The following are a few of the sales and use tax issues that may impact nonprofit entities in Pennsylvania:
Obtaining a Sales Tax Exemption – A nonprofit organization must file the proper application and paperwork with the Pennsylvania Department of Revenue in order to obtain a sales/use tax exemption. Not every entity that is a nonprofit or is exempt from federal tax purposes is entitled to the Pennsylvania sales/use tax exemption. The entity must meet all of the following criteria:
- Advance a charitable purpose;
- Donate or render gratuitously a substantial portion of its services;
- Benefit a substantial and indefinite class or persons of its services;
- Relieve the government of a burden; and
- Operate free from motive of private profit.
Once the exemption has been obtained, a nonprofit entity is able to make purchases free of sales/use tax by providing the state-issued exemption certificate to its vendors.
Purchases – An exempt entity that has obtained the proper exemption in Pennsylvania is able to make the majority of its purchases free of sales/use tax. However, there are some areas in which the organization is still responsible for the payment of sales or use tax. Purchases of tangible personal property that will be used in an unrelated trade or business are subject to sales/use tax. Other common purchases that are subject to tax include materials, supplies and equipment used and installed in the construction, reconstruction, remodeling, repair and maintenance of real estate that becomes permanent part of the real estate. However, these types of purchases should not be confused with materials and supplies used for routine maintenance and repair of real estate, which are exempt from tax.
Construction Contracts – The exemption provided to nonprofit entities does not pass through to the contractor, even if the contractor is working as purchasing agent for the exempt entity. As such, the contractor is still responsible for use tax on the materials that he installs, even if the material installed by the contractor was purchased by the exempt entity. Purchases by contractors in construction contracts with exempt entities that qualify as “building machinery and equipment” are not subject to tax.
Sales in General – Sales of tangible personal property or services by an exempt entity may be taxable and require that the exempt entity register, collect and remit the tax to Pennsylvania. Even if sales are made to members, students, patients, employees or other persons directly associated with the organization, if taxable property is sold, the organization has a responsibility to charge the applicable sales tax. The fact that the organization may make no profit from the sale or that payment for the item purchased is called a donation does not preclude the organization from its responsibility.
Food Sales – Food sales by an exempt organization can be subject to sales tax. Generally, sales of food and beverages by an exempt organization are exempt from tax if the sales are in the ordinary course of the activities of the organization. However, if the organization sells selected foods to the public in competition with other organizations or businesses selling similar items, the activities will be deemed unrelated business activities, and the organization may need to charge and collect sales tax on the sales.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.