Transactions Involving Nonprofit & Governmental Entities. Terry O Neill Taxpayer Service Specialist

Transcription

1 Transactions Involving Nonprofit & Governmental Entities Terry O Neill Taxpayer Service Specialist

2 Sales TO Nonprofit & Governmental Entities

3 How Does an Organization Receive Nonprofit Status? Nonprofit entities may request nonprofit status and income tax exemption from the federal Internal Revenue Service (IRS). Iowa does not make this determination. An entity is automatically exempt from Iowa income tax if exempt status is granted by the IRS.

4 If the Entity is Exempt from Income Tax is it also Exempt from Sales Tax? NO Nonprofit entities are not automatically exempt from paying sales tax, even if they are exempt from state and federal income taxes.

5 Don t Nonprofit Entities Have a Special Sales Tax Exemption? NO A nonprofit entity is treated the same as any other person or business for sales and use tax purposes.

6 So Nonprofits Need to Pay Sales Tax? YES Sales tax must be paid unless some other general sales tax exemption applies. Local option sales tax must also be paid on purchases made in jurisdictions that impose the tax.

7 What Do You Mean by a General Sales Tax Exemption? For example, purchases made for resale are exempt from sales and local option taxes. Purchases for resale are exempt even if the nonprofit entity does not have a sales tax permit.

8 But Aren t Churches Exempt from Sales Tax? NO Churches owe sales tax on purchases for their own use. Example: A church purchases hymn books to be used by the congregation. The church pays sales and local option tax, if any, to the seller.

9 So Churches Always Pay Sales Tax? NO Churches do qualify for the resale exemption or any other general sales tax exemption. Example: A church purchases Bibles from a book publisher to resell to its members. Since the purchase is for resale, the church does not pay sales tax to the publisher.

10 QUIZ QUESTION #1A: TAXABLE OR EXEMPT? A church purchases poinsettia plants to decorate the church building during the Christmas season. Is the sale to the church taxable or exempt? Taxable. The church must pay sales tax when the plants are purchased. 10

11 QUIZ QUESTION #1B: TAXABLE OR EXEMPT? A church purchases poinsettia plants which it sells to members of the congregation during the Christmas season. Is the sale to the church taxable or exempt? Exempt. The church can purchase the poinsettias tax-free for resale. 11

12 Aren t Any Nonprofits Exempt from Sales Tax? A few are exempt, including the following: Federal government Iowa state, county, and local governments Private nonprofit educational institutions located in Iowa Nonprofit hospitals and nonprofit hospices (licensed under Iowa Code chapter 135B) Nonprofit private museums

13 List of Exempt Entities A more complete list of entities that are exempt from Iowa sales/use tax can be found in our Nonprofit Entities publication:

14 Federal Government Iowa State, County & Local Governments (including public schools) Purchases made directly by these governmental entities are exempt from Iowa sales tax. Payment is made with a government check or credit card. Purchases where payment is made by government employees with cash, personal checks, or personal credit cards are taxable even if the employee will be reimbursed by the government.

15 Municipal Utilities EXCEPTION to the exemption on purchases by governmental entities Purchases by municipal utilities that sell: Gas Electricity Heat Pay TV Communication Purchases by the above utilities are taxable. NOTE: Sales to water utilities are exempt.

16 Private Nonprofit Educational Institutions Located in Iowa Purchases made directly by these schools for educational purposes are exempt from Iowa sales tax. Purchases made by employees with cash, personal checks, or personal credit cards are taxable even if reimbursed by the school. The exemption only applies to IOWA schools.

17 What About School Organizations? Organizations affiliated with schools, such as a PTA or school booster club, are not automatically exempt from sales tax.. Purchases made directly by these organizations are normally taxable. If the organization gives funds to the school and the school makes the purchase, the school s exemption from tax will apply.

18 What if a School and a Church Purchase Something Together? When items are shared by a school and a church, the primary use determines if the purchase is taxable. Example: A parochial school and a church purchase an organ together, which is used by the school's music teacher for student lessons and during Sunday services. If the organ is used by the school more often than it is used by the church, it is not taxable.

19 Iowa Nonprofit Hospitals & Nonprofit Hospices Purchases by a nonprofit hospital licensed under Iowa Code chapter 135B are exempt from tax if the property or service purchased is used in the operation of the hospital. Purchases by a freestanding nonprofit hospice facility which operates a hospice program as defined in 42 C.F.R. ch. IV, 418.3, are exempt from tax if the property or service purchased is used in the hospice program. Building materials for construction contracts are not used in the operation of the hospital or in the hospice program, but in activities at least one step removed from that operation.

