Starting a Nonprofit: Sales Tax Exemption
One of the benefits of being a nonprofit organization, compared to being a for-profit entity, is the possibility of avoiding paying sales tax on business purchases.
In order for vendors to recognize a nonprofit organization as exempt from paying sales tax on purchases, the organization must take appropriate preliminary steps.
Sales tax exemption is an issue controlled by the laws of each specific state. So the first, and most important, step is to learn the rules of the state in which the nonprofit operates. This information can usually be obtained from state revenue agencies via an online search.
In some states, the organization must file an application for sales tax exemption. The application may also include other matters beside sales tax purchases, such as registering for the payment of sales tax on sales made by the nonprofit. The applying entity may be required to submit supporting documents, as well. For example, many state require the organization to submit a copy of its 501(c)(3) determination letter with the application. Because the 501(c)(3) determination process takes many months, this can leave an organization unable to obtain sales tax exemption for a period of time. Other states will allow an application for sales tax exemption to be submitted as soon as the 501(c)(3) application has been submitted – not requiring it to have been approved first.
Not every state allows nonprofit organizations to avoid paying sales taxes on purchases. Some states simply do not recognize such an exemption and require all entities to pay sales tax on purchases. There are also a few states that do not charge sales tax on purchases at all, so therefore sales tax exemption is not necessary.
Beyond applying for sales tax exemption approval, in many states a certificate must also be submitted to each vendor verifying the sales-tax-exempt status of the purchasing entity. Such certificates become available to the organization once its sales tax exemption application has been approved. In at least one state, the vendor certificate is all that is required – there is no application process beforehand.
One issue that complicates sales tax exemption is that many nonprofit organizations operate programs in more than one state, and therefore may need to make purchases in multiple states. Since sales tax exemption is governed by each state’s rules, the nonprofit entity may need to apply for sales tax exemption in more than one state to avoid sales tax on purchases.
As the discussion above indicates, sales tax exemption can be a complex matter for a nonprofit organization. It may be more practical to go ahead and pay sales tax on some minor purchases, or on occasional purchase made in a state outside of where the nonprofit conducts the majority of its business. The amount of sales tax paid in these situations may not rise to the level of making the sales tax exemption procedures worth the time and energy required. The real benefit is for major purchases.
