By Bob Heller, JD, LLM
It is common practice for nonprofit organizations to hold fundraisers to support the organization’s exempt purpose. But in a state such as Washington, which does not have an outright tax exemption for nonprofit organizations, the question becomes, what are the tax consequences to the fundraising organization?
Washington taxes apply broadly to all organizations, regardless of whether they are formed for charitable, or other, nonprofit purposes. Exemptions and deductions are available, but they are specific to particular types of organizations or activities.
For example, donations to nonprofit organizations are deductible in computing the business and occupation (B&O) tax, provided no significant goods or services are supplied in exchange.
Fundraising activities often involve the sale of goods or services where B&O, sales, or use tax may apply. It is important to understand when tax applies to a particular activity and what the organization’s responsibilities are.
Washington does have a tax exemption available to nonprofit organizations that conduct certain fundraising activities. The exemption applies to the business and occupation (B&O) tax, sales tax, and even use tax for both the organization and the donor when the requirements for exemption are met.
The exemption is available to qualifying nonprofit organizations that conduct fundraising activities. The activities, however, cannot involve the operation of a regular place of business and the proceeds of the fundraiser must be used to further the organization’s charitable goals.
A “qualifying” nonprofit, for purposes of the exemption, is one that is:
- A tax-exempt IRC § 501(c)(3), (4), or (10) organization; or
- A nonprofit organization that would otherwise qualify under the IRC sections above, except that it is not organized as a nonprofit corporation; or
- A nonprofit organization that does not pay its members, stockholders, officers, directors, or trustees any amounts from its gross income, except as reasonable compensation for services rendered, and does not engage in a substantial amount of political activity.
It is clear from Department of Revenue guidance that eligible events include those which occur periodically to raise money to further the qualifying organization’s charitable goals. There is no steadfast rule that determines what qualifies as “periodic,” but, based on the examples in the Department’s rules, it can be an event held a few weeks a year or a few days a quarter.
What is clear, is that the activity must be outside of the organization’s day-to-day activities and the activities cannot involve the operation of a place of business that maintains regular business hours. Keep in mind that a “regular place of business” depends on the type of activities you are conducting.
Examples of activities involving the conduct of a regular place of business include the continuous operation of a thrift shop (rather than an infrequent rummage sale), an espresso cart or snack bar operated during scheduled sporting events, and a bookstore.
It should be noted that there is a specific exclusion from the “regular place of business” rule for sales by free public libraries of used books, videos, sound recordings and similar items.
Further, the funds generated from the fundraising event must be used to further the goals of the organization. If the funds received only cover the cost of the event, the revenue will be considered taxable. The applicable B&O tax classification (e.g. retailing or service and other) will depend on the types of activities conducted or services performed.
Sales of tangible personal property to consumers are generally subject to the retail sales tax. A qualifying nonprofit organization, however, will be exempt from the sales tax collection requirement on sales made at an event where the organization is exempt from the B&O tax, meaning it has met the qualifications above.
In addition, a qualifying nonprofit organization is allowed to provide a reseller permit to its vendors on property that will be either resold, or given away, at a qualifying fundraising event. If the organization does not have a reseller permit, the Department will allow the organization to pay sales tax to its vendors and then apply for a refund.
Generally, use tax exemptions correspond to the retail sales tax exemptions, but that has not always been the case for personal property purchased or won at fundraising activities.
Beginning in 2013, the rules were revised to allow a use tax exemption for personal property valued at less than $10,000, purchased or won as a prize, at a qualifying fundraising event. In 2015, this value increased to $12,000.
As a result, the organization does not owe use tax on articles of personal property purchased to be resold, or given away, at a qualifying fundraising event and the consumer of that item is also exempt from the use tax.
In addition to the state B&O tax, there are also some 40+ cities in Washington that impose city-level taxes.
The deductions and exemptions provided by the local jurisdictions do not always mirror those at the state level. Depending on the location of your fundraising events, you should be sure to consider whether that city imposes a B&O tax and whether there is a deduction or exemption that applies.
There may also be other taxes imposed by local jurisdictions that could affect you, such as the Seattle admissions tax. This tax applies to charges for admission to an event. An exemption is available for certain events that are hosted by nonprofit organizations and meet certain criteria. A certificate of exemption from the Seattle admissions tax is required in advance of the event.
Contact a member of our SALT team if you have further questions.
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