“Sales tax” is a phrase that fills many nonprofits with dread, especially when they try to determine whether or not to collect or remit it. The rules last changed in 2018. However, in December 2020, the Michigan Department of Treasury issued Revenue Administrative Bulletin (RAB) 2020-25, without any fanfare, which “clarifies” some things that may change how nonprofits operate.
Exemption for the first $10,000 of sales
Fundraising sales tend to be the biggest sales tax question in the nonprofit world. In Michigan, 501(c)(3), (4), and (19) have some leeway with fundraising sales. Those entities with total sales at retail of $25,000 or less can claim exemption from sales tax on the first $10,000 of sales. The exemption does not apply if the nonprofit already specifically collected the sales tax; all sales tax collected must be remitted. But if the nonprofit was going to do algebra to determine what amount of the gross price was sales tax versus sales price, they do not need to remit taxes on the first $10,000 as long as they keep total sales at retail below $25,000. Once $25,000 is met, all retail sales are taxable (subject to standard sales tax rules).
New developments – who carries the risk?
This RAB goes on to explain several nuances that may be different from how things have operated in the past. The RAB gives several examples where a nonprofit (a school in the example, but it could be any 501(c)(3), or (4)) purchases goods from a for-profit to sell for fundraising purposes. Whether or not these sales are considered sales at retail for the nonprofit or the for-profit is dependent on the entity bearing the risk. If the nonprofit simply takes orders on the front end (through the nonprofit itself or volunteers, including students) and then uses the orders to purchase the fundraising items from the for-profit, the nonprofit has no risk. In that case, the for-profit is the one making the sale because the for-profit is fulfilling the orders. Yes, the school pays the for-profit, but there is no risk to the nonprofit since they only ordered what they had sold. The for-profit must collect and remit the sales tax on the transaction; the nonprofit does not remit sales tax on the transaction.
If instead the nonprofit purchases the goods first, and after purchasing the goods enlists volunteers to sell them, now the nonprofit bears the risk that they may not sell all the items. The sale at retail is the nonprofit’s sale at retail; thus, the amounts are subject to sales tax collection and remittance by the nonprofit but could meet the nonprofit exemption described above. Similarly, suppose a nonprofit school operates their cafeteria themselves. In that case, meals sold to students are not taxable, but if the nonprofit outsources to a for-profit (who really makes the sales to the students), they are taxable.
What is not subject to exemption?
What is not subject to the exemption on the first $10,000 of sales at retail? If a 501(c)(19) sells tangible personal property that is not for the purpose of raising funds for the benefit of an active duty service member or a veteran, that is a taxable transaction for sales tax. However, fundraising by the 501(c)(19) that is for the benefit of the active duty or veterans would be subject to the exemption using the same rules as a 501(c)(3) or (4). In addition, non-fundraising retail sales (such as a gift shop at a nonprofit) are all taxable.
The RAB goes on to explain the tax base for retail sales as well. Just because the nonprofit paid sales tax on a purchase they made from the vendor does not cover their requirement for the nonprofit to charge sales tax on the sale. For example, if a nonprofit pays $10 for a t-shirt and sells it at $15, the nonprofit should not pay any sales tax when purchasing the t-shirt for $10 and should claim a resale exemption. Then the nonprofit would charge the final customer sales tax on the $15. If the nonprofit mistakenly paid tax on the $10 shirt, they still must remit on the $15 of sales and then request a refund on the $10 shirt.
Prepared food at events
Many fundraising events have prepared food. In determining the amount of sales tax required to be remitted, the nonprofit first must determine if the food is part of the fundraising event (not an optional payment and not separately stated) or if it is a separate deliverable (such as a cash bar that is optional to purchase.) If it is a separate deliverable, the nonprofit must remit sales tax on the sales and not simply pay sales tax when purchasing the food from the vendor. If the food is part of the fundraising event, there are two options. If they pay fair value to a vendor for the food, they can pay sales tax to the vendor and have the sales tax requirements complete; this only applies to prepared food sales at fundraising events. Otherwise, the taxable amount is the total fundraising event fee, unless the client can substantiate a lower fair value of the food (in which case the food’s fair value is the taxable amount). Note that in no case do they look at the cost of the food, but rather the fair value. If the event has a $25 admission fee and provides dinner with a fair value of $20, but the food was donated, $20 of the $25 is still subject to sales tax (the fair value).
Auctions and raffles
Auctions and raffles are other areas that can be confusing. If the entity is a 501(c)(3) or (4), then the taxable amount of the auction item is the lesser of the fair value or the proceeds received. However, other entities, including 501(c)(19) entities, must pay sales tax on the proceeds received, regardless of the fair value. The RAB also indicates raffle proceeds are not subject to sales tax, but if the nonprofit purchases a good to be raffled, the nonprofit owes use tax on that purchase. Donated items for the raffle have no use tax requirement (although for the auction, they have a sales tax requirement).
Sales tax license
Generally, nonprofit organizations making retail sales are required to obtain a sales tax license, even if they expect to meet the exemption. The RAB clarifies that a nonprofit entity that makes retail sales at two or fewer events in a calendar year does not have to obtain a sales tax license or register for use tax. Instead, the nonprofit may report and remit tax on Form 3421 Sales Tax Return for Special Events or Form 5089 Concessionaire’s Sales Tax Return.
Conclusion
Nonprofit sales tax has always been – and will always be – complex in the State of Michigan. However, this new RAB changes certain areas, especially fundraisers where the nonprofit does not have the risk, and prepared food sales where the nonprofit sells the food separately. Make sure your nonprofit is calculating sales tax correctly.
For more information, refer to the Treasury’s Revenue Administrative Bulletin 2020-25, Sales and Use Tax Treatment of Nonprofit Entities. Contact your Yeo & Yeo professional if you need assistance.