Page 186 - TaxAdviser_2022

TAX CLINIC

tax is due on their purchases. States gen- (e.g., relieving the poor and distressed Pay Authorization and Nonprofit Enti-
erally assess sales and use tax on the sale versus performing scientific research). ties Claiming Exemption From Sales
or purchase of tangible personal property or Use Tax (Feb. 8, 2018)). In North
and certain enumerated services. For Exemption compliance Carolina, a Sec. 501(c)(3) organization is
exempt organizations, this means deter- To claim an exemption, an exempt required to pay sales tax on purchases of
mining whether sales such as member- organization needs to take certain goods and services and then, if eligible,
ships, printed or electronically delivered steps. Generally, states take the position apply to the North Carolina Depart-
publications, and event space rentals, or that every sale, admission, use, storage, ment of Revenue for a semiannual
purchases such as office supplies, give- consumption, or rental is taxable unless refund of the sales and use tax paid (see
away items, consulting fees, lodging fees, eligible for an exemption. To qualify for N.C. Gen. Stat. §105-164.14(b)(2)).
and other items are subject to tax. any eligible exemptions, exempt organi- Exempt organizations will need to
Understanding how a state treats a zations may need to provide an exemp- review the exemption documentation re-
transaction will help identify whether tion certificate to a vendor to indicate quirements for the states where business
there are applicable exemptions. Many that sales tax should not be charged on is transacted. Additionally, adherence to
states employ their own nuanced ap- the transaction. A state may require the all administrative requirements, such as
proach to categories of transactions organization to apply for a specific state periodic renewals of state exemptions
commonly engaged in by exempt exemption in order to claim an exempt and proper completion of exemption
organizations. Certain transactions organization exemption. Most states certificates, is key to maintain and pre-
may be exempt by their nature while have registration processes or require- serve eligible exemptions.
others may be exempted because the ments in place to qualify specifically for
item is purchased or sold by an ex- a sales tax exemption, and some juris- The takeaway
empt organization. dictions require periodic renewal of an Exempt organizations must consider
The majority of states provide gener- exempt status. the state and local sales and use tax
ous exemptions for sales made by, or to, For example, to qualify for a sales implications of each state in which they
an exempt organization in the perfor- and use tax exemption in Virginia, a are conducting business. Rarely will
mance of its exempt purpose. However, nonprofit organization must apply to similar exemption rules or compliance
exempt organizations should not assume the Virginia Department of Taxation requirements apply across all states. Pro-
every purchase or sale is exempt from and meet all of the exemption criteria, actively addressing proper sales and use
sales or use tax. For example, in Califor- including but not limited to (1) being tax compliance is paramount, especially
nia, exempt organizations are generally exempt from federal income taxation considering that an “everything’s exempt
treated like for-profit businesses for sales under Sec. 501(c)(3), 501(c)(4), or 501(c) as a nonprofit” policy is hardly ever the
and use tax purposes; i.e., sales and use (19); (2) providing proof the organiza- case. Exempt organizations must be dili-
tax applies to the sale and purchase of tion is in compliance with Virginia’s law gent in considering how existing state
tangible personal property. Although related to contribution solicitation; and and local sales tax obligations can impact
there are no broad exemptions, Califor- (3) having annual administrative costs their organization.
nia does provide narrow special exemp- not exceeding 40% of the organization’s From Erica Cline, CPA
tions for certain types of organizations annual gross revenue (see Va. Code (Erica.Cline@rsmus.com), McLean, Va.;
engaged in the relief of poverty and dis- §58.1-609.11). Alexandra Mitchell, J.D., LL.M.
tress (see Cal. Code Regs. tit. 18, §1570). Other states, such as Michigan, allow (Alexandra.Mitchell@rsmus.com),
Ultimately, the states greatly differ an alternative to completing a certificate. Washington, D.C.; and Mo Bell-Jacobs,
in (1) how they treat the taxability of In lieu of a certificate of exemption, the J.D. (Mo.Bell-Jacobs@rsmus.com),
various items purchased or sold by an qualified nonprofit entity may provide Washington, D.C.
exempt organization and, more impor- information to the seller, in paper or
tantly, (2) the type of exempt organiza- electronic format, identifying both
tion that may qualify for exemption, e.g., the reason for claiming the exemption Foreign Income & Taxpayers
a Sec. 501(c)(3) organization (e.g., reli- (including its sales tax license number
gious, education, or charitable entities) if the exemption claim is for resale and Puerto Rico residents: Scope
versus a Sec. 501(c)(7) organization (e.g., the purchaser has a sales tax license) and of income tax exemption for
a social club). In addition, not all orga- the purchaser (see Mich. Comp. Laws capital gains
nizations exempt under the same Code §205.62(9) and Michigan Dep’t of Trea- The tax advantages available in Puerto
section are necessarily treated the same sury, Notice to Taxpayers With Direct Rico have recently captured the interest

16 April 2022 The Tax Adviser