If a Non-Profit Group Has a Craft Sale, Do They Have to Charge Sales Tax?
While finding new sources of revenue is a requirement today for many nonprofits, organizations recognized as 501(c)(3) tax-exempt by the Internal Revenue Service must be careful to avoid activities that could jeopardize their status. Although tax-exemption means the group is exempt from federal and state income taxes, that might not be the case for sales tax. Whether a nonprofit needs to collect sales taxes or not can be determined with some upfront planning.
Tax-exempt nonprofits must check with their state department of revenue, or taxing agency, to determine whether they have to charge sale taxes, including for craft-sale fundraisers. Nonprofits that don't have tax-exempt status must collect sales tax at the state's corporate rate. Unfortunately, sales tax rules for tax-exempt groups vary widely and can be quite complicated. Requirements can depend, for example, on the type of nonprofit and the items being sold. As CPA firm Bober Markey Fedorovich points out on its website, in Maryland, if a volunteer fire department or ambulance company holds a fundraising barbecue, hamburgers and hot dogs are exempt from sales tax. But Boy Scouts selling those same items must charge sales tax. You can also check your state’s fundraising regulations at fundraisetaxlaw.org, a website operated by the Multistate Tax Commission and the Association of Fundraising Distributors & Suppliers. To avoid penalties or loss of tax-exempt status, contact an accountant or lawyer versed in nonprofit matters if you have any questions.
Your state department of revenue will provide information about filing paperwork for any required sales taxes. Ahead of the fundraiser, if your nonprofit is a 501(c)(3) tax-exempt organization, make sure that you've filed paperwork with your state’s department of revenue declaring your status as 501(c)(3) organization. Check the state's and local municipality's rules on solicitations to make sure you're registered to solicit funds in the jurisdiction and have met any other requirements. Small groups, those with annual budgets of less than $25,000 annually, are often not required to register with the state. During the fundraiser and its planning, keep good records, including any receipts and related paperwork. Account for the money spent and raised, as well as the products sold.
If the nonprofit regularly sells crafts to raise funds, or conducts any other kind of business to raise funds, it might have to pay another tax. To prevent nonprofits competing with for-profit businesses in revenues, in 1950, Congress amended the Internal Revenue Code to include the unrelated business income tax. This means that net profits from some activities a tax-exempt nonprofit regularly carries out that don’t further the organization’s charitable mission are subject to normal corporate tax rates. For example, an organization that regularly sells crafts by immigrant craftspeople, if its mission is to promote the work of immigrants crafts people, would be exempt from paying UBIT, since the funds will be used to support the nonprofit's clients. Nonprofits with other missions, for example, a cancer support group that sells crafts, might well have to pay UBIT. Fundraisers in which nearly all the work is done by volunteers are generally free from UBIT.
Unrelated business income is reported to the IRS on IRS Form 990-T. As the Minnesota Association of Nonprofits points out, because the tax is only paid on a fundraiser's net profits, after subtracting allowed expenses, many nonprofits have no tax liability in the end. However, too much unrelated business income tax as a percentage of a nonprofit's total revenues can result in penalties, sanctions and even loss of tax-exempt status by the IRS.