As more states determine sales tax liability via economic nexus, nonprofit organizations may be subject to new tax burdens and compliance responsibilities.
Nonprofits need not worry about the U.S. Supreme Court case decision on South Dakota v. Wayfair, right?
While it’s true that nonprofit organizations frequently enjoy the enviable benefit of tax exemption at federal, state and even local levels, nonprofits are not always exempt from paying taxes – contrary to popular perceptions.
In some states, for example, nonprofits are required to pay sales tax when making taxable purchases of goods or services in support of their mission. Though several states will, upon application and receipt of a state-issued sales tax exemption certificate, exempt nonprofits from paying sales tax when making purchases, nonprofits usually do not qualify for tax exemption for the sale of taxable goods or services.
Sales Tax on Nonprofit Goods and Services
According to The NonProfit Times, “a record of nearly $102 million was generated via auction and direct sales by nonprofits during 2018 through eBay for charity,” up 20 percent from the $84 million raised in 2017. Undoubtedly some of these sales, especially after the Wayfair decision, are subject to sales tax.
While limited tax exemptions still exist (usually related to fundraising activities), nonprofits – just like their for-profit counterparts – must often collect and remit state and local sales taxes on the sale of goods or services, including items sold via auction.
Truth is, the number of nonprofit sales that are tax-exempt have been dwindling over time. In Kentucky, for example, nonprofits are required (as of July 2018) to collect and remit sales tax to the Kentucky Department of Revenue on ‘admissions’. This includes tickets to charitable fundraising events, gym membership fees, facility rental fees and entry fees for charity tournaments. Foreign nonprofits, those formed outside of Kentucky, are also required to collect and remit sales tax on items sold at any Kentucky-based events and charitable auctions.
As this trend continues, it is important for nonprofits selling products or services online to understand where and when they need to collect and remit sales taxes. And following the Wayfair decision, physical presence in a state is no longer the sole determinant obligating sellers to impose sales taxes.
From Physical Nexus to Economic Nexis
Prior to South Dakota v. Wayfair, ‘physical nexus’ or presence in a state was the determining factor in whether an entity’s sales warranted tax collection and remittance. The Wayfair decision focuses instead on an online seller’s ‘economic nexus’ for sales tax liability. This means that nonprofits selling goods or services via the internet would have to collect and remit sales taxes when they exceed applicable state monetary and transactional sales thresholds (e.g. sales of $100,000 or 200 transactions in South Dakota).
This not only applies to sales made by a nonprofit locally or through an online store but also, potentially, to conference and event admissions, sales of goods at conferences and events, auctions, downloadable products, journal subscriptions and reports. In other words, this applies to anything contributing to an ‘economic nexus’ in a given state.
South Dakota’s primary intent for bringing the lawsuit was to enforce the collection of taxes on sales by large remote sellers. However, South Dakota’s 200 transactions (now a popular threshold for sales tax registration) can easily be reached, even by small for-profit and nonprofit remote sellers. This unintended consequence has those entities seeking relief from the U.S. Congress, and with some success. State legislators and regulators are now proposing new laws to provide relief for nonprofits, at least, through additional sales tax exemptions.
Brian Greer, TaxConnex
The unintended impacts of Wayfair extend beyond financial considerations. Per Part 2 of this three-part series on the Wayfair case, several states require corporate qualification as a prerequisite to registering for a sales tax account, used for collecting and remitting sales tax. Nonprofits selling online goods and services in those states may now be subject to corporate qualification filing requirements as part of their sales tax obligations. It’s not too far of a stretch to predict that more states will be determining sales tax liability by economic nexus, which would continue to increase filing and compliance burdens.
It’s too early to speculate heavily on these efforts but, given the onerous task of complying with the sales tax collection and remittance requirements for potentially hundreds of tax authorities at city, county and state levels, several changes can be expected at both the state and federal level, should federal lawmakers make this a priority.
In the meantime, there are steps a nonprofit can take to mitigate these unintended consequences.
Take Full Advantage of Sales Tax Exemptions
Now that online purchases will be more frequently subject to sales tax, it is more important than ever for nonprofits to take full advantage of their tax-exempt status when it comes to purchasing goods and services in the states that provide a sales tax exemption.
To this end, nonprofits should review the remote vendors and suppliers they do business with and determine which sellers might now be charging sales tax. Location of meetings and conferences that an organization may be hosting or attending should also be evaluated for possible sales tax exemption opportunities. Organizations should be cognizant of what levels of spend warrant a state sales tax exemption filing.
Keep in mind that as more online retailers may be required to collect and remit sales tax, you will need to provide copies of your sales tax exemption certificates. Don’t expect them to ask for these in advance, be proactive in providing this proof of exemption.
Nonprofit Sales Tax Liability, Post Wayfair
Regarding the sale of goods and services by a nonprofit, Katherine Gauntt, tax guru at BDO US, provides detailed guidance on creating an action plan to determine sales tax nexus:
1. Where are the tangible goods, digital products and services sold?
2. Do the sales reach the threshold for economic nexus?
3. If yes, what are the necessary actions needed for complying? Including:
Registration– Nonprofits should register as a vendor in each tax jurisdiction.
Taxability of Products Sold– A determination of the tax status of each product sold should be made.
Exemption Certificate Procedures– If products are sold to other nonprofits, a process to collect exemption certificates should be established.
Billing Sales Tax– A process must be established to charge the correct sales tax on an invoice. To do so, the nonprofit must utilize the most current sales tax rates to charge its customers.
Reporting– Depending on volumes, sales tax reporting can be in-house or outsourced through third parties. Most states have portals where tax returns can be filed by keying in the data manually if the nonprofit has established economic nexus in only a few states.
4. In addition, nonprofits should consider their internal operational capabilities:
Accounting– Do you have Sales Tax Liability Accounts set up that can undergo reconciliation and audits?
Technology– Do you have the functionality in your billing system to charge the correct tax on taxable sales?
Resources– Do you have enough resources in-house to administer exemption certificates and tax reporting?
Document Retention– Most states require retention of all invoices, work papers, tax returns and other supporting documentation to support the taxes reported.
Wider Tax Nexus, Increased Compliance Requirements
The Wayfair decision now creates a much wider sales-tax nexus for online retailers, including nonprofits who sell goods and services, regardless of prior physical nexus requirements. As more vendors start charging sales tax on online purchases, nonprofits should explore opportunities to take advantage of available state sales tax exemptions for purchases, especially in states where vendors were not charging sales tax prior to Wayfair.
In addition to filing for sales tax exemptions, nonprofits selling goods and services may now require corporate qualification and registered agent services in more states, as authority to conduct business in a state is a prerequisite in some states to registering for a sales-tax account.
COGENCY GLOBAL can assist with some of these required filings, but a detailed analysis to establish where sales tax nexuses exist for nonprofits with sales in multiple states should be done by a reputable sales tax service.
Catch up on our previous Wayfair discussions:
This article is provided for informational purposes only and should not be considered, or relied upon, as legal or tax advice.