Public policy favors not-for-profit organizations through various financial incentives. Although Washington is less generous than other states and the federal government in the taxation of not-for-profit organizations, it does provide for a few financial incentives, including a sales tax and business and occupation (B&O) tax exemptions on certain sales made by not-for-profits.
There are a few scenarios where not-for-profits make sales, including at fundraising events/occasional fundraiser sales and sales from a fixed store location/website. This article will cover these scenarios and the qualifying rules for tax exemption:
Qualifying for the Washington State Fundraising Event Exemption
Not-for-profit organizations are generally required to collect and remit retail sales tax and pay business and occupation (B&O) taxes on sales of goods and certain services. However, the law provides limited exemptions for certain fundraising activities.
In order to qualify for the B&O and sales tax exemptions, the following requirements must be met:
- The sales must be conducted by a qualified not-for-profit organization.
- The sales must involve fundraising activities.
- The proceeds from the fundraising must be used to further the not-for-profit’s goals.
- The site where the sale takes place must not constitute a regular place of business.
What is a Qualifying Not-for-Profit?
To be eligible for the fundraising exemptions, a qualifying organization is one of the following:
- A tax-exempt nonprofit corporation described by §501(c)(3), (4), or (10) of the Internal Revenue Code.
- A nonprofit organization that would qualify for tax exemption under these Internal Revenue Code sections except that it is not organized as a nonprofit corporation.
- A nonprofit organization that does not pay its members, stockholders, officers, directors, or trustees any amounts from its gross income, except as compensation to any person for services rendered and does not engage in a substantial amount of political activity.
Exemption Rules for Events
Fundraisers are one of the main methods not-for-profits use to raise money to fulfill their organizations’ purpose. In the process of planning the event, organizations may purchase items to sell at the fundraiser or add to an auction. Often, these items are subject to sales tax when purchased and/or when sold to an end customer. However, an exemption is available if the funds from the fundraiser or auction sale will go to directly toward the not-for-profit organization’s purpose.
Examples of not-for-profit fundraisers that raise money through sales of goods include large fundraising events as well as smaller events such as operating a food booth at a local fair, selling baked goods at a school event, or a church sponsored feed held in their basement. These events qualify as long as two requirements are met: the income raised from the sale is used for its organizational goals, and the fundraiser is not held at a regular business location.
If both requirements are met, the not-for-profit organization will not be collecting sales tax on the sales of goods at these events. The organization will need to keep strong records for any potential future audits showing the revenue from the sales went directly toward supporting the organization’s purpose, as well evidence for the location and length of the event. This can be shown through accounting and other similar records.
While there is an exemption for collecting sales tax for fundraiser events, one of the requirements for this exemption is that the sale does not occur at a “regular place of business.” A regular place of business is generally defined as a location where a taxpayer carries on its business in a regular and systematic manner, and which is maintained and occupied.
Outside of fundraising events, some not-for-profits have locations where they sell goods on a regular basis, such as a bookstore, gift shop, or a website. When sales take place from one of these locations, sales tax must be collected from the end customer. Sites such as these are considered a regular place of business and therefore do not qualify for the fundraising sales tax exemption. A website is also considered a regular place of business for the fundraising sales and B&O tax exemptions.
The not-for-profit may still purchase any items they will be reselling to end customers with a reseller permit.
Obtaining a Washington Reseller Permit
Goods or taxable services purchased for resale, either as a qualifying fundraiser or as part of the operation of a regular place of business, may present a reseller permit to its vendors to avoid paying sales tax on the purchase of such items. A reseller permit allows the seller to make a tax-exempt purchase and acts as proof the buyer intends to resell the product or taxable service. The seller will keep the reseller permit as a record of why sales tax was not paid at the time of the purchase.
Reseller permits are only available to organizations that make retail sales and have registered with the state of Washington Department of Revenue and obtain a taxpayer reporting account. Once a not-for-profit is registered, it must apply for a reseller permit from the Department of Revenue.
Without a taxpayer reporting account, a not-for-profit will be unable to obtain a reseller permit. If a reseller permit is not obtained at the time of registration, proof of retail sales will need to be provided to the Department of Revenue in order to obtain one later. In the absence of a reseller permit, a not-for-profit will be required to pay sales tax on its taxable purchases to the vendor, but may apply for a refund from the Department of Revenue with proof the purchase was made for resale.
If your not-for-profit organization is planning to make use of the Washington state sales tax exemption, review the rules above and make sure you qualify. If you have questions regarding the exemption or obtaining a reseller permit, contact a Clark Nuber professional.
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