sales and use tax exemptions for nonprofits

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Sales and Use Tax Exemptions for Nonprofits

Ron Barrett

February 8, 2012


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Advising nonprofits in:

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• Planning

• Organizational Development

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Today’s Speaker

Ron Barrett Vice President of Nonprofit Services

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Presented by:

Ron Barrett

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• Ben Franklin wasn’t talking about most nonprofits…

• Nonprofits are immortal

• Nonprofits are exempt from taxes

• The elusive tax exemption

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Presenter’s Contact Information

Ron Barrett

VP of Nonprofit Services

National Corporate Research. Ltd.

1100 G Street, NW, Suite 420

Washington, DC 20005

[email protected]

www.nationalcorp.com

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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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• 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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• 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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• Incorporated as a nonprofit organization

• IRS Determination Letter

• 501(c)(3) Status

• Certificate of Exemption

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




http://www.nonprofitlawblog.com/.a/6a00d834558ca469e20148c7cd5bb8970c-pi






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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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(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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The “Show Me” state’s

Form 1746

“Missouri Sales/Use

Tax Exemption

Application







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

Purpose

Purchaser

Proof

» Payment









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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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• Most states and DC exempt religious

organizations

• States require an exemption

application, filing or

certificate









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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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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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• 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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• 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)











Form 1746

Missouri Sales/Use Tax

Exemption Renewal

Application









Form 126E

Missouri Tax Exemption

Change Request







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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


http://www.tax.ny.gov/pdf/2008/fillin/st/st119_2_1108_fill_in.pdf






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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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• 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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• 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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• 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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• 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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Streamlined Sales Tax Governing Board

Multistate Tax Commission









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SSUTA-CEO: Streamlined Sales and Use

Tax Agreement – Certificate of Exemption

Uniform Sales Tax Certificate









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

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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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