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Missouri Rules That Non-Profit’s Bakery Sales Are Taxable

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Missouri Rules That Non-Profit’s Bakery Sales Are Taxable

Not all states offer non-profits a blanket exemption from sales and use tax, and even states with broad exemptions may still require the transactions to further the non-profit’s charitable purposes to be tax-exempt.

Typically, when a not-for-profit company has tax-exempt status under section 501(c)(3) of the Internal Revenue Code, it is assumed that the company is tax-exempt from state sales and use taxes on all purchases and sales. However, this this not the case. Some states do provide a blanked exemption for these entities; others exempt only certain types of entities (e.g., educational institutions), and others don’t provide any exemption at all. In addition, in each case, the state may take a different approach for the entity’s sales versus its purchases.[1] Even in states with a broad exemption, the state may require that in order for the transaction to be exempt, it must be in furtherance of or related to the non-profit’s charitable purposes. On June 22, 2017, Missouri issued a letter ruling that provides guidance on when a transaction meets that requirement.

The taxpayer was a Missouri not-for-profit corporation which had already been recognized by the state as a charitable organization. The taxpayer would hire homeless individuals, train them on how to bake and sell the baked goods at multiple retail locations in Missouri, as well as on its website. The state had previously determined that sales at the retail location and through the website were subject to sales tax because the primary purpose of the sales was to engage in a competitive commercial business and serve the general public.

The taxpayer also had corporate bake sales in which employees at a corporate location would volunteer their time to organize and promote the bake sales. Employees would pre-order bake sale items, the taxpayer would make the baked goods and the employee volunteers would then pick up the orders at one of the retail locations. Additionally, volunteers would sell additional baked goods on the day of the sale. The collected money was deposited in the corporation’s bank account, and the corporation wrote a check to the taxpayer for the amount deposited.

The taxpayer requested a ruling that because of its not-for-profit status, it should not have to collect and remit sales tax on the sale of its goods at corporate bake sales. Under Missouri law, there is an exemption from sales and use tax for, “All sales made by or to religious and charitable organizations and institutions in their religious, charitable or educational functions and activities . . . .”[2]

The state ruled that the taxpayer’s corporate bake sales were subject to tax, relying on a prior Missouri Supreme Court case which looked at three factors to determine if the sales activity of a not-for-profit should be exempt from sales tax: (1) the primary purpose must be for the charitable purpose of the organization, (2) the services performed must directly serve the charitable functions and/or activities of the organization and (3) there must not be an intent to serve the general public.[3] Here, the state concluded that the taxpayer’s primary purpose in having the corporate bake sales was to engage in a competitive commercial business and to serve the general public.

This ruling highlights the need to examine a non-profit’s sales and use tax exemption very carefully. State rules in this area vary widely, and given the limited resources that many non-profits have, it is especially important that the entity comply with all tax rules so that it does not need to spend the funds it has to satisfy an unexpected tax liability. That can be a devastating result for a non-profit.

Aprio’s SALT team assists non-profits with understanding their sales and use tax obligations for both sales and purchases so that the organizations can devote all of their resources to carrying out their important missions. We constantly monitor these and other important state tax issues in order to assist you with your specific tax situation, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Alissa Graffius at alissa.graffius@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 August 2017 SALT Newsletter. You can view the full newsletter here.

[1] A state might be more willing to exempt a non-profit’s purchases since the non-profit would bear the economic burden of the sales tax. In the case of sales, the entity just acts as a collection agent for the state.

[2] Mo. Rev. Stat. § 144.030.2(20) (emphasis added).

[3] St. John’s Medical Center, Inc. v. Spradling, 510 S.W.2d 417, 419 (Mo. 1974). In that case, the Missouri Supreme Court concluded based on these factors that a non-profit hospital’s cafeteria and gift shop sales are not subject to tax since they were made in their charitable functions and activities.

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 the matter.

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