When it comes to not-for-profit organizations, each state may treat them differently from a tax perspective. Some not-for-profit organizations may be nontaxable on their purchases and taxable for their sales, or vice versa. Some states will tax both sales and purchases or treat both as nontaxable. It’s important to know that being exempt from federal income tax does not always translate to being exempt from sales tax. There are many factors that come into play when a not-for-profit organization is paying or collecting sales tax.
WHAT IS SALES TAX AND WHAT DETERMINES IF I OWE?
Sales tax is a tax on the retail sale of tangible personable property and enumerated taxable services. For not-for-profit entities, where they are located, their main activities or functions, and type of entity can determine whether they pay or collect sales tax.
JEOPARDIZING YOUR EXEMPTION
Pursuant to federal law, there are certain activities that can cause an organization to lose its tax exemption. For example, the following activities can endanger exempt status of an organization:
- Activity that results in private benefit or inurement to a private shareholder or individual
- Lobbying activity, if it constitutes a substantial part of the organization’s overall activities or if it exceeds a predetermined dollar amount
- Activities that are illegal or violate fundamental public policy
- Failure to comply with annual filing requirements
- Any political campaign activity
- Unrelated business activity that is substantial when compared to the organization’s exempt function activities
SALES AND USE TAX FOR ILLINOIS NOT-FOR-PROFITS
Purchasing
Under Illinois law, purchases by not-for-profit organizations are generally exempt from sales and use tax in Illinois, but the organization must have and provide their active state exemption certificate. Nevertheless, there are factors that can cause organizations to pay sales and use tax. If the organization is not operating “exclusively for charitable, religious or educational purposes,” it may not be exempt from paying sales tax on purchases.
Pursuant to Ill. Admin. Code 130.2005(n), “exclusively” has not been given its literal interpretation by the Supreme Court regarding not-for-profit organizations. It means that an organization’s primary activity or function must be charitable, religious or educational. Purchases made by the organization must relate to the primary activity or function of the not-for-profit organization to be exempt. If a substantial activity or function of an organization is not operating exclusively, it will not be considered exempt.
Selling
Sales by exclusively charitable, religious and educational organizations are taxable, unless specifically exempt. Tax exempt sales in Illinois for not-for-profits are:
- Sales to members, students in the case of schools, or patients in the case of qualifying hospitals, of tangible personal property to be used primarily for the purposes of the selling organization
- Sales that are noncompetitive with businesses; or occasional dinners, socials and similar activities, whether they are open to the public or not.
For a sale to be considered noncompetitive all proceeds must go to the organization, transactions must be handled through the organization’s members, sales cannot be continuous and the main purpose is to make a charitable donation. Only two “occasional” dinners or similar activities may be exempt per calendar year.
SALES AND USE TAX FOR MISSOURI NOT-FOR-PROFITS
Purchasing
Under Missouri law, sales and use taxes are not applicable to sales made to any religious and charitable organizations and institutions provided they are acting within their religious, charitable or educational functions and activities. For not-for-profit civic, social, service or fraternal organizations to be exempt from tax, the net proceeds must be designated for civic or charitable functions or activities. All purchases must be solely in their civic or charitable functions or activities. Not-for-profit organizations must have and provide their active state exemption certificate. Out of state not-for-profit organizations may purchase or sell exempt, as stated above, if their home state exempts such transaction in that state.
Selling
For the most part, the same guidelines for purchasing apply to sales by the not-for-profit organization.
If you have any questions, our State and Local Tax team is here to help. Contact your Anders advisor below to learn more about how any taxes apply to your not-for-profit organization.
