Is Your Nonprofit Really Tax Exempt?

by Jeff Dorris, CPA

With more than 1.5 million nonprofit organizations registered in the U.S., the nonprofit sector is a major contributor to state economies. However, state tax law does not always offer the same exemption status awarded by the Internal Revenue Service (IRS). Many state taxes still apply to the activities and functions of your nonprofit. The lack of guidance in state statutes oftentimes groups many nonprofits in the same boat as their for-profit counterparts.

Unrelated Business Income
Aleisa Howell recently wrote a great article addressing What Your Nonprofit Needs to Know About UBIT. It discussed fundamental concepts of UBI and how these activities generate revenue in ways that are not substantially related to the performance of the organization and its exempt function or purpose. These same types of UBI can have substantial impacts on your nonprofit from a state tax perspective as well.

It is important to understand the various ways that your organization generates revenue. Basic questions to answer are: How do I generate revenue? Who are my customers? What am I selling? Is this a retail sale? These answers will impact whether or not your organization has obligations to the state(s) that you operate in.

The most likely obligation that your organization may have is whether or not to collect sales tax on sales made to others. Sales tax is a transactional tax that is owed by the end consumer of a taxable good or service. In most cases, your nonprofit would not be considered the end consumer of the goods and services sold and therefore, any exemption would not be applicable. A state will hold you responsible for collecting and remitting the sales tax if you make taxable sales.

Common Taxable Nonprofit Unrelated Business Income
The nonprofit designation encompasses a broad range of industries, including philanthropy, healthcare, education, &, etc. Below is a list of common activities where sales tax collection may be required:

Food Sales/Cafeterias
Gift Shops/Apparel
Thrift Stores/Coffee Shops
Admissions/Entrance Fees

The above is far from an all-inclusive list, but it sheds light on the types of activity that could require sales tax collection. If your organization makes taxable sales, then your state will hold you responsible for collecting and remitting sales tax. If you fail to collect the sales tax, then your organization will be liable for the uncollected tax.

Key Considerations and Takeaways
It is important to be aware of your organization’s activities and understand that your exempt designation may not apply to state-level taxes. You may be required to pay state taxes and also collect those taxes depending on your specific situation. Sales tax collection is an area that is commonly overlooked and can become costly in an unfavorable audit.

The mechanics of how to collect and remit sales and use tax is different for each state. Many states have some version of an online portal where you can file and remit the tax. However, those portals lack guidance for your questions. In many cases, you will be the one making the decision of what sales are taxable, how much tax to collect, and how to file.

The good news is that sales tax does not need to be the scary adversary that it once was. There are software and ERP solutions that can make life easier. Another alternative is to reach out to the State and Local Tax experts at Mauldin & Jenkins. We continue to help nonprofits analyze, collect, and file their sales tax returns every month and we can help you too. Mauldin & Jenkins has a separate division, Sales Tax Simplified (StaxS) that is solely focused on sales tax filings for our clients. Regardless of how you choose to handle your obligations, the key is that you are aware of them and that you have a process in place so that you don’t have future risks of noncompliance.