What this is: 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.
What this means: 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.
“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
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.
Would you like to read more about building a foundation for your mission? Start with our Nonprofit Services Resource Center.
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 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, Virginia and Florida, that require renewal filings every 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, 6-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 DC, for example, must be physically located in DC 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.
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We are a non-profit and have a Florida Sales Tax Exemption. What if we book a hotel in another state? Can we get the sales tax exempted?
Sales tax exemptions are state specific, so any potential sales tax exemption would be determined by the statutes of the state where the hotel is located. In most states you’d need to apply for a sales tax exemption, but the requirements do vary by state, and not all states exempt hotel accommodations (i.e. there might be a sales tax exemption available for other types of purchases). I can offer more details if you can provide the state(s) where you will be traveling, and also the type of organization you are (501c3 or other type, and the associated industry…e.g. educational, healthcare, religious, etc. – the more specific the better).
We also have a tax-exempt certificate in Florida. We are a 501c3 organization that would fall under charitable, health, and education, and we do have the letter from the IRS. We have a yearly convention in other states, and we purchase supplies and literature in other states. Thus far some states have accepted our tax exempt certificate from Florida or our 501c3 letter. Can we get a Multi-State Certificate of Exemption (SSUTA-COE) that would cover these needs? This year our convention is in Maryland. Thank you in advance for your advice.
Donna, Thanks, your questions are very relevant. You are correct, a few states will accept just the IRS Determination Letter (e.g. Tennessee will accept it from nonprofits not incorporated in the state) to obtain a sales tax exemption. However, most states have specific forms that must be filed with the state or provided to vendors, and sales-tax exemption procedures or filing requirements vary by state. Also, individuals at the point-of-sale might accept the IRS Determination Letter, even when other evidence is required, but this is usually done without a full understanding of the actual state requirements. Frequently, there is confusion about what is required at the point-of-sale which, unfortunately, can lead to rejections of otherwise legitimate tax-exempt transactions. As for the Multi-State Certificate of Exemption (SSUTA-COE), you can use this form in many states, but it does not relieve an organization from also meeting each state’s specific requirements for a sales tax exemption (i.e. a state form or process must still be completed). With regard to Maryland, first-time filers must complete a SUTEC Application. Note that a sales tax exemption is only available for nonprofits [(501(c)(3), 501(c)(4) or 501(c)(19)] in MD, DE, PA, VA, DC or WV. That is, to qualify for a Maryland exemption certificate, an out-of-state nonprofit organization must have a location in Maryland or be located in an adjacent jurisdiction (Washington, D.C, Virginia, West Virginia, Pennsylvania, or Delaware) and satisfy one of the following conditions: the organization provides its services in Maryland on a routine and regular basis; the adjacent jurisdiction does not impose a sales or use tax on a sale to a nonprofit organization made to carry on its work; or the adjacent jurisdiction has a reciprocal exemption from sales and use tax for sales to nonprofits located in adjacent jurisdictions similar to Maryland’s exemption. COGENCY GLOBAL can prepare and file the Maryland SUTEC Application for you and can file for sales tax exemptions in all other states where a nonprofit qualifies for an exemption. Let me know if we can assist you. Please note that the information provided here is not to be taken as legal or tax advice. To ensure compliance with each state’s requirements, consultation with legal or tax professionals is recommended.
If a 501c3 non-profit organization is managed by a for-profit organization, would they still be exempt from paying sales tax on purchases that fulfill their original mission? Does it depend on which organization is actually writing the check to pay the bill?
Hi Rachael, If the nonprofit has or qualifies for a sales tax exemption in its home state or other states (application for exemption is required), then the sales tax exemption is available, if the following requirements are met: 1. purchaser must be the nonprofit 2. payment (e.g. check, credit card) must be from the nonprofit’s accounts 3. purpose of the purchase must be related to the nonprofit’s mission Please note that this information is not to be taken as legal or tax advice. For legal or tax advice, seek the input of qualified legal counsel or a tax professional.
We are a nonprofit 501(c)3 organization that holds yearly conferences providing education for it’s members. In the past, we have paid sales tax on prepared meals at the hotel, and rotate through different states in the country. We are looking for states where we can get exemption from this sales tax… does sales tax on prepared meals typically fall under this exemption umbrella (understanding we need to apply for exemption)? Thank you in advance!
We are a nonprofit 501(c)3 organization that holds yearly conferences providing education for it’s members. In the past, we have paid sales tax on prepared meals at the hotel, and rotate through different states in the country. We are looking for states where we can get exemption from this sales tax… does sales tax on prepared meals typically fall under this exemption umbrella (understanding we need to apply for exemption)? Thank you in advance!
