Does Being a Nonprofit Organization Mean You Are Exempt from Sales and Use Tax?

State and Local Tax|Not-for-Profit

By Jennifer Koehler

It depends. Contrary to popular belief, recognition by the Internal Revenue Service as a nonprofit entity does not automatically make an organization exempt for sales and use tax purposes. States have specific criteria that must be met in order for a nonprofit organization to qualify for exemption. Generally, a nonprofit must be a charitable organization, educational institution, religious organization, or a volunteer firemen’s organization in order to be considered an exempt entity for sales and use tax purposes.

In Pennsylvania, only charitable organizations that meet the definition of a “purely public charity” are eligible for exemption. To be deemed a purely public charity, a nonprofit corporation must meet each of the five requirements as defined in 61 Pa Code § 32.1:

     •   Advance a charitable purpose;
     •   Donate or render gratuitously a substantial portion of its services;
     •   Benefit a substantial and indefinite class of persons who are legitimate subjects of charity;
     •   Relieve the government of some of its burden; and
     •   Operate entirely free from private profit motive.

In Ohio, sales tax exemption is available to churches, organizations exempt from federal taxation under IRC Sec. 501(c)(3), and nonprofit organizations operated for charitable purposes. Sec. 5739.02 (b) (12) of the Ohio Revised Code provides a list of defined activities that qualify as having a “charitable purpose” in each of the following categories: relief of poverty; the improvement of health; education; public broadcasting; homes for the aged; animal shelters; community centers; and arts performances.

Rules for nonprofits and their qualifications as exempt entities for sales and use tax purposes vary by state, and the process of gaining exempt status can be quite arduous. Once an organization achieves exempt status, it must review additional guidelines governing the taxability of specific purchases made by the exempt organization. Generally, purchases of items used in connection with an unrelated business activity are not exempt from sales tax.

Nonprofit organizations that are not sure about their exempt entity status or what constitutes a tax-exempt purchase should consult with their state and local tax professional.

Jack Stewart contributed to this article.

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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.

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