Download Sales Tax and the Not-for-Profit Organization

Sales Tax and the
Not-for-Profit Organization
KLR Not-for-Profit Services Group
March 2013
www.KahnLitwin.com
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Sales Tax and the Not-for-Profit Organization
Sales tax is a tax placed on consumers of goods and services. It is not a tax placed on the sellers of
goods and services. Not all goods and services are subject to sales tax. What is and is not subject to
sales tax is a matter of state law.
The sales tax laws of most states frequently refer to the tax as a use tax. This not only emphasizes
the fact that the tax is placed on the consumer, or the user, of the product or service, but the
reference also indicates that the consumer has the liability for the tax when they begin to use the
product. The consumer’s liability is extinguished only if a receipt can be provided showing that the
sales/use tax was paid to a retailer.
** As a not-for-profit organization you may be exempt from paying sales tax when you purchase
something for your organization’s use. You are most likely not exempt from charging and
collecting sales tax when you have dealings with the general public and are acting like a retailer.
Why do retailers charge sales tax?
Because the state tax division realizes that it is best to collect sales tax at the time of purchase rather
than at any point after the purchase, the law has been written requiring retailers to collect the tax
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from the buyer and give the buyer a receipt for the amount collected.
Why don’t not-for-profit organizations pay sales tax on their purchases?
Because state law exempts some not-for-profit organizations from paying the use tax on their
purchases. The specific law reads as follows:
Sales to churches, orphanages, and other exempt charitable and religious organizations, nonprofit
hospitals, educational institutions, interest-free loan associations, organized sporting leagues and
associations, bands for boys and girls under 19 years, certain vocational organizations, senior citizens
clubs exclusively composed of persons over 61 years, and parent-teacher associations are exempt.
The exemption applies only to purchases made by the organization itself for its own purposes. Each
organization must file an application for, and obtain from the tax administrator, an exemption
certificate covering such exempt organization. 2
What does the Rhode Island State Sales and Use Tax Law say regarding sales made by notfor-profit organizations?
Sales of low-cost items by not-for-profit organizations:
The state law indicates that certain not-for-profit organizations do not have to charge sales tax on
low-cost items which are sold in connection with fund raising to support the organization. The
specific law reads as follows:
Nonprofit eleemosynary organizations formed to sponsor and support youth activities, accredited
elementary and secondary schools are exempted from charging, collecting, and remitting the sales
tax on items worth $20 or less sold to support youth activities. They are liable, however, for sales
and use tax on other items they purchase.3
el·ee·mos·y·nar·y adj. 1. Of, relating to, or dependent on charity. 2. Contributed as an act of
charity; gratuitous. See Synonyms at benevolent. (From the American Heritage Dictionary)
Note that this section of the law applies only to eleemosynary organizations “formed to sponsor and
support youth activities” or support “elementary and secondary schools”. Therefore, this section
does not apply to every not-for-profit organization.
As a matter of fact, it applies to only a minority of not-for-profit organizations. It also applies only
to a specific type of sale — fund raising sales of small dollar items. Although the law indicates the
worth of the item sold, “worth” has been interpreted as the sales price of the item sold. In other
words, selling something in a fund raising effort for $25 which is only worth $10 will not be a
transaction exempt from the sales tax law.
Casual sales by not-for-profit organizations:
Not-for-profit organizations do not have to collect sales tax on “casual sales.”
These types of sales must meet two criteria to be exempt from the sales tax law.
(1) An item sold will not be classified as a "casual sale" unless it is the sale of an item, which is not
held or used by the seller in the course of activities for which the seller is required to hold a seller's
permit. Thus, if your organization normally sells an item for which a permit to make sales at retail
is required, the sale of these items can not ever be classified as “casual sales”. e.g. if your organization
regularly sells books and, therefore, has a permit to make sales at retail, no sale of these books
will ever be classified as a casual sale, and be exempt from the sales tax law.
(2) Casual sales include sales made at bazaars, fairs, picnics, or similar events by nonprofit
organizations which are organized for charitable, educational, civic, religious, social, recreational,
fraternal, or literary purposes. Sales such as this will only qualify as “casual sales” if the organization
sells these items at not more than two (2) events, which combined, do not exceed a total of six (6)
days duration each calendar year. Such organization may, however, request of the tax administrator
to have more than two (2) events in a calendar year so long as those events do not exceed, in total,
six (6) days during such calendar year. For each of these events the law requires that the
organization obtain a sales tax permit from the Division of Taxation. 4
Note that this casual sale exemption from the sales tax regulations is broader than the exclusion for
low-cost items. The casual sales regulations apply to all not-for-profit organizations organized for
charitable, educational, civic, religious, social, recreational, fraternal, or literary purposes, while the
low-cost exemption applies only to eleemosynary organizations.
There are also a couple of exceptions to the casual sale exemption. Sales tax applies to the sale of a
motor vehicle, or trailer even though such sale is a casual sale, and whether or not it is in fact
registered or required to be registered by the purchaser with the Registry of Motor Vehicles. While
casual sales of house trailers and mobile homes are exempt, casual sales of all other trailers, including
camping trailers cannot be casual sales and are always taxable.
The casual sales defined in (2) above are specific to events. If your organization is making casual
sales according to the definition in (1) above, but makes more than 5 of this type of casual sale in a
12-month period, then you are classified as a retailer.
The casual sale only means a sale by a person other than a retailer. Therefore, if you qualify to be
considered a retailer, you lose your ability to make tax-free casual sales.
Do not-for-profit organizations have to collect sales tax on transactions that do not meet the
above exemptions?
Yes, a not-for-profit organization making a sale to the general public is acting like any other retailer.
If the product or service is subject to the state’s sales tax law, then the not-for-profit must collect the
sales tax and remit it to the state in the same manner as any other retailer.
In order to determine if the product you are selling is subject to sales tax, you should obtain a copy
of the Rhode Island sales tax manual from the sales tax division of the Rhode Island Division of
Taxation. Some of the unique situations that not-for-profit organizations find themselves and which
are not specifically addressed in the state sales tax manual are described below.
Auctions
Retail sales by an auctioneer, regardless of whether those sales otherwise meet one of the
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exemptions noted above, are subject to RI sales tax.
The regulation providing this ruling does not differentiate between a professional auctioneer and a
volunteer auctioneer that run many not-for-profit organization charity auctions. However, we
believe that an auctioneer is an auctioneer and the charity is best served by charging and collecting
sales tax on the items sold. Keep in mind, however, that when an item sells for an amount in excess
of its fair market value, the sales tax should only apply to the fair market value and not to the entire
amount paid. The not-for-profit organization should be prepared to issue a receipt to the successful
bidder in a form similar to the following:
Utopia Charitable Society Auction Receipt
1 case, Mixed Table Wines from France
Winning bid
Fair Market value of item
RI Sales tax (7%)
Donation above fair market value *
$ 750
$ 500
$ 35
$ 250
Total received from donor
$ 785
* This amount may be claimed by the donor as a charitable contribution to the Utopia Charitable
Society. All amounts contribute to the success of our mission.
Thank you for your support.
Caution: failure to collect sales tax at an auction may subject the organization to paying sales tax on
the gross amount collected.
Silent Auctions: Since a silent auction does not involve an auctioneer, we believe that these items
may not be subject to this regulation, assuming the silent auction meets the other requirements for
exemption. However, if an organization conducts a silent auction in conjunction with a live auction,
we recommend that sales tax be applied to all auction items. The Rhode Island Division of Taxation
is not likely to view the silent auction activity as being sufficiently separate from the live auction to
bypass the taxation of retail sales by an auctioneer contained in this regulation.
Tickets to events
In general, event tickets are not subject to sales tax. Thus, if your organization charges for a speaking
event, annual meeting, exhibit or show, etc., no sales tax applies to this transaction.
