The Changing Tide: Is Your Nonprofit Exempt from Sales Tax?

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Efforts by the states to thoroughly exhaust all possible resources for potential sales tax revenue have begun to invade nonprofit space.  States are are tightening the definition of what and who qualify for exemptions.

A Washington State church recently found out the negative implications of being unaware of such changes. In 1997 Cascade Christian Center of Skagit Valley, a 509(c)(3) church, built Jungle Playland, a family entertainment center.  Proceeds from the center support the churches many programs to help the community.  However, new regulations passed in 1999 determined that money from Jungle Playland was considered by the state to be a money-raising business falling under the category of retailing – therefore subject to collecting and remitting sales tax.  The church was unaware of the changes and in 2008 underwent an audit which revealed that they owed $180,000 in sales tax.  Even though the state agreed to accept a lower amount of $58,000, it is still beyond the means of the church.  Unfortunately this also means that there is a negative impact on their ability to support their efforts to help the community.

The laws around 501(c)(3) nonprofits are just as complex as for profit businesses and also vary just as greatly from state to state.  Those laws and regulations are subject to change with the ever increasing needs of the states to bring in more revenue to attempt to cover their debts (which include services such as keeping more teachers in the classroom, more police officers on the streets just to name a few).

North Carolina, for example, takes a different approach with nonprofits – they offer NO upfront exemptions.  Instead, those organizations can apply to the Department of Revenue (DOR) to get reimbursed twice a year.  In recent years the DOR started to deny more and more reimbursements stating that they were more “civic” in nature than “charitable”.  To make things more complex – there really were no defining rules about what is civic vs. charitable.  Many organizations in North Carolina were finding out that just because they were exempt from state income tax and franchise tax did not necessarily mean they were “exempt” from sales and use tax where the term “charitable” was more narrowly (but not clearly) defined.

After a lawsuit was filed by North Carolina nonprofit Lynnwood Foundation for being denied reimbursement, subsequent attempts have been made to clarify the laws, but for many reasons this proves to be difficult.  The state has come to at least a temporary compromise to arbitrarily tie the determination of sales tax exemption to IRS National Taxonomy of Exempt Entities (NTEE) codes to help minimize the number of 501(c)(3) organizations that get denied reimbursement – but it also means that many of those organizations will still be required to collect and remit sales tax.  Since the NTEE codes are subject to change, so are the regulations around which organizations or certain activities within those organizations are exempt.  Again, making it more difficult for nonprofits to continually ensure that they are compliant with the sales and use tax regulations.

To cite yet another example, similar to North Carolina, California does not have a broad sales tax exemption for those organizations that are exempt from federal and state income tax.  Instead there is a complex set of rules, as there are with many states, around specific activities and/or specific types of products/services sold.

No matter what state your nonprofit resides in, it is important to know that the rules around “seemingly” exempt companies are becoming more complex and narrow when pertaining to sales tax and use tax.  A negative audit is detrimental to anyone, but can be even more so to nonprofit organizations who provide us with such valuable services.

Don’t let sales tax law changes affect your business negatively—To learn more about sales tax compliance and reducing audit risk, join our webinar “Sales Tax Audits Can Be Devastating! Are You at Risk?” on Wednesday, September 14th, at 10am PDT / 1pm EDT:

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