A sales tax compliance guide for nonprofits
Starting a nonprofit organization can be extremely rewarding, but it’s no easy task. And when it comes to sales tax compliance, there are quite a few considerations to keep in mind. While most people are aware that nonprofits are often exempt from paying federal and state income tax, the regulations that surround sales tax compliance aren’t as black and white.
There are several important things to note regarding sales tax compliance for nonprofits. This guide can help your organization understand what’s involved so it can maintain compliance and run smoothly.
What defines a nonprofit?
First, make sure the organization you’re founding or working for qualifies as a nonprofit. By definition, a nonprofit organization is dedicated to promoting a specific social cause or advocating for a shared group need. Because of the organization’s contribution to society, it will receive an income tax exemption from the IRS. To receive that tax exemption, the business must apply to be a registered 501(c) entity.
Though many assume nonprofits and not-for-profits are synonymous, there are actually a few differences. While nonprofits can have a separate legal entity, not-for-profits cannot claim that status. Typically, not-for-profits are unable to qualify for tax-exempt status as they tend to have more full-time employees than volunteers.
Important sales tax considerations for nonprofits
Tax laws for nonprofits can be confusing, which is why there are some important things to make note of when you’re focusing on sales tax compliance. Being exempt from income tax does not make an organization automatically exempt from collecting or paying sales tax. Some of the major considerations include:
The state in which the organization is located. Sales tax exemptions are based on state laws regarding nonprofits.
The type of nonprofit organization involved. If your organization sells goods and services for income, for example, you’ll have different exemptions to apply for than a nonprofit that relies on donations but may make purchases for the organization.
Paying sales tax vs. collecting sales tax on goods sold. The regulations will often differ based on the type of transactions.
How to request sales tax exemptions for nonprofits
Any sales tax exemptions your nonprofit receives will depend on the states where you do business and the type of transaction involved. The process for requesting exemption from state sales tax varies widely. For example, in North Carolina, charitable organizations must pay sales tax but can file semiannually for a refund of sales taxes paid. But in Alaska, Delaware, Montana, New Hampshire, and Oregon, filing for exemption is not necessary as there is no state sales tax (although Alaska does have local sales tax).
In many states, you’ll have to fill out an application form and provide some supporting documents, such as an IRS determination letter and forms, financial statements, and a Form 990. In some cases, a 501(c) designation isn’t enough for a nonprofit to be exempt from paying sales tax at all.
Something else to note: Nearly every state provides exemptions to organizations making purchases of items intended for resale to an ultimate consumer. To find out if it’s possible to receive a sales tax exemption for your nonprofit in your state, you can use this IRS search tool or check your state’s department of revenue site. Washington’s can be found here.
Common tax issues nonprofits face
Unfortunately, nonprofit organizations are sometimes susceptible to tax problems. The IRS can occasionally come down hard on nonprofits, mainly to ensure they aren’t purposely misleading the government or the public. The most common tax issues are:
Audits. Nonprofits are uniquely prone to audits, mainly because the IRS wants to make sure the entities aren’t being run for personal gain. This means nonprofits may find their finances are susceptible to more intense scrutiny.
Late filing penalties. It can take extra time for nonprofits to get everything in order, meaning your organization can get hit with hefty fees. The best way to avoid this is to file for an extension and possibly look into abatement options.
Not filing for sales tax exemption. Many organizations pay sales tax on all goods and services bought and sold, not knowing that there may be exemptions available with proper paperwork. Also, nonprofits may erroneously assume they’re never liable for sales tax on transactions. This is best resolved by educating yourself on the sales tax exemption laws in your state.
Figuring out sales tax compliance for your nonprofit might seem daunting. But by researching your state’s sales tax laws and potential exemptions, you’ll be setting your organization up for long-term success and minimizing the risk of audits. Learn more about sales and use tax pertaining to nonprofits at the Avalara Tax Desk.
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