Many nonprofit organizations believe that since the IRS has granted them tax-exempt status, the organization is exempt from all taxes. However, that is not the case, and Michigan sales tax is one area that significantly 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, in many situations, 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:
- The organization has been granted tax-exempt status as a 501(c)(3) or 501(c)(4).
- The item being purchased is tangible personal property.
- The item being purchased will be used or consumed primarily in carrying out the organization’s exempt purposes.
- 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 is 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. The State of Michigan does not issue tax exempt numbers. Form 3372 must be provided to the seller with each purchase and retained in their records for four years.
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.
Nonprofit schools, nonprofit hospitals, churches, or governmental agencies are given separate statutory exemption. These organizations would provide vendors with Form 3372 but would not have to provide a copy of their IRS determination letter.
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 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. Registration can be done online through the Unemployment Insurance Agency or by completing Form 518 – Registration for Michigan Taxes.
Effective September 26, 2018, the State of Michigan changed the rules for certain nonprofits collecting sales tax on fundraising sales through an update to the Michigan Compiled Laws (MCL 205-540).
The old rule stated that if less than $5,000 of sales were made, the nonprofit could elect not to collect and not to remit sales tax on those sales. However, as soon as $5,000 in sales were made, sales tax would need to be remitted on every dollar of taxable sales.
The new rule now states that sales of the first $10,000 of tangible personal property in a calendar year for fundraising purposes are exempt from sales tax as long as the nonprofit has aggregate sales at retail in the calendar year of less than $25,000.
The amount of nontaxable fundraising sales has doubled from $5,000 to $10,000. Previously it was all or nothing for the exemption, and now it is truly an exemption for the first $10,000 sold. However, there are still planning and budgeting issues to consider because once aggregate sales at retail hit $25,000, there is no exemption. The $25,000 threshold is for gross sales for the calendar year, not per event.
It is important to note that all sales tax collected must be remitted to the State of Michigan unless it is first refunded to the customer. If the organization collects sales tax on all of its sales, then later determines that they have less than $25,000 in aggregate sales, they would still be required to remit all sales tax collected during the year or refund it to each customer for the first $10,000 of sales.
A conservative way to plan is that if the organization believes during the budget process that sales will be $10,000 or less, do not charge sales tax. Then, as things change during the year, if sales exceed $10,000, start to charge sales tax on those exceeding $10,000.
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 before the 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 to ensure compliance with the state. Also, 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.
Additional resources regarding Michigan sales tax as applied to nonprofit organizations: