Michigan Sales Tax Complexities for Nonprofits

Lauren Edgley

Many nonprofit organizations believe that since the IRS has granted tax-exempt status, the organization is exempt from all taxes. However, that is not the case, and Michigan sales tax is one significant area that impacts most nonprofit organizations. The default treatment for sales tax for a nonprofit organization is the same as for a for-profit organization unless there is an exemption. As a result, there are many situations in which a nonprofit organization should pay sales tax on items it purchases and charge sales tax on items it sells.

Paying sales tax on purchases

When a nonprofit organization makes a purchase, it can claim an exemption from paying sales tax only if all of the following four conditions are met:

1. The organization has been granted tax-exempt status as a 501(c)(3) or 501(c)(4).

2. The item being purchased is tangible personal property.

3. The item being purchased will be used or consumed primarily in carrying out the organization’s exempt purposes.

4. The transaction does not fall under an exception.

To illustrate the first three conditions, consider an organization that is purchasing cards and dice for a Las Vegas Night fundraising event. The organization is a 501(c)(3) and the items being purchased are tangible personal property. However, the items will not be used in carrying out the organization’s exempt purposes. Even though fundraising is a necessary activity for most nonprofits, it is a means to achieve financial goals and not itself an exempt purpose. The organization should not claim an exemption and should pay sales tax on this purchase.

Once an organization has met the first three conditions, the exceptions described in the sales tax rules should be carefully reviewed for any large transactions that are being considered. For example, purchasing a vehicle costing more than $5,000 that will be used primarily for fundraising would result in the organization owing sales tax, even if the other conditions are met.

If an organization meets all four conditions, then a sales tax exemption can be claimed by providing the vendor with a completed Michigan Form 3372, Sales and Use Tax Certificate of Exemption, and a copy of the IRS determination letter.

It is important to note that items purchased by a nonprofit organization for resale are subject to the same rules as for a for-profit organization. The organization can claim a sales tax exemption on the purchase by filing Michigan Form 3372 with the vendor (a copy of the IRS determination letter is not necessary since the exemption is being claimed for resale instead of for use in the nonprofit’s exempt purpose), but will need to collect sales tax on the sale of those items according to the guidelines outlined next.

Collecting sales tax on sales

A nonprofit organization must register for sales tax with the Michigan Department of Treasury before selling tangible personal property, regardless of whether or not an exemption will apply. Once registered, a nonprofit organization is subject to the same filing requirements that a for-profit organization is, even if no sales tax is due.

When a nonprofit organization sells taxable goods, it is exempt from collecting sales tax only if all of the following three conditions are met:

1. The organization has been granted tax-exempt status as a 501(c)(3) or 501(c)(4).

2. The organization has aggregate retail sales of tangible personal property in the calendar year of less than $5,000.

3. The transaction does not fall under an exception.

To illustrate the first two conditions, consider an organization that is selling open bags of popcorn at a carnival. The organization is a 501(c)(3) and the items being sold are taxable goods because they are food for immediate consumption. The organization estimates that aggregate retail sales in the calendar year will be less than $5,000, so they choose to not collect sales tax. If their estimate is correct, then the organization can claim an exemption and no sales tax will be due to the state. However, if sales exceed $5,000, then the organization is required to pay sales tax on all sales and will need to remit this amount to the state.

If the organization described above estimates that sales will exceed $5,000, then they should collect sales tax. The organization is required to remit any sales tax that is collected to the state, regardless of whether they meet the $5,000 sales threshold for exemption.

This example is less complex than many other sales activities in which a nonprofit organization may get involved. It is critical that an organization carefully review the sales tax rules before conducting any sales of tangible personal property, including serving meals at a fundraising event or holding an auction. These types of activities have special rules and additional recordkeeping that may be required, so appropriate steps should be taken prior to the actual event.

Planning ahead ensures compliance

The Michigan sales tax rules can be confusing for general taxpayers, and the exemptions and exceptions that apply specifically to nonprofit organizations only make them more complex. Nonprofit organizations should take the necessary steps to understand these rules in order to ensure compliance with the state. In addition, if the organization has transactions in other states, those sales tax rules may be different from the Michigan rules discussed here.

For more information, please contact any member of Yeo & Yeo’s Nonprofit Services Group or visit the Sales and Use Tax section of the Michigan Department of Treasury website, http://www.michigan.gov/taxes/.

Lauren Edgley

Lauren Edgley

CPA

Lauren provides tax planning and preparation services for individuals, businesses and not-for-profit organizations. She is a member of the firm’s Tax Services Group. She has more than eight years of public accounting experience and is a manager in the firm’s Lansing office. Contact Lauren via e-mail at lauedg@yeoandyeo.com or call 517.323.9500.