It is easy to assume that entities operating in a tax exempt capacity are free from most, if not all taxes. In fact, many have a misconception on this issue, as their view of Non Profit entities as tax exempt can and may be incorrect at times. Although most qualified Non Profit entities are free from Income Taxes, it is not always the case as it relates to other State and Local taxes.
Unfortunately, many states like California impose sales and use taxes on all entities with the exception of the Federal Government, which is deemed tax exempt in all states. Although there are many exceptions to this rule, it is important to understand how your home state evaluates the taxability of not for profit entities to avoid unnecessary state and local exposure.
Here are a few Sales and Use tax facts regarding the taxability of tax exempt entities across the United States:
- 9 States have Limited Exemptions for non-profit companies.
- 11 States have no exemption for non-profit companies.
- 26 States have exemptions for non-profit companies.
- The remaining 5 States do not currently have a state sales tax.
Each respective state has its own guidelines in evaluating when a Non Profit entity can and will impose sales and use taxes on specific transactions. Although the answer to a question in one state may be simple and straight forward, it becomes complicated when dealing in a multi-state environment, as the answer is rarely a simple when dealing with 50 different taxing jurisdictions.
Equally important is identifying and obtaining the correct documents or forms needed to secure a transaction as exempt. Many states regularly audit Tax Exempt entities to ensure proper sales and use tax compliance. Proper documentation and understanding of the States sales and use tax rules will ensure an easy audit process with little to no sales and use tax exposure.
As we have already noted the taxability of transactions differ in every state, it should be equally noted that they also differ by type of institution. Exemptions for hospitals will differ from religious organizations, schools or public museums. If you need assistance in determining whether your Non Profit entity has exposure or would like to discuss the taxability of specific transactions, please reach out to our state tax specialists, and we can assist you with brining your Non Profit into state compliance.