Fundraising Sales Tax Change Provides Nonprofits More Budgeting Leeway

• The old rule stated that if less than $5,000 of sales were made, the nonprofit could elect not to collect and not to remit sales tax on those sales. However, as soon as $5,000 in sales were made, sales tax would need to be remitted on every dollar of taxable sales. This caused budgetary issues with smaller nonprofits, since there was uncertainty at times if the organization would be under the $5,000 threshold.
• The new rule is still based on calendar year sales, and still applies to only certain nonprofits, generally those exempt under 501(c)(3) or 501(c)(4) of the IRS code. The rule now states that sales of the first $10,000 of tangible personal property in a calendar year for fundraising purposes are exempt from sales tax as long as the nonprofit has aggregate sales at retail in the calendar year of less than $25,000.

Considerations for Planning and Budgeting

The amount of nontaxable fundraising sales has doubled from $5,000 to $10,000. Previously it was all or nothing for the exemption, and now it is truly an exemption for the first $10,000 sold. However, there are still planning and budgeting issues to consider because once aggregate sales at retail hit $25,000, there is no exemption.

A conservative way to plan is that if the organization believes during the budget process that sales will be $10,000 or less, do not charge sales tax. Then, as things change during the course of the year, if sales exceed $10,000, start to charge sales tax on those exceeding $10,000. The likelihood that the nonprofit’s budgeted sales will be less than $10,000, and actual sales will be $25,000 or more, should be remote if budgeting is based on expected activities.

This change gives the nonprofit more leeway in their budgeting and helps avoid having to remit sales tax that was never collected. If the nonprofit chooses to collect sales tax when it is exempt, it likely needs to remit that amount to the state. The forms and documentation on the State of Michigan’s website have not yet been updated for this change in Michigan Compiled Laws (MCL 205.54o).

If you have questions or concerns about your sales tax responsibilities going forward with the new rule, contact a member of Yeo & Yeo’s Nonprofit Services Group.