Non-Profits and Sales Tax Exemptions on Purchases and Sales
Transcript of 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
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Please refer to the instructions emailed to the registrant for the dial-in information.
Attendees can still view the presentation slides online. If you have any questions, please
contact Customer Service at 1-800-926-7926 ext. 10.
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
For this program, attendees must listen to the audio over the telephone.
Tips for Optimal Quality
Sound Quality
Call in on the telephone by dialing 1-866-927-5568 and enter your PIN when
prompted.
If you have any difficulties during the call, press *0 for assistance. You may also
send us a chat or e-mail [email protected] immediately so we can address
the problem.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
Continuing Education Credits
Attendees must stay on the line throughout the program, including the Q & A
session, in order to qualify for full continuing education credits. Strafford is
required to monitor attendance.
Record verification codes presented throughout the seminar. If you have not
printed out the “Official Record of Attendance,” please print it now (see
“Handouts” tab in “Conference Materials” box on left-hand side of your computer
screen). To earn Continuing Education credits, you must write down the
verification codes in the corresponding spaces found on the Official Record of
Attendance form.
Please refer to the instructions emailed to the registrant for additional
information. If you have any questions, please contact Customer Service
at 1-800-926-7926 ext. 10.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the + sign next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides and the Official Record of Attendance for today's program.
• Double-click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
Non-Profits and Sales Tax Exemptions on Purchases and Sales Seminar
Keith Staats, Grant Thornton.
June 19, 2013
Ron Barrett, National Corporate Research
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
Slide 48 – Slide 51
Slide 52 – Slide 62
Slide 14 – Slide 19
Slide 20 – Slide 43
Slide 44 – Slide 47
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
Ron Barrett, National Corporate Research
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?
www.nationalcorp.com
Connect with us: Subscribe to our:
10
Connect with us: Subscribe to our: www.nationalcorp.com
11
12
www.nationalcorp.com
Connect with us: Subscribe to our:
12
13
• Incorporated as a nonprofit organization
• IRS determination letter
• 501(c)(3) status
• Certificate of exemption
• Four Ps: Exempt purpose, purchaser, proof, payment
www.nationalcorp.com
Connect with us: Subscribe to our:
13
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.
www.nationalcorp.com
Connect with us: Subscribe to our:
15
17
The four Ps of point-of-sale perfection … common requirements among disparate laws
Purpose
Purchaser
Proof
» Payment
www.nationalcorp.com
Connect with us: Subscribe to our:
17
18
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
www.nationalcorp.com
Connect with us: Subscribe to our:
18
19
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
www.nationalcorp.com
Connect with us: Subscribe to our:
19
21 www.nationalcorp.com Connect with us: Subscribe to our:
The “Show Me” state’s
Form 1746,
“Missouri Sales/Use
Tax Exemption
Application”
21
22 www.nationalcorp.com Connect with us: Subscribe to our:
22
23
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
www.nationalcorp.com
Connect with us: Subscribe to our:
23
24
• Most states and DC exempt religious
organizations
• States require an exemption
application, filing or
certificate
www.nationalcorp.com
Connect with us: Subscribe to our:
24
25
www.nationalcorp.com
Connect with us: Subscribe to our:
25
26
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?
www.nationalcorp.com
Connect with us: Subscribe to our:
26
www.nationalcorp.com Connect with us: Subscribe to our:
27
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
www.nationalcorp.com
Connect with us: Subscribe to our:
29
30
• 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)
www.nationalcorp.com
Connect with us: Subscribe to our:
30
31
• 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)
www.nationalcorp.com
Connect with us: Subscribe to our:
31
32 www.nationalcorp.com Connect with us: Subscribe to our:
The “Show Me” state’s
Form 1746,
“Missouri Sales/Use Tax
Exemption Renewal
Application”
32
33 www.nationalcorp.com Connect with us: Subscribe to our:
The “Show Me” state’s
Form 126E,
“Missouri Tax Exemption
Change Request”
33
34
• 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.
Connect with us: Subscribe to our:
34
35
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
Connect with us: Subscribe to our:
35
36
• 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
Connect with us: Subscribe to our:
36
37
• 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
Connect with us: Subscribe to our:
37
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
www.nationalcorp.com
Connect with us: Subscribe to our:
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
www.nationalcorp.com
Connect with us: Subscribe to our:
39
40
www.nationalcorp.com
Connect with us: Subscribe to our:
40
41
Streamlined Sales Tax Project governing
board
Multistate Tax Commission
www.nationalcorp.com
Connect with us: Subscribe to our:
41
42
SSUTA-CEO: Streamlined Sales and Use
Tax Agreement – Certificate of exemption
Uniform sales tax certificate
www.nationalcorp.com
Connect with us: Subscribe to our:
42
43
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
http://nationalcorp.wordpress.com/
Connect with us: www.nationalcorp.com Subscribe to our:
43
© 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.
© Grant Thornton LLP. All rights reserved. 46
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.
© Grant Thornton LLP. All rights reserved. 47
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.
© Grant Thornton LLP. All rights reserved. 49
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.
© Grant Thornton LLP. All rights reserved. 51
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.
© Grant Thornton LLP. All rights reserved. 53
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
© Grant Thornton LLP. All rights reserved. 54
Which Of A Non-Profit’s Sales Can
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.
© Grant Thornton LLP. All rights reserved. 55
Which Of A Non-Profit’s Sales Can
Qualify For A Tax Exemption (Cont.)
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
© Grant Thornton LLP. All rights reserved. 57
Which Of A Non-Profit’s Sales Can
Qualify For A Tax Exemption (Cont.)
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.
© Grant Thornton LLP. All rights reserved. 58
Which Of A Non-Profit’s Sales Can
Qualify For A Tax Exemption (Cont.)
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.
© Grant Thornton LLP. All rights reserved. 59
Which Of A Non-Profit’s Sales Can
Qualify For A Tax Exemption (Cont.)
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.
© Grant Thornton LLP. All rights reserved. 60
Which Of A Non-Profit’s Sales Can
Qualify For A Tax Exemption (Cont.)
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
© Grant Thornton LLP. All rights reserved. 61
Which Of A Non-Profit’s Sales Can
Qualify For A Tax Exemption (Cont.)
• 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.
Disclaimer
This document supports Grant Thornton LLP’s marketing of
professional services, and is not written tax advice directed at the
particular facts and circumstances of any person. If you are interested
in the subject of this document we encourage you to contact us or an
independent tax advisor to discuss the potential application to your
particular situation. Nothing herein shall be construed as imposing a
limitation on any person from disclosing the tax treatment or tax
structure of any matter addressed herein. To the extent this document
may be considered to contain written tax advice, any written advice
contained in, forwarded with, or attached to this document is not
intended by Grant Thornton LLP to be used, and cannot be used, by
any person for the purpose of avoiding penalties that may be imposed
under the Internal Revenue Code.