales and Use Tax Exemptions for Nonprofits

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• Supporting DocumentsArticles of Incorporation, or Constitution if unincorporated

Bylaws

IRS Determination Letter, if applicable

Brief narrative and brochures or other printed material explaining the purposes, functions and activities of the organization

Most recent financial statement (not required for religious organizations)

• Renewal: required every 5 years within 3 months of expiration

• Where to file? Local Government Services Bureau,

Illinois Department of Revenue

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Page 34: Sales and Use Tax Exemptions for Nonprofits

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• AL: Home address &

SSN of officers

• DC: Qualification &

Basic Business

License

• ME: Copy of

Publications

• MD: Must be in MD

or adjacent state

• UT: Tax-exempt

Organizations &

Vendors enter

into a contract

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Page 35: Sales and Use Tax Exemptions for Nonprofits

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• PA: “Anything but” Basic

12-page form & instructions

5 criteria to qualify

43 Questions

Officer compensation

Detailed description

• MD: Must register with SDAT & file annual return

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Page 38: Sales and Use Tax Exemptions for Nonprofits

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SSUTA-CEO: Streamlined Sales and Use

Tax Agreement – Certificate of Exemption

Uniform Sales Tax Certificate

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Page 39: Sales and Use Tax Exemptions for Nonprofits

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Helpful Resources• IRS Links to State Revenue Sites

– http://www.irs.gov/taxpros/article/0,,id=100236,00.html

• Federation of Tax Administrators

– http://www.taxadmin.org/fta/link/default.php?lnk=2

• Multistate Tax Commission

– http://www.mtc.gov/

• Streamlined Sales Tax Governing Board

– http://www.streamlinedsalestax.org/

• The Sales Tax Connection (a top 50 tax blog)

– http://salestax.wordpress.com/

• National Corporate Research

– Forms Library & Filing Guidelines

http://www.nationalcorp.com/ncr/service/show/43

– Corporate Transactions & Compliance Blog

http://nationalcorp.wordpress.com/

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Page 40: Sales and Use Tax Exemptions for Nonprofits

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This presentation is provided for informational purposes only and

should not be relied upon as legal or tax advice. For matters related to

the taxation of specific companies or characterization of nonprofit

status, please seek the advice of competent legal counsel and/or a

CPA professional.

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Page 41: Sales and Use Tax Exemptions for Nonprofits

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