Hi Sara, Unfortunately, there is no easy answer, as each state has different requirements for exemptions and not all states offer a sales tax exemption to nonprofits. In addition, in the states that do offer a sales tax exemption, not all of them are applicable to prepared meals (i.e. it’s sometimes an exception to the exemption – for example Vermont). In most states, the key to a possible sales tax exemption is being a 501c3 tax-exempt organization, so you have that in your favor. Yet, even as a charitable organization, a sales tax exemption is not available in more than half of the U.S. states, and of those that do there are requirements that may exclude your organization from an exemption (e.g. in DC, your organization must have a physical presence to qualify for a sales tax exemption). Rather than researching all states, a better approach would be to narrow your list to a handful of states, where you’d like to hold an event, and then research those states or hire a company like COGENCY GLOBAL to do the research for you. Doing this every six to twelve months, would be an easy solution for this challenging task.
Thank you so much for the information, Ron. It is very helpful! What would be the best way to obtain a quote from COGENCY GLOBAL to gather this information (to research, say, 3 different states for conference possibilities)? Thanks again!
We are a 501(c)(3) tax-exempt organization that trains and educates re abuse. We occasionally obtain a fee for abuse training and the tools and resources we provide to equip trainees as a part of the training course. We train individuals and organizations across the country, but are new to training outside of CA. Are we required to charge and pay taxes to organizations we train, such as Illinois?
Thanks for thinking of COGENCY GLOBAL, but unfortunately we are not able to assist with most tax related filings, especially if it’s related to monthly or quarterly reporting and remitting of taxes due. We do however offer sales tax exemption filing and renewal services for nonprofits in need of an exemption when making purchases, if that’s needed in the future. We also provide charitable solicitation registration and renewal services, if that’s of interest to you.
Colorado states on the SOS website that they except foreign tax exempt certs. Our NPO is located in New Mexico, where our exemption is not allowed for building materials, so we purchase the materials for our tiny home program in Colorado.
Does a non-profit organization have to be a 501c3 corporation in order to be tax exempt from sales tax in the state of Florida – for purchases either to be given away or resold – or to be exempt from collecting sales tax when reselling items that are purchased – when all proceeds go towards fulfilling the mission or purpose of the non-profit?
Thank you for getting in touch with us. We will reach out to you shortly.
If the mission is to provide care bags…items that are donated to a person undergoing cancer treatment. Can the items purchased for the bag be tax-exempt?
The answer depends on a variety of factors, including the type of organization purchasing the items, state(s) where the items are purchased, who pays for the items, etc. If the organization purchasing the items is a tax-exempt, 501(c)(3) organization, and either has a sales tax exemption certificate or follows the specific state requirements for a sales tax exemption in the state(s) where the items are purchased, then a sales tax exemption is likely applicable. However, not all states exempt sales tax for nonprofit, charitable organizations, so it would depend on the state where the items for the care bags are purchased.
We are a 501(c)3 in Maryland incorporated to organize and manage a youth hockey team. Is the 501(c)3 exempt from Maryland sale tax if… 1) The 501(c)3 purchases generic hockey jerseys that are loaned to players throughout the season and then returned to the 501(c)3 at the end of the season. In this case, the 501(c)3 bought and continues to own the jerseys. 2) The 501(c)3 purchases hockey jerseys with the names of each player on the player’s jersey. The jerseys are then given to each player to keep as personal property. In this case, the 501(c)3 bought and transfers ownership to the player. 3) The 501(c)3 purchases generic hockey jerseys that are loaned to players throughout the season and then are available to be purchased by players from the 501(c)3 at the end of the season. In this case, the 501(c)3 bought and continues to own the jerseys throughout the season, but if a player wanted to buy the jersey at the end of the season from the 501(c)3, he/she is allowed to do so. 4) The 501(c)3 has a banquet for the players and families. Is food purchased for the banquet exempt from sales tax? 5) If the Maryland-based team that the 501(c)3 manages travels within Maryland to play other teams and stays at a hotel, are the hotel costs for the players and coaches exempt from sales tax? 6) If the Maryland-based team that 501(c)3 manages travels to Pennsylvania to play other teams and stays at a hotel in PA, are the hotel costs for the players and coaches exempt from sales tax? Also, a question if it is appropriate here, if the 501(c)3 pays the coach of the team a stipend, is the coach considered a volunteer or a 1099 contractor? Thank you!
We are a 501c3 &exempt from all property, sales & use tax. We recently installed new playground equipment & the company installing it says we are liable for the sales tax on the construction/installation even though we did not have to pay sales tax on the equipment. Is this true?
Thank you for getting in touch with us. We will reach out to you shortly.
Thank you for getting in touch with us. We will reach out to you shortly.
Enjoyed reading through other questions and answers. We are a very small nonprofit and tax exempt in Nebraska. When we purchase tshirts, rent motel for conference, etc. and don’t pay sales tax, but then our members pay us for their rooms and t-shirt, meals etc do we need to charge them sales tax. ( I know it says we need to pay sales tax on meals) The more we try to figure this out the more confused we become. Accountant or Tax Lawyer cost too much for our small organization.
Hello, Charlotte. Thanks for writing in. We will have someone from the nonprofit team respond shortly.