How Can a 501(c)(3) Also Be Sales Tax Exempt?
Most people know that an organization classified by the IRS as a 501(c)(3) is exempt from paying tax on its income. In most cases, contributors to these organizations also receive a tax deduction for the donations they make. But, the exemption rules begin to change when it comes to state sales tax and the exemptions granted to nonprofits. Depending on where your organization is located and the specifics of your state's regulations, your organization may be able to save a great deal of money by also receiving a nonprofit sales tax exemption.
Tax-Exempt Status Defined
Most charitable organizations register with the IRS and apply for tax exempt status so that they do not have to pay tax on their income. This tax exempt status on income is also honored by the states. However, nonprofit status exists only at the state level and organizations must file separately for it in addition to the tax exempt status they receive from the federal government. Identification numbers can be confusing as well. An organization's federal tax identification number or EIN is used to identify organizations in the United States. However a tax-exempt number is issued at the state level and is used on forms to show that your organization is exempt from state sales tax.
Sales Tax Governed by States
Sales tax is a tax that is governed by and paid to the individual states usually at the point of sale for taxable goods purchased. Each state levies their own sales tax rate and a few states don't even have a sales tax. As an extension of the break given to charitable organizations by the federal government, many states offer an exemption to nonprofits so that they also do not have to pay tax on the goods they purchase, saving them lots of money. However, the purchases must be specifically necessary for the organization's exempt purpose.
Applying for State Tax-Exempt Status
Most states require that organizations apply for state tax exempt status from their state revenue department. Some states issue a tax-exempt certificate which must be renewed periodically, verifying the organization's continued federal status as a 501(c)(3). When apply initially, organizations must fill out the required state application and include a copy of their IRS-issued exemption determination letter. Some states may also require a copy of your Certificate of Incorporation, your by-laws and a financial statement.
Using Your Tax-Exempt Status
When making purchases for your nonprofit organization you will need a copy of your state-issued tax-exempt certificate and your tax-exempt number. Vendors will want to verify your status, so that they can make sure that they are not required to collect the tax on your purchase. Usually, each state has a form or Sales Certificate that you should fill out and present to the seller. This form states that you have a legal right to purchase products without paying the tax. Forms should be kept on file by the vendor as they also protect them from the obligation of collecting the tax. If a vendor refuses to honor the sales tax exemption, request from them an Assignment of Right to Refund application. This allows you to request a refund of the tax the retailer improperly collected from your organization directly from the state.
Exemptions Are Not for Everyone
Although your nonprofit organization may be receiving exemptions from federal income and state sales tax, you may still need to collect sales tax from your constituents if you sell items in order to raise funds. Some states may have threshold limits on the amount of days you engage in sales or the amount of revenue generated which are used to determine if sales tax must be collected and reported. Organizations should always verify regulations with their state revenue department.
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Writer Bio
Elisabeth Natter is a business owner and professional writer. She has done public relations work for several nonprofit organizations and currently creates content for clients of her suburban Philadelphia communications and IT solutions company. Her writing is often focused on small business issues and best practices for organizations. Her work has appeared in the business sections of bizfluent, azcentral and Happenings Media. She holds a Bachelor of Arts degree in journalism from Temple University.