Health Care Reform Resource Center
33 Davis Brown Attorneys Selected for The Best Lawyers in America 2014
Davis Brown Attorneys Named Among Best in the U.S.
Immigration Client Resource Center
Voted Des Moines' Best Law Firm

Davis Brown Tax Law Blog


Non-profit Organizations and Iowa Sales and Use Taxes - February 18, 2012

A common misconception persists among Iowa non-profits and vendors that all non-profits are exempt from sales tax on goods purchased on behalf of the non-profit. Most non-profits do, in fact, have to pay sales taxes on their purchases. Only specifically enumerated non-profits are fully exempt from sales taxes. However, nonprofit organizations typically do not have to collect tax on items that they sell so long as the proceeds go directly to the educational or non-profit purposes of the organization. It is always a good idea to review these rules if you are a non-profit operating in Iowa.

 

The following are the Iowa entities that are exempt from sales and use taxes:

  • American Red Cross.
  • Navy Relief Society.
  • U.S.O. (United Service Organizations).
  • Community health centers.
  • Migrant health centers.
  • Certain Residential care facilities and intermediate care facilities for the mentally ill.
  • Residential facilities for mentally retarded children.
  • Certain licensed residential facilities for child foster care.
  • Rehabilitation facilities which provide certain accredited rehabilitation services to persons with disabilities and qualified adult day care services.
  • Community mental health centers.
  • Sales of tangible personal property and services made to nonprofit hospitals and nonprofit hospices.
  • Statewide nonprofit organ procurement organizations.
  • Nonprofit legal aid organizations.
  • Nonprofit organizations organized solely for the purpose of lending property to the general public for nonprofit purposes.
  • Nonprofit private museums.
  • Governmental units, subdivisions, or instrumentalities of the federal government or of the state of Iowa.
  • Federal corporations created by the federal government which are exempt under federal law.
  • Private nonprofit educational institutions located in Iowa.
  • Private nonprofit art centers located in Iowa.
  • Habitat for Humanity in Iowa when purchasing building materials.
  • Toys for Tots when purchasing toys.
  • Community action agencies.

 

For non-profit organizations which are not found on the preceding list, Iowa Code § 423.3(78)(2011) exempts the sales price of sales of tangible personal property if the profits from the sale are used for educational, religious, and charitable purposes. Organizations should be aware that this is a separate test from the IRS requirements for exempt status under IRC §501(c)(3).  Iowa Administrative Rule 701-17.1 defines the terms, "educational, religious, and charitable". Exemption as a religious organization is fairly straight-forward and most churches, synagogues, or mosques should qualify. Educational is defined as "the acquisition of knowledge tending to develop and train the individual. An activity that has as its primary purpose to educate by teaching." Charitable is defined, "the term 'charitable 'may be applied to almost anything that tends to promote well-doing and well-being for public good or public welfare with no pecuniary profit to the one performing the service.".  In short, it is a good idea to review these rules prior to claiming an exemption.

 

The IDR has a good website for non-profits that covers these issues in some depth. The exemption for non-profit sales requires that the net proceeds go towards the charitable activity. However, if not all of the proceeds go towards charitable activities, then the exemption is prorated, not denied. The website referred to above, gives the following illustration:

 

A local organization (not a 501(c)(3)) has a fundraiser and collects $10,000 in net proceeds. The organization gives $9,000 to a local nonprofit homeless shelter and uses $1,000 to pay guest speakers at its meetings. The organization does not pay sales tax on the $9,000 given for a charitable activity, but must pay sales tax on the $1,000 it retained for its own use.

 

The term net proceeds means the gross revenue less the costs of operating and holding the event. Unfortunately, non-profit sales tax issues can get complicated in a hurry. Notice in the above example, the organization was likely not a qualifying non-profit for sales tax purposes. However, it qualified for the exemption because the organization expended the proceeds for charitable purposes. If the organization were exempt under Iowa sales tax law, the speaker fees could also be considered exempt net proceeds because the speakers would be furthering the charitable or educational purposes. It is important to look at who the entity is that is claiming the exemption.

 

Other examples given include a food vendor at a little league game where the proceeds of the vendor go back into the little league for uniforms. That example is determined to be an exempt activity for sales tax purposes so long as the little league organization is a IRC § 501(c)(3) charity. Certain local theaters, civic centers, and similar entities can also claim an exemption for the sales prices of the ticket sales to their events, provided that the entity sponsoring the event is an exempt organization and the event furthers the charitable or educational purposes.

 

Operationally, it is important to keep track of the proceeds that are gathered from exempt events. If the organization provides any benefits (other than reasonable compensation) to its volunteers and members, the Department has taken the position that the organization must remit sales tax on the amount spent for these benefits. The Department provides a simple example of a charity that raised $10,000.00 but spent $1,000.00 on a pizza party for those that helped with the event and its members. The Department takes the position that those proceeds are not spent in furtherance of the exempt purposes and the organization must pay sales tax on the $1,000.00. Thus, it is a good idea to segregate unrestricted donations from proceeds raised through fundraising and event activities. If a pizza party is desired, then the donated funds can be used for those purposes from a separate account without triggering a sales tax liability.

 

To summarize, only a select few non-profits in Iowa can claim an exemption for purchases for their organization. Most, however, can claim a sales tax exemption for their fundraising and event activities - keeping in mind that the proceeds must be spent in furtherance of the exempt purpose.

 

Developing Issues for Tax Professionals - A question that is being considered by tax professionals and the Department at the moment is just how the "net proceeds" concept is to be applied in practice. As we know, the vendor is responsible for the collection of sales taxes from the consumer at the time the sale is completed. Thus, the following question is necessarily raised - if the exemption is applied on the back-end of the transaction (determining the net proceeds requires analysis after the sale takes place), then how is the tax to be collected on the front end of the transaction? In practice, most non-profit organizations simply remit the tax on the for-profit proceeds without consideration as to how it was collected. This raises a number of issues as to how you would itemize a receipt or disclose to those purchasing the item that sales taxes are being collected. The Department has yet to provide guidance on this issue, but as charities provide more and more complex services and goods, this is becoming an issue that will have to be dealt with and developed. We will post any guidance that we receive on this issue in the future.