Q&A #126 – Are 501(c)(3) organizations automatically exempt from sales and use tax?
Question: My nonprofit organization recently received approval of 501(c)(3) status from the IRS. Does this mean that we are also automatically exempt from sales tax in our state?
Answer: A nonprofit organization’s eligibility to qualify for exemption from sales tax (and a related tax called “use tax”) is determined by the laws and procedures of the applicable state, but in general IRS approval of 501(c)(3) status does not result in automatic exemption from sales and use tax. 501(c)(3) status is often a prerequisite for exemption from sales and use tax, but most states have a separate detailed application process for this exemption. Further, in many states the sales and use tax exemption has rigid criteria and not all 501(c)(3) organizations will qualify.
It is important to recognize that the federal and state tax systems in the United States, although interdependent in numerous ways, are separate and distinct. 501(c)(3) status is a federal tax classification, and 501(c)(3) organizations might or might not be exempt from various taxes at the state level, such as state corporate income tax, real property tax, personal property tax, sales and use tax, among other examples.
While some states treat 501(c)(3) organizations as automatically exempt from certain taxes like the state corporate income tax (with no separate state application required), the process and requirements vary depending on the laws of the applicable state and/or other taxing authority like a county or municipality, and often vary within a particular state, county, or municipality depending on the type of tax.
Sales and use tax is one example of a tax that usually has its own separate and unique exemption application requirements, and 501(c)(3) status is often just one of several required criteria for exemption. For example, many states do not grant exemption from sales and use tax unless the organization also demonstrates that it is physically based in the state and/or has a charitable mission that specifically benefits the residents of that state. Additionally, some states put an expiration date on sales and use tax exemption, requiring an organization to periodically reapply to renew the exemption.
Planning Tip – It is common for a nonprofit organization’s geographic footprint to expand or contract over time. Consequently, organizations must keep an eye on whether their evolving activities trigger new considerations and obligations, such as the need to obtain tax-exempt status in additional states. Plan to periodically reassess your organization’s exposure to new state and local taxes and other laws. This assessment is particularly important when an organization’s fundraising efforts and/or programmatic activities expand into new states. Also, pay close attention when hiring new employees or allowing current employees to work remotely from another state. These are common examples of changing situations that can quickly trigger new state tax and other legal obligations.
Note also that being approved as exempt from sales and use tax in one state does not mean that the organization is automatically exempt in other states.
If you have a question you would like to submit to SE4N, send it to us using the contact form and we will consider answering it in a future post. Please do not send confidential information.
You might also be interested in:
