Complexity of sales tax applicability and exemptions with respect to nonprofits is often the cause of noncompliance. Before I dive into some specific provisions, there are two points that are critically important for nonprofits to understand.
First, being recognized as tax-exempt does not confer an exemption from sales tax. Second, eligibility for a sales tax exemption is activity- specific. In other words, a particular activity may be exempt, but not the organization in general.
The General Rules: California taxes all sales of tangible personal property unless covered by an exemption. Similarly, the use tax applies to taxable merchandise that will be used in California unless covered by an exemption. The California exemptions are numerous but narrow, so it’s best to have documentation on why the tax doesn’t apply to a particular activity before Board of Equalization inquiry. Exemption applicability applies both to the sale and purchase of items by nonprofits. Even if an exemption applies, a nonprofit may need to obtain a seller’s permit.
Specific Examples: The statements below highlight common situations that trigger sales tax or an exception.
- Sales of merchandise at fundraising events are generally taxable. Examples of fundraising activities include auctions, festivals, and swap meets. There are limited exceptions such as sales at auctions to benefit the homeless.
- While donations are not subject to sales tax, donations in which the donor receives merchandise in return may be subject to sales tax.
- Charitable organizations that relieve poverty and distress may be exempt from sales tax on the sale of items principally to assist those in a distressed financial condition.
- Art purchased by museums for public display is exempt from sales and use tax. Also, an individual buyer of art from a retailer will not owe sales tax where the individual has agreed to donate the art to a museum and the retailer directly delivers the art to the museum.
- As you will see in the specific exemptions below, sales of food may or may not be subject to sales tax. Ultimately, the exemption’s applicability will depend on the activity where the food was sold, the type of nonprofit, whether the food is consumed on sight and the type of food. Special rules may apply to the sale of beverages sold at a separate price and are generally subject to sales tax.
Social clubs may sell meals, food, and beverages exclusively to its members if the sales occur less than once a week.
School sales of meals to students are exempt from sales tax, but the exemption may not apply where beverages or caterers are involved.
Catering often presents unique sales tax issues, but, in general, there is not an exception and it is taxed on sales as a restaurant would be taxed. However, a nonprofit should ensure that either it or the caterer is the retailer of the meal and the correct party is reporting the meal for sales and use tax purposes.
- Items withdrawn from a seller’s inventory and donated to a public charity are generally not subject to a use tax. However, if the seller had already paid sales or use tax, there is no exemption that would allow for a refund of the amount paid.
- Donations of gift cards, cash, checks or services are not subject to sales tax, regardless of whether the buyer is tax-exempt.
- There is an exception for sales of American flags by certain veteran’s organization.
- Organizations that provide services to the developmentally disabled may be exempt from sales of crafts less than $20 made by its constituency, subject to additional restrictions.
- Sales of periodicals may or may not be subject to sales tax. The analysis will depend on whether they 1) are provided free of charge, 2) sold by subscription, 3) are the users of the periodical, or 4) include commercial advertising.
There is not one line of questions that determines whether a particular activity is subject to the sales and use tax. Rather, it is more akin to a smorgasbord of exceptions. Back taxes and penalties over multiple years can come as a big surprise when a nonprofit erroneously treats a particular activity as exempt from sales tax. We recommend that an organization periodically review and document all sales and purchases it treats as exempt from the collection or payment of sales tax.
If you have questions regarding your organization’s activities in connection with any of the topics discussed above, please contact Ryan Fischer at email@example.com or toll free at 844.4WINDES (844.494.6337).