20 Iowa Nonprofit Private Museums Purchases by a nonprofit private museum used for educational, scientific, historic preservation, or aesthetic purposes are exempt from tax. A museum includes: Art galleries Historical museums Museums of natural history Museums devoted to one particular subject or one person A museum does not include: Aquariums Arboretums Botanical gardens Nature centers Planetariums Zoos

21 Exemption Certificates Used to make exempt purchases Fillable online at 21

22 QUIZ QUESTION #2: MULTIPLE CHOICE When a purchase is made for a governmental entity, which of the following payment methods is not exempt? a. Government check b. Personal credit card of a government employee, who will be reimbursed later c. Government credit card d. All are exempt b. The governmental entity must make the purchase directly. 22

23 Sales BY Nonprofit & Governmental Entities

24 Sales by the Federal Government The United States federal government is not required to collect Iowa sales tax when making a sale.

25 Sales by the State of Iowa Sales by the State of Iowa are taxable.

26 Sales by Iowa Cities & Counties The type of sale determines whether a city or county must charge sales tax.

27 Taxable Sales by Cities & Counties Utilities and Communication Services Water Communication services Municipally-operated pay television services The following are subject to sales tax, unless sold to residential customers: Gas Electricity Heat Note: local option tax, if applicable, must still be charged even if sold to residential customers

28 Taxable Sales by Cities & Counties Sewer and Solid Waste Services Sewer Solid waste collection and disposal Taxable to nonresidential commercial customers

29 Taxable Sales by Cities & Counties Entry Fees for Athletic Events Fees paid to cities and counties that sponsor athletic events are taxable Team entry fees Individual entry fees League fees Tournament fees Events include but are not limited to baseball, basketball, softball, volleyball, golf, tennis, racquetball, swimming, wrestling, and foot racing

30 Taxable Sales by Cities & Counties Fees for Use of Athletic Facilities Individual fees Group fees Daily fees Season ticket fees Facilities include but are not limited to golf courses, ball diamonds, tennis courts, swimming pools, and ice skating rinks. The fee is taxable whether or not the use is for a brief or extended period of time

31 Exempt Sales by Cities & Counties Athletic lessons or instruction Such as golf or swimming lessons Athletic equipment rental Such as a golf cart or recreational boat Food and drinks at concession stands or other merchandise Facility or park rental Unless the area is a specific athletic facility Campground or hiking trail Repair work

32 Third Party Sales Third-party sales are not exempt just because they take place at a city or county event or facility. It may sometimes be difficult to determine if a city, county, or third party is the retailer. The facts of each situation and the terms of contracts must be considered.

33 QUIZ QUESTION #3: MULTIPLE CHOICE Which of the following are taxable at a city owned golf course? a. Golf cart rental b. Hot dog from the concession stand c. Green fees d. Soda pop purchased from the beverage cart c. Fees for use of an athletic facility are taxable. 33

34 Do Other Nonprofits Need to Collect Tax When They Make Sales? Sales made BY entities or organizations are exempt if the proceeds are used for qualifying educational, religious, or charitable purposes.

35 Educational Purposes Educational purposes include the following: acquisition of knowledge to develop and train a person activity that has as its primary purpose to educate by teaching activity that has as its primary objective to give educational instruction activity for which the educational process is not merely incidental activity where the purpose is systematic instruction school recreational activities and intramural sports any activity designed to offer culture to the public tests given to students or prospective students to measure intelligence, ability, or aptitude municipal or civic science centers art centers libraries IRC 501(c)(3) nonprofit youth athletic groups

36 Religious Purposes Religious purposes include the following: any activity that promotes religious worship all forms of belief in the existence a deity forms of worship reference to one's views about the deity, or the relationship to one's creator the use of property by a religious society or by a body of persons as a place for public worship

37 Charitable Purposes Charitable purposes include the following: performance of services for public good or public welfare activities for the benefit of a family, an individual, or the public at large giving of gifts relief of poverty promotion of health provision of a governmental or municipal service maintenance of public parks other similar activities Profit-making organizations may engage in charitable activities, even though they are not charitable organizations.

38 For Sales to be Exempt, How Must the Proceeds be Spent? The net proceeds must be used by or donated to one of the following to be exempt: Entity exempt from federal income tax under Internal Revenue Code section 501(c)(3) Government entity (including public schools) Private nonprofit educational institution

39 What are Net Proceeds? Net proceeds are those remaining after direct expenses have been deducted from the gross receipts of the activity or event. The expenses must be necessary and have an immediate bearing or relationship to the fulfillment of the activity. For example, the cost of food for a fundraising meal is a direct expense.

