Non-Profits and Sales Tax Exemptions on Purchases and Sales

Non-Profits and Sales Tax Exemptions on Purchases and Sales Navigating Variations in how States Award and Administer Exemptions and Apply Nexus Rules

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WEDNESDAY, JUNE 19, 2013

Presenting a live 110-minute teleconference with interactive Q&A

Ron Barrett, Vice President of Nonprofit Services, National Corporate Research, Washington, D.C.

Keith Staats, Director, State and Local Tax Practice, Grant Thornton, Chicago

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Non-Profits and Sales Tax Exemptions on Purchases and Sales Seminar

Keith Staats, Grant Thornton.

[email protected]

June 19, 2013

Ron Barrett, National Corporate Research

[email protected]

Today’s Program

Kinds Of Organizations That Qualify For Sales Tax Exemptions

[Ron Barrett]

Limitations On Qualifying Purchases

[Ron Barrett]

Exemption Certificates, Sales Tax Permits, State Reports

[Ron Barrett]

Application Of A Sales Tax Exemption To A Non-Profit Assignee

[Keith Staats]

When State's Sales Tax Nexus Rules Apply To A Non-Profit

[Keith Staats]

Which Of A Non-Profit's Sales Qualify For Exemption

[Keith Staats]

Slide 8 – Slide 13






Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

KINDS OF ORGANIZATIONS THAT QUALIFY FOR SALES TAX EXEMPTIONS


9

• Ben Franklin wasn’t talking about most nonprofits …

• Nonprofits are immortal.

• Nonprofits are exempt from taxes.

• The elusive tax exemption

10

• How do non-profits obtain sales tax

exemptions?

• What documents are required?

• Do exemptions expire?

• Are there any fees?

• Where are filings required?

• Must you be situated or have a presence in a

state?

• Which states offer sales tax exemptions to

non-profits?

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13

• Incorporated as a nonprofit organization

• IRS determination letter

• 501(c)(3) status

• Certificate of exemption

• Four Ps: Exempt purpose, purchaser, proof, payment



13


http://www.nonprofitlawblog.com/.a/6a00d834558ca469e20148c7cd5bb8970c-pi






LIMITATIONS ON QUALIFYING PURCHASES


15

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.



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Slide Intentionally Left Blank

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The four Ps of point-of-sale perfection … common requirements among disparate laws

Purpose

Purchaser

Proof

» Payment



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Exceptions: The exclusive tax exemption

Legislative (e.g., AL)

Industry-based (e.g., hospitals, universities)

Geographic limitations (e.g., DC and MD)

Tax-exempt status - other 501(c)s

No reciprocity



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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



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EXEMPTION CERTIFICATES, SALES TAX PERMITS, STATE REPORTS


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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



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• Most states and DC exempt religious

organizations

• States require an exemption

application, filing or

certificate



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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?



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29

Procedures vary by type of purchase (e.g., Connecticut)

Goods and services vs. meals and lodging: Point of sale vs. pre-

approval from state

CERT-119: Provided to sellers (with attached exemption permit or determination letter) at point of sale (limit five 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



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• Supporting documents: – Articles of incorporation and/or by-laws

– IRS determination letter and/or IRS forms 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. multi-state (SSUTA-CEO or uniform sales tax certificate)



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• Annual or periodic renewals (FL, MD, MA, MO, PA and SD)

• Due dates

• Status/search: Verify sales tax exemption, certificates and 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)



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Form 1746,

“Missouri Sales/Use Tax

Exemption Renewal

Application”

32









Form 126E,

“Missouri Tax Exemption

Change Request”

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• Who should file? An organization described in NYS tax law

sections 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 a determination letter.


34

http://www.tax.ny.gov/pdf/2008/fillin/st/st119_2_1108_fill_in.pdf






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Requirements (Cont.)

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 sub-units.

