NONPROFIT SALES TAX EXEMPTION

MY ORG IS A 501(C)(3). HOW DO WE BUY THINGS WITHOUT PAYING SALES TAX?

We’re frequently asked by our clients in Minnesota: “Now that we have our 501(c)(3) status from the IRS, how do we buy things without paying sales tax?” This is called sales tax exemption.  Just because you have your tax exempt status from the IRS, does not mean you have exemption from all taxes. It is possible to get property tax exemption (a story for another post), and it’s also possible to get sales tax exemption. Here are the things to understand when it comes to sales tax exemption:

WHAT IS SALES TAX EXEMPTION?

Charitable organizations that have received 501(c)(3) tax exempt status from the IRS do not have to pay federal income tax on related business income (donations, gifts, grants, etc.). 501(c)(3) charitable organizations are also ordinarily exempt from state income tax.

In many states, state law also exempts charitable organizations from paying most forms of sales tax. In Minnesota, Minnesota Rule 8130.6200 states that the determination of exempt status is not solely dependent on the federal income tax exemption for nonprofit organizations. Exemption is strictly limited to those associations that are organized and operated exclusively for charitable, religious, or educational purposes, as stated in Minnesota Statutes 297A.70, Subd. 4 and Minnesota Rule 8130.6200.  At this time, unfortunately Minnesota does not grant sales tax exemption to organizations organized and operated exclusively for “other” 501(c)(3) purposes (i.e., scientific, literary).

In Minnesota, if qualified, sales tax exemption is limited to purchases for items used in furtherance of the organization’s charitable mission. There is no sales tax exemption for administrative expenses. Also, items exempt from sales tax must be sold directly to the exempt organization in order for the sales tax exemption to apply.

WHAT DO WE STILL HAVE TO PAY SALES TAX ON?

In Minnesota, sales tax exemption does not apply to:

• prepared food, candy, soft drinks, including catered food

• alcoholic beverages (except wine purchased by an established religious organization for sacramental purposes)

• taxable cannabis products

• lodging

• gambling equipment and supplies

• most motor vehicle purchases, leases, and rentals

• 9.2% car rental tax and 5% car rental fee

Nonprofits must also pay the tax on waste collection and disposal services (although this is a special tax, not a sales tax).

HOW DO WE UTILIZE THE SALES TAX EXEMPTION?

The organization must first fill out the Minnesota Department of Revenue Form ST-16 and file it with the Minnesota Department of Revenue. Next, after receiving confirmation of sales tax exemption from the Minnesota Department of Revenue, the organization should fill out the Minnesota Department of Revenue Form ST-3 and provide it to each retailer/service provider from which the entity wishes to make a qualifying purchase. Please be sure that an Officer or Director (i.e., Board Member) is signing the forms after proper authority has been given by the Board as a whole.

This information applies to Minnesota 501(c)(3) organizations. If your organization is outside of Minnesota, please check with your state taxing authority for more information about sales tax exemption.