By Cat Donovan
Executive Assistant
Big Buzz Idea Group
Navigating the complex landscape of sales tax is a critical task for nonprofit organizations, requiring a thorough understanding of numerous regulations, exceptions and exemptions. It’s up to nonprofit leaders to stay informed about these intricacies to ensure compliance and optimize their financial operations. It is important to keep in mind that sales tax is a state concept, and the regulations will vary by state law.
Exempt Organizations Overview
Non-profit status is an income tax concept and status, and doesn’t necessarily mean the organization is exempt from sales tax. The Illinois Department of Revenue states sales tax exemptions are granted to “not-for-profits organized and operated exclusively for charitable religious, educational or governmental purposes.”
Exemptions are typically tied to nonprofit status. However, many states – including Illinois – require organizations to apply to the state Department of Revenue to qualify for the sales tax exemption. It’s rare that organizations can just provide their federal registered 501c3 letter at the register when purchasing goods.
In Illinois, registered and approved nonprofits will receive their exemption identification number, or E-number (because it starts with the letter E) followed by 99 and a series of numbers. The E-number is what nonprofit organizations must present to suppliers to get the sales tax exemption.
It’s important to remember that sales tax applications must be renewed every five years to get an updated letter proving your tax-exempt status.
To view a more comprehensive list of who does and does not qualify for Illinois sales tax exemption, visit the IDOR website.
Purchases vs. Sales
How does your exemption apply: to nonprofit purchases or to nonprofit sales? In most states, the exemption applies to items purchased for the purpose of running the nonprofit organization. For example, when a school purchases desks, textbooks or computers, it’s a clear correlation between the purchase and the mission of the organization.
Booster Clubs and Parent Teacher Organizations (PTOs) need to confirm if they are a division of the school or a separate legal entity because their classification will impact if they are another tax-exempt organization that must separately register to obtain their own exempt status. PTOs are able to file separately for the purpose of supporting the educational mission of the school, but they do need to file as a 501c3 with the IRS.
Some nonprofit organizations have entities within them that make sales and compete with for-profit companies. An example of this would be a nonprofit hospital where the cafeteria or gift shop are not tax-exempt and instead must register as a retailer. The items purchased for the cafeteria or gift shop to be sold qualify for the resale exemption. Their purchases are tax exempt; however, sales tax is applied to the purchaser and that tax is then remitted to the Department of Revenue.
Purchases By Exempt Organizations in Illinois
In Illinois, a sale of tangible personal property to any corporation, LLC, society, association, foundation, or institution organized and operated exclusively for charitable, religious, or educational purposes is exempt from sales and use tax, and a sale or transfer of tangible personal property as an incident to the rendering of service for or by such an entity is also exempt.
Girl Scout cookies are tax exempt because their sales do not compete with other business establishments. They are also sold for a limited period of time. Those two components are critical in meeting the sales tax exemption.
A lot of nonprofits sell items as a form of fundraising. Depending on if a good is sold occasionally or year-round will impact their sales tax status. Illinois would likely consider the year-round sale to be in competition with for-profit businesses.
Legal Agents & Suppliers
When nonprofits use service providers or suppliers it’s important to make sure that provider is documented as a legal agent for the organization and therefore able to apply the sales tax exemption on items purchased for the nonprofit.
Always carefully check invoices for vendors the organization contracts with to make sure unnecessary sales tax charges are not appearing. And if a nonprofit is hosting an event at a for-profit location, it’s very important that the nonprofit pays the suppliers and not the host business as to not spend unnecessary funds on sales tax.
There are ways for nonprofits to name a company providing a service as their legal agent so that the status of the nonprofit flows through to the service provider or supplier. It is important to set up contracts with vendors, suppliers and service providers so there is a documented paper trail on this matter. It can save nonprofits thousands of dollars a year.
Online Out-Of-State Sales by a Nonprofit
In 2018, The US Supreme Court ruled 5-4 on the case Wayfair vs. South Dakota. The decision now allows states to mandate that businesses without a physical presence in a state who exceed the state defined economic nexus threshold (many states use more than 200 transactions or $100,000 in sales) must register in the state, collect tax on those remote sales and remit sales taxes on transactions in the state – and this is the current mandate in Illinois. However, some of these exact terms do vary depending on the state. To see the thresholds by state, check out the Remote Seller Nexus Chart.
Donations
Sales tax exemptions apply to the donee and not the donor. Donations of tangible goods to nonprofits are not tax free to the person giving the donation. Sales tax should be paid on the donated item at time of purchase.
To watch a recording of the Big Buzz Breakfast Club where Diane Yetter presents “What Nonprofit Organizations Need to Know About Sales Tax,” please click here. The presentation covers in great detail the intricacies of nonprofit sales tax and how to best guide your organization through the complex web. Every dollar is critical to nonprofit organizations. If you know where to look in the sales tax arena, there are certainly savings to be found.
To learn more about Diane Yetter and Sales Tax Institute, visit their website, www.salestaxinstitute.com.
