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Sales tax returns for nonprofit organizations

  • Mar 3, 2017 | Stephanie Faris

Nonprofit organizations (NPOs) have tax-exempt status, allowing them to make purchases without paying sales tax. This has led to the common misconception that they’re completely free from tax liability in every circumstance. However, this isn’t the case at all.

To achieve nonprofit status, an organization must first file for 501(c)(3) status with the Internal Revenue Service. Form 1023 serves as application for recognition as exempt from federal income tax. Organizations need to complete this within 27 months of filing articles of incorporation, with tax-exempt status taking effect on the date those articles of incorporation were filed.

However, even once this status is granted, an organization still is not 100 percent free of tax concerns. Here are a few things NPOs need to know about their tax liability.

Tax returns

Once nonprofit status is granted, an organization may make the mistake of assuming they’re now free from filing a tax return. However, even if your organization owes nothing in taxes to the IRS, you’ll still need to file an informational tax return each year using Form 990.

It’s important to be aware that this information could be released to the public upon request. Nonprofit organizations are also particularly susceptible to being audited, so you’ll need to keep meticulous records each year of all of your organization’s income and expenditures.

Tax on sales

Nonprofit status does not automatically give an organization free reign to never pay sales taxes. Sales and use tax laws vary from one state to the next, and they also can vary depending on the type of organization.

An organization’s product sales can come into question, with tax auditors examining whether the proceeds went toward the organization meeting its charitable goals. In North Carolina, for example, nonprofits pay sales tax throughout the year, then apply to the state for reimbursement, at which point the information is reviewed before the money is refunded.

From state to state, items that are tax-exempt can vary. In California, for instance, food sales at an event where the organization doesn’t make a profit don’t qualify for tax-exempt status. The meals have to benefit the organization.

The method of payment can also affect tax exemption. In Washington D.C., 501(c)(3) organizations can only exempt purchases made for charitable purchases using an approved payment method.

Nonprofits aren’t 100 percent free from sales tax obligations, but they can enjoy tax exemptions on many purchases and sales. Organizations should understand both local and federal laws that apply to their tax status and maintain thorough documentation for the IRS, local regulators, and their own donors.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Stephanie Faris
Avalara Author Stephanie Faris