7/27/2019 Non Profits and Sales Tax

1/3

7/27/2019 Non Profits and Sales Tax

2/3

2. QUESTION: How do nonprofts provetheyre tax-exempt?

ANSWER: By providing exemption certif-cates and other documentation.

To substantiate tax-exempt status, a nonproft mustpresent a business with a valid, timely, and accuratecertifcate o sales tax exemption or each applicablejurisdiction. The burden o keeping records o exemptioncertifcates also lies with the seller. Common exemp-tion certifcate activities include certifcate verifcation,storage, associating transaction with certifcate, andmanaging expiration and renewal notifcations.

Whether or not nonprofts have to pay sales tax on

taxable purchases depends on the state and local taxrules that apply to that transaction. The research todetermine whether or not sales tax is due lies with thenonproft. Even though the ederal government awardsederal tax-exempt status, a state can require addition-al documentation to honor it. For example, in Illinoiscompanies who qualiy as exempt according to the IRScannot assume that their exemption qualifes them orexemption rom sales tax at the state level. In the stateo Illinois, organizations must obtain an exemptionidentifcation number (an E number) to qualiy or astate sales tax exemption.

Sales Tax Exemption Certifcate ValidityChecklist:

Each item needs to be flled in and not let blank

P Seller name / address (make sure the name listed

on the certifcate matches the name on the customer

account).

P Buyer name/address.

P Current date.

P State o exemption.

P Sales tax registration number.P Type o exemption claimed.

P Type o property purchased.

P Type o nonproft.

P Customer signature (some states require an authorized

signature, either a board member or executive director).

POnly state-approved exemption certifcate orms are

permitted.

Nonprofts & sales tax (An Avalara Q&A*)

P Nonprofts must pay or purchases using only organi-

zation or government unds.

EXAMPLE:

In Florida, all entities, except ederal agencies, wishing toqualiy or sales tax exemptions to complete an Applica-tion or Consumers Certifcate o Exemption (Form DR-5).In many cases, exemption certifcates expire 5 yearsater the date o issuance and are subject to review andreissuance procedures.

3. QUESTION: Do nonprofts that sellgoods or services to consumers need tocollect sales tax?

ANSWER: In some cases, yes.It is crucial or nonprofts to understand the signifcantdierence between paying sales tax and the obligationto collect sales tax on goods and services they sell toconsumers. Its important to recognize the excuse romcollection allowed to some non-proft vendors in somecases does not apply to items they sell. The underlyingitems are taxable or not based on existing state lawwhether the non-proft vendor is obligated to collect ornot. For merchandise, Tangible Personal Property (TPP)rules apply. For memberships or events, there are specialrules applicable or memberships and admissions, wehave pro rules or these type activities too.

EXAMPLE:

In states such as Washington State, nonprofts are re-quired to collect and remit retail sales tax on their saleso goods and services. In others, like Michigan, exemp-tions oered to nonprofts or purchases o tangible per-sonal property were expanded in 2013. This is great newsor nonprofts, but it creates another layer o exemptioncertifcate management complexity.

4. QUESTION: Can nonprofts be audited?

ANSWER: Yes.

As a matter o act, nonprofts are more likely to beaudited than their or-proft counterparts, but businessesthat sell to them are equally at risk. Failure to properlysubstantiate tax-exempt and erroneous or missing ex-emption certifcates are among the top audit triggers.A number o states, notably Texas and Caliornia, publishcommon sales tax related errors that might trigger anaudit. In both states, erroneous or incomplete exemption

7/27/2019 Non Profits and Sales Tax

3/3

certifcates are among the top three audit triggers.

Mistakes in exemption certifcate management include:

Nonprofts charging consumers sales tax when thetransaction should have been tax-exempt.

Nonprofts using expired or erroneous exemptioncertifcate to prove tax-exempt status.

Given the rate o change to sales tax rules and thevariability between jurisdictions, a company would behard-pressed to manage the process accurately.

EXAMPLE:

The Cascade Christian Center o Skagit Valley, a nonproftchurch that runs programs to support the community,

also operates a un center or kids. Ater WashingtonState enacted a new law regarding nonprofts, the uncenter was no longer tax exempt. It took a sales taxaudit to bring this to the attention o the Center. Theresulting penalties fnes and ees nearly bankrupted theorganization.

CONCLUSION

To learn more about your states specifc requirements,you can research their codes on nontaxable transactions,sales to nonprofts and other related codes.

Alleviate your exposure to audits, with AvaTax Certs.Built to integrate into your fnancial application, ERP,e-commerce shopping cart or retail POS, AvaTax Certsbrings your customer exemption certifcates to your fn-gertipsavailable on demand and across all locations.

ADDITIONAL RESOURCES

1. Automating the exemption certifcate liecycle:http://www.avalara.com/resources/whitepapers/automating-the-ex-

emption-certifcate-liecycle

2. Using AvaTax to automate the exemption certifcateliecycle: http://www.avalara.com/products/avatax

Get Started.To learn more about pricing,view online demonstrations,or chat about AvaTaxscapabilities, visit:

www.avalara.com

or call

877.780.4848today.

About AvalaraA privately held company, Avalara was ounded by a team o tax and sotware industry veterans to ulfll a vision o delivering an aordable, scalable sales tax

solution. Thus making what was not economically easible in the past or mid-sized business not only aordable, but more accurate as well all with the latest and

most innovative technology available. From Bainbridge Island, close to Seattle, Avalaras knowledgeable sta works tirelessly to help customers put the hassles o

sales tax compliance out o mind. Avalaras mission is to transorm the tax process or customers by creating cost-eective state-o-the-art solutions. The company

does so through integrated on-demand, Web-based sotware services that provide transparent transactions, accurate tax compliance, painless administration and

eortless reporting.

Nonprofts & sales tax (An Avalara Q&A*)