501 (c) (3) and Me – Are All Non-Profit Purchases Exempt?
Customers who have 501 (c) (3) status automatically receive exemption from sales tax, correct? Not always. States differ in their treatment of purchases by government, non-profits and religious organizations. Where the states do allow them, most require that purchases must be for exclusive use by the exempt entity and paid for with funds from the entity. That sounds reasonable. However, if an employee or volunteer for the entity pays for the purchase with personal funds, then the transaction would be taxable.
Some states will pass through the exemption status from the application for 501 (c) (3) to the Department of Revenue (DOR). Others require that the customer apply to the DOR for the qualification. In some cases, the state will assign an exemption number (such as New York (NY), where they require a special form that includes the state issued exemption number), where others will issue a letter or certificate that must be provided to the vendor (as in Florida (FL), where they issue a form DR-14 which must be used by the customer to prove and document their exemption status for the transaction).
What This Means to Your Business
As a business owner, it rests upon you to know what documentation you require from your customer for each state. It is also important for you to be able to identify what items are tax-exempt and what is not.
Appropriate documentation is critical to proving you were not required to collect and remit sales tax on a transaction. If NY wants a generic certificate that includes the exemption number, you must provide it. If FL expects you to deliver a copy of their letter or form DR-14, then you must provide it. It helps your customer if you are knowledgeable enough to guide them to provide the correct information and it protects you from collecting invalid certificates.
The Federal Government is Exempt
Purchases by the federal government are tax exempt in every state. But what you might not know is every state has different documentation requirements. A purchase order may be adequate in one state, but another will require you to produce the exemption certificate to validate the purchase was from a federal government entity.
Although most people assume government purchases are exempt, that does not mean that state sales tax is not required for state or local government purchases. Minnesota, South Carolina, Washington, California, Arizona and Hawaii all charge sales tax on state and local government purchases.
In the confusing world of non-taxed transaction compliance, there is hope! Join our Webinar “Take the headache out of exemption certificate management” on July 26, 2011 and learn how easily your company can maintain non-taxed transaction compliance.