Understanding state sales tax exemptions for nonprofits
I often remind nonprofit leaders that the privilege of being exempt from federal and state income tax does not extend to other areas of taxation. IRS tax-exempt status does not apply to most payroll taxes, certain excise and business income taxes, and state sales tax, which is today’s topic. In fact, we are seeing heightened compliance efforts by state and local governments nationwide with respect to sales tax audits of nonprofits.
As you may be aware, many of our governmental units are a bit short of cash these days and are looking high and low for additional revenues. Nonprofits can be an easy target for additional revenue because many nonprofit leaders are not aware of the rules.
The first step in understanding the responsibilities of a nonprofit organization with respect to state sales tax is knowing that you have two sets of responsibilities: as a both buyer and seller. Also important to know is that, unless specifically exempted, your responsibilities are the same as a for-profit business. That means you are required to pay sales tax on purchases, and to collect and remit sales tax on sales. Many organizations get the purchasing side right, because retailers enforce those rules. However, there is often confusion regarding when to charge sales tax on sales, and remit that tax to the state via the filing state sales tax returns.
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