Supporting documents required [if not a 501(c)(3)]:

Determination letter

Organizing documents with any amendments

Statement of activities, receipts and expenditures, and assets

and liabilities

• Where to file? NYS Tax Department, Exempt Organizations Unit


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• 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

[501(c)3 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 Revenue Department


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• Supporting documents Articles of incorporation, or Constitution if unincorporated

By-laws

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 five years, with three months of expiration

• Where to file? Local Government Services Bureau,

Illinois Revenue Department


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38

• AL: Home addresses

and SSNs of officers

• DC: Qualification and

basic business

license

• ME: Copy of

publications

• MD: Must be in MD

or adjacent state

• UT: Tax-exempt

organizations and

vendors enter

into a contract



38







39

• PA: “Anything but” basic

12-page form & instructions

Five criteria to qualify

43 questions

Officer compensation

Detailed description

• MD: Must register with SDAT and file annual return



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Streamlined Sales Tax Project governing

board

Multistate Tax Commission



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SSUTA-CEO: Streamlined Sales and Use

Tax Agreement – Certificate of exemption

Uniform sales tax certificate



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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

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http://www.irs.gov/taxpros/article/0,,id=100236,00.html

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APPLICATION OF A SALES TAX EXEMPTION TO A NON-PROFIT ASSIGNEE

Keith Staats, Grant Thornton

© Grant Thornton LLP. All rights reserved. 45

Application Of Sales Tax Exemption

On Purchases Non-Profit’s Assignee

• Exemption for purchases is generally not assignable.

• Exemption for purchases is for the use of the tax-exempt organization.

• Generally limited to the legal entity in possession of the exemption

– For example, hospitals often are structured with multiple legal

entities.

– Exempt not-for-profit hospitals will need multiple exemptions,

– Centralized purchasing vs. need for multiple exemptions for multiple

entities

– State-specific provisions must be reviewed to verify the scope of the

exemption.


Application Of Sales Tax Exemption On

Purchases Non-Profit’s Assignee (Cont.)

• Some states have exceptions to the general rule of non-assignability of

the exemption, in the case of construction contractors.

– Contractors generally are considered the "users" of tangible

personal property purchased.

– Contractors generally owe tax when they purchase tangible

personal property for incorporation into real estate.

– Certain states allow a non-profit’s sales tax-exempt status to “flow

through” to the contractors – e.g., Ohio and Illinois.

– Specific state documentation requirements must be reviewed.


Application Of Sales Tax Exemption On

Purchases Non-Profit’s Assignee (Cont.)

– Issues arise when contractors in states that allow a flow-through of the non-

profit’s exempt status for contractors purchase both construction materials

and items that remain tangible personal property.

– Certain states may not allow a contractor to use the non-profit’s exempt

status to purchase items such as stoves and refrigerators.

• Example: Contractor remodels a kitchen, and purchases and installs a

new stove and refrigerator.

• Certain states will allow the exemption to flow through for construction

materials, but not for appliances.

• Example: Illinois will allow the exemption for construction materials but

will deny the exemption if the stove and refrigerator are invoiced to the

contractor.

• Care should be taken to research specific state requirements and

properly document invoices per state requirements.

WHEN STATE’S SALES TAX NEXUS RULES APPLY TO A NON-PROFIT



When A State’s Sales Tax Nexus

Rules Apply To Non-Profits

• Purchases by non-profits with multi-state locations

• State exemptions for purchases are effective for the issuing state.

– Multi-jurisdictional non-profits may need multiple exemption registration in states that

require registration to claim exemption.

– Example: Non-profit with offices in New York, Florida and Illinois

• Purchases of office supplies and equipment are made in New York from a New

York vendor.

• Supplies and equipment are shipped to Illinois and Florida by the vendor or the

non-profit.

• Illinois and Florida will require an entity to self-assess and pay use tax on

purchases made from out-of-state vendors and used in Florida, absent a state

exemption.

• The non-profit needs separate exemptions in each state (Florida and Illinois) to

avoid paying tax to the states.



When A State’s Sales Tax Nexus Rules Apply To

Non-Profits (Cont.)

• Local taxes

– Cities and counties may have exemption requirements separate from

state requirements.

– Example: An organization with locations in City A and City B makes

purchases invoiced to City A, and the purchased items are used in both

City A and City B. The organization must determine whether City B has

a separately imposed local “use tax” on items acquired outside City B

and, if so, whether it conforms to a state exemption determination of

whether a separate exemption is needed.

