The Internal Revenue Service commonly refers to charitable organizations as nonprofit entities, 501(c)(3) organizations, or tax-exempt entities. Unfortunately, this implied reference to tax exemption will not always be the case. The Internal Revenue Code provides an exemption from federal income tax, and although most states also apply this exemption to state income tax, it does not automatically apply to state sales and use tax. Read on to learn more about which activities may be exempt from sales and use tax.
Unlike the exemption from federal income tax, not all tax-exempt entities are automatically exempt from sales and use tax. To determine whether or not your organization is exempt from sales tax, you will need to consider the home state of your organization and the type of organization you are operating. In most states, tax-exempt organizations are required to pay sales tax on their purchases and to charge sales tax on the items they sell. Some states, however, allow certain types of nonprofit organizations a special exemption from sales tax. This exemption is generally limited to the purchase of items to be used for their exempt purpose. In addition, many states require the nonprofit organization to go through an application process to receive sales tax exemption status.
California Sales and Use Tax Exemptions
In California, although many nonprofit and religious organizations are exempt from federal and state income tax, the state does not provide a similar broad exemption from sales and use tax. Generally, nonprofit and religious organizations are treated just like other for-profit California sellers and buyers for sales and use tax purposes.
California defines sales and use tax as the following:
“Sales tax” applies to the sale of tangible personal property, unless the sale is covered by a specific legal exemption or exclusion. Individuals, businesses, and groups that sell taxable merchandise in California must pay sales tax on their taxable sales.
“Use tax” applies to the purchase of taxable merchandise that will be used, consumed, stored, or given away in this state unless the purchase is exempt or excluded from tax. Individuals, businesses, and groups must pay use tax on their taxable purchases. The state use tax is complementary to, and mutually exclusive of, the state sales tax – you will never be required to pay both.
Although there is no broad exemption, California does allow for some special exemptions and exclusions from sales and use tax for certain nonprofit and religious organizations. Some organizations may not owe tax on any of their sales, whereas others may only owe tax on certain types of sales, but not all sales. Other organizations may be responsible for tax just like other California sellers. It all depends on which type of organization you have as well as your organization’s practices and activities.
Nonprofits also carry out certain activities that are not considered sales for sales tax purposes. These activities generally are not subject to sales or use tax. Examples include:
- Gifting of merchandise as a true donation.
- Sales of tickets for concerts, movies, plays, shows, and similar events when food and meals are not included in the ticket price.
- Sales of tickets for game booths and raffles when prizes are not guaranteed to every ticket purchaser.
- Sales of travel, home rentals, guide services, personal services, tutoring, and other things of value that are not physical products.
- Sales of gift cards, gift certificates, and coupon books.
- Membership drives and other fundraising activities that do not involve the exchange of merchandise, or that include merchandise premiums of a much lower value than the donation or membership amount.
- Sales of advertising that do not involve an exchange of merchandise or goods.
Sales and use tax exemption rules for nonprofit organizations vary from state to state. The home state of the organization and the type of organization are primary factors in determining the exempt status. It is important for nonprofit organizations to be aware of, and comply with, the rules of their state. If you have any questions regarding whether or not your nonprofit organization is exempt from sales and use tax, please do not hesitate to contact our office at (858) 558-9200.