Nonprofit Accounting Basics

Sales and Use Tax

The rules for nonprofit sales/use tax vary considerably from state to state. Generally, organizations are required to pay sales and use tax on their own purchases unless they have an exemption issued by the state. Some states exempt all charitable organizations while others will exempt only certain types of charitable organizations. It is important to obtain an exemption certificate from the state if an organization qualifies for exemption in the state. Use tax is a self reported tax on purchases from out of state that are not taxed in the state where purchased. Certain types of merchandise are excluded from sales and use tax on a state by state basis.

It is important that an exemption from payment of sales/ use tax does not exempt an organization from collecting sales tax on merchandise that it sells. Generally, there is a requirement to collect sales tax on sales within the organization’s home state and to customers in any state where the nonprofit has nexis. This is true for all types of sales including phone, mail and internet. Thus, it is important for an organization to determine exactly which states require it to register, collect and remit the tax. Keep in mind, nexis can be caused by something as simple as having an employee working from home in the next state. Certain types of sales by nonprofits may be excluded by some states from collection of sales tax. A sales tax audit can be a very arduous and expensive process for the organization, with the state going back several years in assessment of both tax and heavy penalties.