– Example 2: City A and County B impose an “amusement” tax on the

price of admissions to public performances, tours, etc. The organization

must review the requirements for exemption for the city and county

taxes, as well as application procedures for exemption for each

jurisdiction.

WHICH OF A NON-PROFIT’S SALES QUALIFY FOR EXEMPTION



Which Of A Non-Profit’s Sales Can

Qualify For A Tax Exemption

• Sales by non-profits

– Sales of tangible personal property are generally taxable when made by a

non-profit.

– Example: A non-profit trade association sells books.

– Non-profit with offices in Illinois, New York and Florida sells books over the

Internet from New York, and also sells T-shirts and hats with the

organization’s logo.

– Normal sales tax nexus rules apply to sales by non-profits.

– In the example, sales into Illinois and Florida are subject to Illinois and

Florida sales tax, because the non-profit has offices in those states.

– Review potentially nexus-creating activities

• Employees or agents in the state

• Participation in seminars



Qualify For A Tax Exemption (Cont.)

• Sales by a non-profit are generally taxable.

• Certain limited sales by non-profits can be tax-exempt if they are for

purposes.

– They must involve fundraising, be

– Limited in scope, and be

– Non-competitive with regular retailers.

• Certain other “sales” by non-profits, such as meals provided to patients

of non-profit hospitals, may qualify as exempt.

• Specific state requirements for the specific type of non-profit entity must

be reviewed.




Florida

• Occasional sales can be made tax-free under the following circumstances:

– Twice or less during any 12-month period, provided the organization is not a

registered dealer

– The organization pays tax on the property purchased exclusively for resale.

– The organization is not making the sales on commercial premises where other

businesses are making similar taxable sales.

– The sale does not involve an aircraft, boat, mobile home, motor vehicle or other

licensed vehicle.

• Sales of Bibles

• Sale of artificial commemorative flowers by a veterans organization

• Sale by a non-profit to organization of prepared meals delivered to the residence of

handicapped, elderly or indigent





Massachusetts

• Fundraising sales by an exempt organization not made in the regular

course of the organization’s business may be tax-exempt if:

– The organization does not make sales in the regular course of

business, and

– Amounts derived from sales are used to further the organization’s

exempt purpose.

• If the tests are met, then the number of casual and isolated sales in a

calendar year is immaterial.




Michigan

• Tangible personal property sold for fundraising purposes is exempt from

tax if

– Sold by an exempt organization, and

– Aggregate retail sales in a calendar year are less than $5,000.

• Affiliates of an exempt entity are not considered separate persons, for

purposes of the $5,000 limitation.

• Hospitals

– Generally, items transferred to patients in the course of treatment are

non-taxable.

– Meals sold to visitors and employees, non-prescription drugs and

medicines sold to patients, doctors and employees are taxable.




California

• No general exemption for sales or purchases by non-profit

organizations

• Sales and donations of charitable organizations that assist the needy

can be exempt, provided certain requirements are met.

• Meals and food products sold by a religious organization at its

gatherings are exempt, provided the sales are for obtaining revenue for

the organization's functioning and the receipts are so used.

• Meals served to the elderly or disabled are exempt.




Illinois

• Occasional dinners, socials or similar activities (no more than two times

per year) even if the activities are open to the public.

• Sales such as infrequent sales of cookies, or calendars by Scout

organizations

• Sales such as sales of Bibles or choir uniforms to church members




• Seminars conducted by non-profits

Example:

– A non-profit conducts in-person seminars in various states.

– Participants in the seminar receive books and DVDs.

– At the seminar site, the non-profit also sells other books and DVDs and materials over the

counter.

– The general rule is that by being physically present in the state, the non-profit has nexus and

must collect tax on the “over-the-counter” sales.

– Conducting seminars can establish sales tax nexus for the non-profit not only for materials sold at

the seminar, but also for Internet and mail order sales made into the state.

– States vary as to whether sales tax is due on seminar materials transferred as part of the

payment for seminar attendance.

– Many states will use a “true object” test.

– Some states, e.g. Illinois because of the impact of the state’s service occupation tax, may have a

different treatment.

62 © Grant Thornton LLP. All rights reserved.

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Non-Profits and Sales Tax Exemptions on Purchases and Sales

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