“In this world nothing can be said to be certain, except death and taxes.”
When Benjamin Franklin wrote this sardonic proverb to Jean-Baptiste Leroy in 1789, tax exemptions were likely few – and he certainly wasn’t taking nonprofits or charities into consideration.
The Elusive Sales Tax Exemption for Nonprofit Organizations
Most nonprofits are exempt from federal and state income tax, and they are also frequently exempt from real property tax. But the one tax exemption that even nonprofits sometimes find elusive is sales tax. (For this discussion, we include ‘use tax’ when using the term ’sales tax’.)
With sales tax rates approaching 10% in some jurisdictions that combine state and local sales taxes, it is an important exemption not to overlook. But with the complexity of determining in which states an exemption exists and the lack of uniformity from state to state, some nonprofits do fail to take advantage of these exemptions.
501(c)3 Tax Exemption is Key
In the majority of states that have sales tax – excluding Alaska, Delaware, Montana, New Hampshire and Oregon – the key to earning a sales tax exemption is being designated a charitable, tax-exempt 501(c)3 nonprofit organization under the Internal Revenue Code. (For other types of tax-exempt nonprofits, state sales tax exemption is much less certain and requires a careful reading of each state’s tax code and regulations.)
Recognition by the IRS may be enough in some states to be exempted from state sales tax. Charities in Wyoming just have to provide the state with a copy of the organization’s IRS determination letter in order to receive an exemption approval letter. Illinois simply requires a form or letter of request from nonprofits while other states, like Connecticut and Michigan, require that nonprofits just provide their vendors with a form that claims they are exempt from state sales tax for their purchases. In North Carolina, charities must pay sales taxes but can file semiannually for a refund of sales taxes paid.
In other states, the process for obtaining exemption from state sales tax can vary significantly. Most states that offer sales tax exemptions (about 30) generally require a short application form along with some or all of the following supporting documents:
- IRS Determination Letter and/or IRS Form 1023 or 1024.
- Articles of Incorporation and/or Bylaws.
- Financial Statements and/or Form 990.
A fee is rarely required. This is usually a ‘one-and-done’ type of filing but there are states, such as Maryland, Missouri and Florida, that require renewal filings every year or every 3-5 years.
Sometimes though, 501(c)3 designation is not enough for a charitable nonprofit to be exempt from sales taxes. In Pennsylvania, under Act 55 of 1997, an organization must complete a cumbersome, six-page application and demonstrate that it meets all of the following criteria to qualify for the state sales tax exemption:
- Advance a charitable purpose.
- Operate entirely free from private profit motive.
- Donate or render gratuitously a substantial portion of its services.
- Benefit a substantial and indefinite class of persons who are legitimate subjects of charity.
- Relieve the government of some of its burdens.
Sales tax exemption applications are frequently denied in Pennsylvania for failing to quantifiably prove that an organization meets all of the above requirements.
Additional State Sales Tax Exemption Requirements
On top of filing for exemption, there may be strict procedural requirements to follow in order to actually receive the exemption.
Charitable nonprofit organizations in Washington, D.C., for example, must be physically located in D.C. and file an application to qualify for a sales-tax exemption. Once a Certificate of Exemption is issued, exemptions from sales tax are granted only if the purchases relate to a charitable purpose, are made by a person associated with the tax-exempt organization and paid by that organization. If any of these 3 requirements are not met, then sales tax may be imposed even if an organization has a legitimate sales-tax exemption and the certificate to prove it.
These purchase, purpose and payment requirements are true for nearly all states that offer an exemption from sales tax to nonprofit organizations.
Multi-State Certificate of Exemption (SSUTA-COE)
For most nonprofits, it might only make sense to apply for sales tax exemption in the state they are domiciled or in nearby states where they conduct a lot of business. Larger nonprofits that operate in multiple states and regularly make exempt purchases from the same vendor(s) may find it beneficial to obtain sales-tax exemptions in multiple states. These organizations might want to take advantage of the Streamlined Sales and Use Tax Agreement Certificate of Exemption (SSUTA-COE).
SSUTA-COE was created with the goal of simplifying administration of sales tax collection and reporting, and includes procedures for claiming an exemption from sales tax in multiple states. SSUTA-COE is accepted by vendors in 24 member states, along with a few non-member states. It’s important to note that not all states allow all of the exemptions listed on the form. Purchasers (nonprofits) are still responsible for knowing whether they qualify to claim a sales tax exemption and may be held liable for any tax, interest, and possible civil and criminal penalties imposed by the member state(s) if the nonprofit was not in fact eligible to claim a tax exemption.
While the SSUTA-COE form can be a time saver, it does not relieve nonprofit organizations from obtaining state sales tax exemptions in individual states or performing proper due diligence to determine whether or not the organization qualifies for exemption in the states that accept this form.
Nonprofits Need Not Fear State Sales Tax Exemption
Considering the varying state processes for obtaining sales tax exemption along with specific charitable use requirements, it can be challenging to determine where, when and how a nonprofit organization qualifies for a sales tax exemption. For many organizations, the best option may be consulting with an attorney, tax advisor or knowledgeable service company that can offer assistance in making these determinations.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal or tax advice