40 Do You Have an Example of How This Works? A local Jaycees chapter raises $10,000 from a haunted house fundraiser. The chapter gives $9,000 to the United Way and retains the other $1,000 for a pizza party for the chapter members and for others who helped with the event. Sales tax is not due on $9,000. The Jaycees must remit sales tax on the remaining $1,000.

41 What if the Organization Keeps the Proceeds? An organization will sometimes conduct fundraising activities where the net proceeds are used to further the organization's purpose. In these cases, the net proceeds are exempt if the organization itself is considered educational, religious, or charitable and is exempt from income tax pursuant to IRC 501(c)(3).

42 Organizations that Promote Iowa Food & Beverages Sales of food and beverages by an organization primarily engaged in the promotion of food or beverage products that are grown, produced, or raised in Iowa are exempt from tax. Example: A nonprofit association that is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code promotes the sale of Iowa-raised turkey. The organization sells turkey sandwiches, chips, and beverages. The association does not charge sales tax on its food sales.

43 Sales by Certain Fairs Sales made by the following are exempt from Iowa sales tax: State fair organized under Iowa Code chapter 173 A county, district, or fair society organized under Iowa Code chapter 174 NOTE: Sales made by third parties at the fair are taxable.

44 What About Gambling? All receipts from gambling activities sponsored by nonprofit entities are subject to sales tax, regardless of the ultimate use of the proceeds. Gambling receipts include charges paid to participate, admissions, and ticket sales.

45 What Must Nonprofits Do When They Hold Gambling Events? Nonprofit organizations, including churches, that conduct games of skill, games of chance, raffles, bingo, and other games are required to obtain a gambling license and sales tax permit. To obtain a gambling license, see Social & Charitable Gambling on the Iowa Department of Inspections & Appeals website. To obtain a sales tax permit, complete the Business Tax Registration on the Iowa Department of Revenue website.

46 So Gambling is Always Taxable? NO, there are a few exceptions. Gambling activities are exempt when: conducted by county and city governments, or held by the Iowa State Fair or Fair Society (organized under Iowa Code chapters 173 and 174), or held by agricultural fairs (specified in Iowa Code section 99B.5), or raffles where the proceeds are used to provide educational scholarships by a qualifying organization representing veterans

47 QUIZ QUESTION #4: TRUE OR FALSE? Remember the church that sold poinsettia plants to congregation members? The proceeds from those sales are going into the church treasury, so the church must collect sales tax from the members. False. Proceeds going to the church are considered used for religious purposes. 47

48 Construction Contracts with Designated Exempt Entities

49 Designated Exempt Entities Only the Following private nonprofit educational institution in Iowa nonprofit private museum in Iowa tax-certifying or tax-levying body or governmental subdivision of Iowa, including the state board of regents, state department of human services, state department of transportation Habitat for Humanity rural water districts organized under Iowa Code chapter 357A municipally-owned solid waste facility which sells all or part of its processed waste as fuel to a municipally-owned public utility all divisions, boards, commissions, agencies, or instrumentalities of state, federal, county, or municipal government which do not have earnings going to the benefit of an equity investor or stockholder NOTE: Nonprofit hospitals are NOT designated exempt entities.

50 Exemption Certificates Designated exempt entities May issue special exemption certificates to contractors and subcontractors Exemption Certificates allow: Purchase of materials free from sales tax Use of building materials from inventory without tax See Department website for more detailed information

51 How it Works Designated exempt entities: Register contracts with Department of Revenue Includes information on contractors and subcontractors. Uses online application. Provide each contractor/subcontractor with an exemption certificate/authorization letter developed exclusively for this purpose. The letters are printed directly from the online application. Contractors and subcontractors give a copy of the certificate to their material suppliers. Allows purchase building materials for the contract free from sales tax. Suppliers should retain this certificate in their records for at least three years.

52 Benefits for Exempt Entities Contracts don t include Iowa sales tax, which lower the bids. They do not need to obtain Contractor s Statements after the project is completed. They do not need to use the option of applying to the Iowa Department of Revenue for a refund of Iowa sales tax.

53 QUIZ QUESTION #5: YES OR NO? A new nonprofit hospital is being built. Does the hospital qualify as a designated exempt entity? No. 53

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