When asked a tax question, I usually resort—both seriously and facetiously—to one of my standard answers: “Everything is taxable…unless it’s not.” Remember that all taxes are written to include what is being taxed, whether it is income, wealth, gain or value of assets transferred. After writing the law to pick up as much as possible in the tax base, Congress or the legislature turn to deductions and exemptions, granting them solely as matters of legislative grace. These principles apply to both income and sales taxes. The exemptions available to nonprofit entities are numerous, as they generally pay no income or sales tax. This article will focus on when and how the Illinois sales and use taxes apply to Illinois nonprofit organizations.
General Rule: The State of Illinois taxes the selling price of tangible personal property (TPP) the last time it is transferred for value.
Illinois does have some special rules applying to transfers of TPP involving non-profit entities.
Sales to nonprofits. Sales of TPP to nonprofit organizations are generally exempt from sales and use tax. This exemption applies as long as the organization provides its state exemption identification number to its vendor. The organization obtains an active exemption identification number by applying to the Illinois Department of Revenue, and it is usually valid for five years, after which it must be renewed. Some examples of exempt purchases include:
- Office supplies for the local church
- Food for Monday’s breakfast at the homeless shelter
- First aid supplies for next weekend’s Scout campout.
If you are the purchaser for your organization, remember the purchase is not automatically exempt. You must have the organization’s exemption identification number, and the vendor may ask you to provide evidence you are actually buying for that organization (like by using check stock from the organization or using a credit card issued to the organization).
Sales by nonprofits. Sales of TPP by nonprofit organizations generally are subject to Illinois sales and use tax. Certain exemptions apply, but most of these exemptions apply whether the seller is a for-profit or nonprofit organization: sale for resale, sale to a nonprofit organization, sale in interstate commerce, and sale of machinery and equipment for farms and manufacturing in enterprise zones, to name a few. Please note items sold at gift shops and “thrift stores” operated by charitable or religious organizations are subject to sales tax.
There are several general situations in which sales of TPP by nonprofit organizations are exempt:
- Sales to members (students if the seller is a school, patients if the seller is a qualifying hospital) of TPP used primarily for the purposes of the seller;
- Sales that are noncompetitive with businesses, including occasional dinners, socials and similar activities, whether or not open to the public; and
- A limited number of occasional dinners conducted by a nonprofit.
Examples of sales to members qualifying for the exemption are:
- Sales by certain nonprofits of books or other items containing such organizations' own individualized literature, even if such sales are made to the public, because such sales are not competitive with retailers;
- A school’s sale of pencils and paper to its students; and
- A qualifying hospital’s sale of meals or medicine to its inpatients. However, sales made in a hospital cafeteria, which is open to the public, will be taxable sales.
Noncompetitive sales occur when it can be said that such selling is noncompetitive with business establishments. The specific facts and circumstances of the individual situation will determine whether or not a particular sale is “noncompetitive.” Matters to be considered include:
- The nature of the particular item being sold (candy or refrigerators); and
- The character of the particular sale, and the real, practical effect upon competition.
Examples of noncompetitive sales include infrequent sales of cookies, doughnuts, candy, calendars or Christmas trees by Scout organizations or by other nonprofits. Even if the sale to the public occurs only once a year, the nonprofit conducting the sale would incur a sales tax liability if it sells hats, greeting cards or other items for which the buyer’s main motive is to acquire the property rather than accept the property merely as a token for making a donation.
The Attorney General has laid down the following tests for determining that such selling is noncompetitive:
- The transactions are conducted by members of the nonprofit and not by any third party, such as a franchisee, licensee or paid fundraiser;
- All of the proceeds must go to the nonprofit;
- The transaction must not be a continuing one, but rather,should be held either annually or a reasonably small number of times within a year; and
- The main reason for buying the items must be the making of a charitable contribution, with the transfer of property being merely incidental and secondary to the main purpose of making a gift to the nonprofit.
The third exception is for occasional dinners, socials or other similar activities that are conducted by certain nonprofits are not taxable, whether or not such activities are open to the public. This exemption extends to occasional dinners, ice cream socials, fun fairs, carnivals, rummage sales, bazaars, bake sales and the like, when conducted by certain nonprofits, whether the items that are sold are purchased or donated for the purposes of the sale, and even if the sale is open to the public.
For the purposes of this exemption, “occasional” means not more than twice in any calendar year. Where more than two events are held in any calendar year, the organization or institution may select which two events held within that year will be considered exempt. Once the organization or institution has made the selections, the selections cannot be changed. All other events in that year will be considered taxable.
Remember, when working with nonprofits, the exemptions from income tax and sales tax are different. Simply because a transaction involves a nonprofit does not render it completely tax-exempt. iBi
Alan Willadsen is a tax manager at Heinold-Banwart. He can be reached at (309) 694-4251 or awilladsen@hbcpas.com.
