Summer 11 - Fundraising and Sales Tax - Who Owes What?
To be fair, this question causes a lot of head-scratching — not only in nonprofit circles but also in state revenue departments across the country. Taxation of nonprofit sales varies incredibly from state-to-state and entails nuances and a numbing array of exceptions.
Here Comes the Tax Man
The problem occurs when 501(c)(3) organizations mistakenly assume that their exemption from federal and state taxes extends to state sales tax. They hold a fundraiser, fail to collect sales tax on their fundraising products and go about their merry way — until the letter arrives from the local taxing authority.
In response to their empty coffers, state taxing authorities are actively targeting both in-state and out-of-state charities for sales tax compliance. Cash-strapped state Departments of Revenue are conducting “randomly selected audits”
in the hope of uncovering back sales taxes, often from improperly accounted for fundraising events.
Where’s the Logic?
Complicating matters, there’s very little rhyme or reason to the system. Consider Maryland. If the local volunteer fire department or ambulance company holds a fundraising barbecue, all of those hamburgers and hot dogs are exempt from sales tax. Boy Scouts selling the same food? Taxable. New York’s sales and compensating use tax provides a general exemption for any sale or amusement charge by a qualified exempt organization … except for the sale of parking services.
And it can all get downright illogical. Take, for example, tickets sold for a game booth run by the Kiwanis at the local fair. In many states, sales tax does not apply when prizes are not guaranteed to every ticket purchaser (e.g., a true game of chance). But if the Kiwanis decide that every player “wins” a token prize, the entire ticket price is taxable, even if the trinket is worth just pennies.
So, Do We Owe Sales Tax?
The answer is: It depends. In a very general sense, if your organization is a 501(c)(3) and your fundraising is handled primarily by volunteers, you will probably not have to pay sales taxes on your profit. But to be sure, you’ll need to check with a tax specialist and your state.
The easiest way to check your state’s fundraising regulations is with the website operated by the Multistate Tax Commission and The Association of Fundraising Distributors & Suppliers at http://fundraisetaxlaw.org.
Other smart moves include:
- File the paperwork. Before your group conducts a fundraiser, make sure that you have filed paperwork with your state’s Department of Revenue declaring your status as a nonprofit or 501(c)(3) organization. Likewise, make sure you are registered to solicit funds in the state and municipality where you are fundraising. For more information, visit http://multi statefiling.org, which includes a summary of filing procedures as well as a compilation of the reporting requirements for registered organizations.
- Check into permits. Some states may require that your organization obtain a special permit for fundraisers such as raffles, lotteries or other special events.
- Keep meticulous records. Almost any piece of information relating to your fundraiser is worth keeping, but the most importance should be placed in tracking the money and any products sold (put your treasurer and accountant in charge of this).
- Insure against liability. A fundraiser could expose your organization to unforeseen liability. Talk with your insurance agent about additional liability insurance for the duration of your event.
- Check on professional fundraisers. There are plenty of consultants and vendors who will take care of all facets of your fundraising campaigns. But who’s to say that they have properly registered and complied? The onus is always on your organization to comply with registration requirements.
- Beware of crossing lines. As a fundraising tool, the Internet’s incredible reach exposes your organization to countless jurisdictions, each with its own sales tax regulations. For detailed guidance on fundraising using the Internet, visit the National Association of State Charity Officials at http://nasconet.org.
The Nonprofit Advisor is produced quarterly by Bober Markey Fedorovich’s Nonprofit Services Team. For more information about our nonprofit services, please call or email our team leader, Lori A. Sheets, CPA at 330.255.2481 or by email. For specific questions regarding sales tax, please contact our SALT specialist, Jonathan O’Donnell at 330.762.9785 or by email.