If, however, the attendee will receive a tangible benefit at the event, then sales tax applies to the
value of the tangible benefit. Thus, if your organization holds a dining event at which attendees will
receive the tangible benefit of food, sales tax must be charged on the fair market value of the
benefit. If no value can be assigned to the tangible benefit, the Division of Taxation may conclude
that the entire ticket is taxable.
The state law indicates that the tax administrator can require that the amount collected by a retailer
in reimbursement of sales or use tax be displayed separately from the list price.6 Therefore, it is
advisable to indicate on your ticket, the fair market value of the tangible benefit to be received and
the value of that benefit separately stated from the sales tax thereon. This applies whether your
organization has purchased the benefit or if it was donated to your organization and you received it
at no cost.
This regulation is parallel to the IRS regulations relative to quid pro quo contributions. The IRS
regulations require your organization to separately disclose the fair market value of the benefit to be
received from the charitable contribution portion of the ticket price. If the tangible benefit to be
received is a product to which Rhode Island sales tax applies, then the sales tax should also be
disclosed on the ticket and the sales tax must be remitted to the state.
Example: Your charitable organization sponsors a nationally known speaker at a dinner event. The
cost of attending is $50 and the fair market value of the meal served is $12. The restaurant where the
event is being held is making a contribution to your organization by providing the meal to you for
$9 per person. The information that should be disclosed on your tickets is as follows: Price of
admission $50, of which $37.16 is a tax deductible charitable contribution; the remaining $12.84
represents the fair market value of the meal to be served ($12) and the state sales tax ($.84) that
applies to the meal.
If the restaurant charged your organization the $.84 sales tax on each meal, you do not have to remit
anything to the state. (See member events below.)
Member events
When your organization holds an event for its bona fide members, no sales tax applies to the event
even if the members receive a tangible benefit. Thus, if the attendees at your annual dinner meeting
are all bona fide members of the organization, the event qualifies as a purchase by the charitable
organization and your exemption from the state sales tax will qualify you to make the dinner
purchase without paying sales tax. Since the attendees are all members of the not-for-profit
organization, a second sale has not been made and no sales tax applies.
Note that if the event was open to the general public or the attendees are not bona fide members of
the not-for-profit organization, the restaurant must charge your organization sales tax. You must
pass this sales tax charge along to the attendees via your ticket information noted above. If you fail
to do this, the Division of Taxation may conclude that the entire price of admission charged by your
organization is subject to sales tax and bill you based on the amount of tickets sold.
The failure of the restaurant, hotel, caterer or other provider of tangible products to charge you sales
tax does not alter your responsibility to collect sales tax from the ultimate consumer in accordance
with the state sales tax regulations. Remember, you are acting as a retailer and are subject to all of
the same regulations to which every retailer is subject.
Discount cards and coupons
When your organization solicits local businesses to provide discount benefits to your contributors
and you provide them with a discount card to be used for free or discounted merchandise there is
no sales tax to be collected by you. The Rhode Island sales tax regulations indicate that when a local
merchant gives away merchandise and is not reimbursed by an out-of-state company (such as a
home office or other third party) the transfer of merchandise is not subject to sales tax.
If your organization has purchased tangible merchandise coupons such as gift certificates, you do
not have to pay sales tax for those when making the purchase and do not have to collect sales tax
when providing these in exchange for “contributions”. The appropriate sales tax will be collected by
the merchant when the coupon is exchanged.
Footnotes: Footnote References are to the Rhode Island General Laws
1 G.L.
Ch. 44-18-22; Reg. SU 87-90
2 G.L. Ch. 44-18-30(E), (OO), Reg. SU 88-48; SU 91-35
3 G.L. Ch. 44-18-30 (JJ); Reg. SU 97-120
4 G.L. Ch. 44-18-20(7); PL 95-90
5 RI Sales and Use Tax Regulation SU 96-17
6 G.L. Ch. 44-19-8; Ch. 21,147
* Please note that this whitepaper is a general summary of law and omits many important details,
footnotes, and caveats. It is no substitute for informed advice from a tax professional based on your
particular circumstances.
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