What Nonprofits Need to Know About the New Sales Tax Rules

CPAs & Advisors

Jessica Rolfe
Jessica Rolfe CPA Principal CPAs & Advisors

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When are the new sales tax rules effective and are you required to follow the old rules prior to the effective date?

Previously, 501(c)(3) and 501(c)(4) organizations in Michigan that had less than $5,000 of taxable sales in a calendar year were not required to collect and remit sales tax. The previous law caused issues for organizations who were close to that threshold because it was not an exemption of the first $5,000, but all or nothing. If they were over $5,000, they owed sales tax on all of the sales. If they were under, they owed sales tax on none of it.

The new law states that the first $10,000 of taxable sales for fundraising purposes are exempt as long as total sales for the calendar year are less than $25,000. This change took effect September 26, 2018, according to Michigan Compiled Law (MCL) 205.54o. We anticipate receiving further guidance from the State of Michigan as well as updates to forms and instructions.

Prior to the effective date of September 26, 2018, the old law would technically still apply.

Whether the organization wants to follow the new rules for the entire year should be based on risk tolerance. Keep in mind, if sales tax was expressly collected, it must be remitted; no options. If the organization was not expressly collecting it, and had not yet remitted it, then there is a risk choice to make. Technically if you went over $5,000 before 9/28, there should be tax paid in on everything prior to 9/28, and then no tax thereafter for the remaining amount of the $10,000 (assuming the organization is under the $25,000 in sales).

Example: $6,000 in sales prior to 9/28, $5,000 after. First $6,000 was before 9/28 and fell under old rules, so all $6,000 would have tax; the next $4,000 is non-taxable; the last $1,000 is taxable.

If you hadn’t already paid the tax on $6,000, that’s $360; what’s the chance the state comes after the organization for that? The organization could just remit tax on the last $1,000. We do not believe that is legally the correct answer, but there is an element of what risk the organization is ok with.

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