By Terry C. Barrett, CPA, Tax Senior Manager | State and Local Tax Team Leader
Does your nonprofit qualify for Virginia sales tax exempt status?
Being a nonprofit and exempt from taxes seems to go hand-in-hand. However, in Virginia, exemption from sales tax is not guaranteed. Virginia provides an exemption from its sales and use tax to nonprofit organization who meet certain exemption criteria, the first of which is being exempt from federal income taxation under Section 501(c)(3), 501(c )(4) or (501)(c)(19). Other exemption criteria and an explanation of the process for obtaining exempt status may be found on the Virginia Department of Taxation’s website. Thus, not all nonprofits are exempt from the tax on their purchases.
In addition, once organizations receive their tax exempt status from the Department of Taxation they may think they are exempt from any sales/use tax obligations. However, most of the sales tax exemptions are limited to purchases but not sales by nonprofit organizations. Their sales generally are taxable because they are in direct competition with for-profit businesses who are required to collect the tax on their sales. Thus, organizations ranging from community recreational associations to gift shops or online gift stores of nonprofit museums generally must collect and report the tax on their sales of tangible personal property.
VIRGINIA Tax Requirements on Not-for-Profit Seasonal Sales
Nonprofit organizations need to be careful, too, if they only have seasonal sales. For example sales of pumpkins, Christmas trees, or holiday decorations, conducted for a limited period of time, are taxable. While Virginia has an exemption from its sales tax for “occasional sales,” that term is defined in Virginia Code §58.1-609.10 2 as “a sale by a person who is engaged in sales on three or fewer separate occasions within one calendar year.” The Department of Taxation ruled in Ruling of the Tax Commissioner (P.D.) 90-39 (3-19-1990) that sales of Christmas trees over a period of more than 30 days were subject to the tax because of the duration of the sales. Registration for and collection of the sales tax was required because the organization conducted sales on more than three occasions or made regular sales on a seasonal basis. The Department of Taxation provides for seasonal registration and filing requirements in these cases.
It is noteworthy, though, there is a statutory exemption from the sales tax for certain fundraising activities by nonprofits including sales of food, prepared food and meals and tickets to events that include the provision of food, by qualifying nonprofit organizations provided the events take place on fewer than 24 occasions in a calendar year.
COVID-19 Impact on Nonprofit State Tax Obligations
During the COVID-19 times, nonprofit organizations may have had to retool their revenue generating activities due to state-mandated closures eliminating income from admissions to events, activities, traditional fundraising activities, and limited traffic to gift shops. Internet sales by gift shops or the organizations generally are subject to sales tax. If the sales are to a Virginia purchaser, Virginia sales tax generally should be collected (unless the purchaser is exempt). If the sale is to a non-Virginia purchaser, and the organization has substantial sales into another state (e.g., more than 200 separate transactions or $100,000 in revenue), it may be subject to tax collection requirements in other states. State taxing jurisdictions are actively monitoring sales activity into their states and are looking for non-compliant out-of-state sellers, particularly now when state budgets are strained due to the COVID-19 pandemic.
If you have questions about possible sales or use tax implications relating to your organization’s sales or purchases, please reach out to your Keiter Opportunity Advisor or our Not-for-Profit Team | 804.747.0000. We are here to help.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.