Founded by a former IRS Agent

Founded by a former IRS Agent

How Tax Exempt is a Tax Exempt Organization?

November 4, 2014

How Tax Exempt is a Tax Exempt Organization?

While 501c organizations are generally exempt from income taxes this does not (usually) apply to other taxes, such as sales and use taxes.

The California Board of Equalization (“BOE”) recently updated its Publication 18 for Nonprofit Organizations. The 45 page publication is fairly complex with relatively few exclusions, but here is a quick summary:

  • Sales and use taxes generally apply to Nonprofit Organizations unless there is a specific exemption or exclusion.
  • There is no general exclusion for either Nonprofit or for Religious Organizations.
  • Nonprofit Organizations that engage in the sales of goods or merchandise in California require a seller’s permit.

Activities that are generally excluded from sales or use taxes (per Publication 18):

  • The gifting of merchandise for a true donation: an amount someone gives your organization without expecting to receive merchandise of equal value in return.
    (Example: The NPR coffee cup I received for my $500 donation was not a sale and should not have sales tax applied to it.)
  • Sales of tickets for concerts, movies, plays, shows, and similar events when food and meals are not included in the ticket price.
  • Sales of tickets for game booths and raffles when prizes are not guaranteed to every ticket purchaser.
  • The sale of travel, home rentals, guide services, personal services, tutoring, and other things of value that are not physical products.
  • Sales of gift cards, gift certificates, and coupon books.
  • Membership drives and other fundraising activities that do not involve the exchange of merchandise or that include merchandise premiums of a much lower value than the donation or membership amount.
  • Sales of advertising that does not involve exchange of merchandise or goods.

Specific exemptions and exclusions for certain organizations

Publication 18 also prescribes specific exemptions and exclusions for certain organizations (if you are one of these you should take the time to find the circumstance that may apply to you):

  • Organizations that relieve poverty and distress
  • Cultural Organizations, Museums, and Gov’t Art programs
  • Veterans’ Organizations
  • Religious Organizations
  • Social clubs and Fraternal Organizations
  • Organizations that provide Community Health and Human Services

Publication 18 also describes (in detail) the requirements, exemptions, and exclusions in connection with sales of the following items by all Nonprofit Organizations.

  • Food and meals
  • Vending machines
  • Newspapers and periodicals
  • Sales involving fundraiser companies
  • Promotional items sold to members

The most common sales transaction performed by Nonprofit Organizations

Publication 18 covers the most common sales transaction performed by Nonprofit Organizations-serving food at a fundraising event, which is generally taxable. If the Nonprofit Organization contracts with another business or entity to serve the meal (likely for an event held at a hotel), then it is the responsibility of the business or entity serving the food to report and pay the sales tax.

However, if the Nonprofit Organization serves the meal itself, then it is responsible for reporting and paying the sales tax.

If your Nonprofit Organization is involved in sales of goods or merchandise, we strongly recommend you read this CA BOE publication before, not after, the sales take place!

It’s time to schedule an appointment with Pogosian Nazaryan & Company.