Thursday, November 30, 2006

We're a Non-Profit!

Big deal! So what?

I’m being rude and crude to point out that just because the IRS says you’re a non-profit organization (or not-for-profit, if you'd prefer) may mean absolutely nothing for sales tax and/or use tax purposes.

I’d estimate that close to one third of the states do not provide a broad exemption from sales and use tax for purchases made by non-profit organizations. And even if you are exempt in your state, that exemption means nothing in other states, where you might be doing a trade show, providing services, have an office, etc.

For example, let's say you're a non-profit organization in Nashville and you're registered with the state of Tennessee and have your number, certificate, etc. If you happen to be in Huntsville for a meeting and need a replacement laptop, the Huntsville OfficeMax is going to laugh at you when you try to use your Tennessee exemption in Alabama. OK, they may not laugh at you, but if they're paying attention, they're going to push the form back at you and apologize. Because that Tennessee exemption doesn't work in Alabama.

States that do provide a broad exemption often have their own criteria and don’t just default to the IRS rules. So you might be a 501(c)(3) located in Illinois, for example, but still not qualify to be exempt from SUT in Illinois.

Some states are very specific about who is exempt on their purchases. For example, Louisiana has few exemptions. But if you operate a free hospital, you can buy tax-free. However, it has to be a free hospital. If you're the average hospital in Louisiana, even a non-profit, you have to pay sales tax and/or use tax on your purchases.

Even if your purchases are exempt, states generally require non-profits to collect tax on their sales, just like regular businesses. There are exceptions for fund-raising events (often under occasional sales rules) and some admissions charges, but they vary dramatically from state to state. So if your organization sells stuff, particularly on a regular basis, you should assume you have to collect tax.

And you also have to worry about the nexus you may have in other states, just like regular businesses.

In other words, this entire topic of sales and use taxes may apply to you! Your purchases might be exempt, but your sales are likely to be taxable. It all depends on what states you operate in, and how and what you sell.

Oh, and vendors. If you sell to non-profits and have been assuming they're exempt all this time, you may be in for a rude shock when you get audited.

Sales Tax Guy

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Anonymous said...

Hi Jim,

Regarding sales tax for a political subdivision of the commonwealth....we purchased wire from an electric company and we didn't pay the sales tax that was on the bill because we are sales tax exempt. They have just written us asking us to pay the sales tax because of sales and use tax law and act 45. We are located in PA. I'm having trouble finding info on this. Do you have thoughts on this matter?


Sales Tax Guy said...

I'd suggest you ask them to show you the law that says you have to pay the tax. I'm pretty sure in PA, subdivisions aren't generally taxable on their purchases.