Arkansas and Colorado Issue Guidance Addressing Sales Tax Implications for Transactions Involving Non-Profit Organizations

Non-profit organizations are generally exempt from federal and state income tax, but that does not mean charitable organizations are wholly exempt from state sales/use tax.

By Denisse Beldin, SALT associate

You are likely familiar with the privilege afforded to non-profit organizations, in that they are generally exempt from federal and state income tax. But have you ever thought about the potential sales tax liability a non-profit organization could face at the state level?

Recently in Arkansas, a taxpayer submitted a request for a Revenue Legal Counsel Opinion regarding the sales tax implications for a qualified 501(c)(3) nonprofit corporation operating in Arkansas. [1] The corporation was curious if they qualified for an exemption from sales tax on the purchase of taxable goods and services in the operation of their organization in Arkansas. The legal counsel for the Arkansas Department of Revenue responded to their request stating that there was not a sales tax exemption available for 501(c)(3) corporations purchasing goods and services in Arkansas. [2]

In Arkansas, gross receipts derived from the sale of tangible personal property or taxable services to a charitable organization are generally not exempt from sales tax. In a situation where goods are purchased for resale by a charitable organization, there may be a possible exemption if the non-profit organization has either: a) resale certificate or b) a letter opinion issued by the Arkansas Department of revenue certifying that the organization is a 501(c)(3) corporation and that it intends to resell the goods purchased. Generally though, Arkansas considers goods that are not purchased for resale as being “for consumption or use” and are taxed appropriately.

Contrast the rules in Arkansas with Colorado, a state that generally exempts sales to charitable organizations but exempts sales by such organizations only if certain requirements are met. [3] Those requirements are as follows: (i) the organization may not engage in sales for more than 12 days during the calendar year (whether or not consecutive), (ii) the funds raised from such sales must be used in the course of the organization’s charitable service and (iii) the net proceeds must not exceed $25,000 for any calendar year.

Colorado goes one step further in exempting certain transactions involving charitable organizations. A recent Colorado General Information Letter (“GIL”) explains that the state provides an exemption for all purchases of construction and building materials by for-profit contractors and subcontractors for use in the building, erection, alteration or repair of structures owned and used by government entities, charitable organizations and schools. [4] Additionally, the GIL makes clear that any item that is taxable or exempt under the state sales/use tax provisions is also taxable or exempt from any state-administered special district, city and/or county sales/use tax. Colorado does have many home rule cities whose sales/use taxes are not administered by the state, and those cities’ rules may differ from the state rules, so taxpayers are cautioned to examine the relevant provisions.

The sales and use tax rules related to charitable organizations vary greatly among the states, and it is often the case that a charitable organization is not completely exempt from state and local sales/use taxes just because it is exempt from federal and state income taxes. In addition, many of the rules are dependent on the type of charitable organization (e.g., religious, educational, etc.).

The SALT group at Aprio is experienced with the sales and use tax treatment of charitable organizations and is available to assist you in reviewing your transactions to identify the proper sales/use tax treatment. We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant SALT developments and include any updates in future issues of the Aprio SALT Newsletter.

Contact Denisse Beldin, SALT associate, at denisse.beldin@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the February 2016 SALT Newsletter. To view the newsletter, click here.

[1] Arkansas PLR 20151204, 01/08/2016. Information about Arkansas Revenue Legal Counsel Opinions can be found here.

[2] This is not to be confused with a situation where a 501(c)(3) organization sells tangible personal property or services. The gross receipts from that transaction are exempt from sales tax in the state of Arkansas (Ark. Code. Ann. §26-52-401(2)).

[3] Col. Rev. Stat. §39-26-718(1)(a) and §39-26-718(1)(b)(II).

[4] Colorado GIL- 15-024, 10-20-2015. A General Information Letter provides a general overview of the relevant tax issues but is not binding on the Colorado Department of Revenue.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.

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