Sales and Use Tax Exemptions for Nonprofits

Sales and Use Tax Exemptions for Nonprofits

Ron Barrett

February 8, 2012

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Today’s Speaker

Ron Barrett
Vice President of Nonprofit Services
National Corporate Research, Ltd.

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Presented by:
Ron Barrett
5

• Ben Franklin wasn’t
talking about most
nonprofits…

• Nonprofits are immortal

• Nonprofits are exempt
from taxes

• The elusive tax
exemption
6

Presenter’s Contact Information
Ron Barrett
VP of Nonprofit Services
National Corporate Research. Ltd.
1100 G Street, NW, Suite 420
Washington, DC 20005
rbarrett@nationalcorp.com
www.nationalcorp.com
linkedin.com/pub/ronald-barrett/a/680/b00

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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


• 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


• 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


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


(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


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


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

 Purpose
 Purchaser
 Proof

» Payment


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


• Most states and DC exempt religious
organizations
• States require an exemption
application, filing or
certificate


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?


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


• 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)


• 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


• 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


 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


• 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

• Supporting Documents
 Articles 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


• AL: Home address & • ME: Copy of
SSN of officers Publications
• DC: Qualification & • MD: Must be in MD
Basic Business or adjacent state
License • UT: Tax-exempt
Organizations &
Vendors enter
into a contract

• 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


 Streamlined Sales Tax Governing Board

 Multistate Tax Commission


 SSUTA-CEO: Streamlined Sales and Use
Tax Agreement – Certificate of Exemption

 Uniform Sales Tax Certificate


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/


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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Sales and Use Tax Exemptions for Nonprofits

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