Sales tax applies to the sale of tangible personal property, unless the sale is covered by a specific legal exemption or exclusion. Individuals, businesses, and groups that sell taxable merchandise in places like California must pay sales tax on their taxable sales.
Similarly, “use tax” in California applies to the purchase of taxable merchandise used, consumed, stored, or given away. That is, unless the purchase is exempt or excluded from tax. Individuals, businesses, and groups must pay use tax on their taxable purchases. The state use tax is complementary to, and mutually exclusive of, the state sales tax. Tax generally applies regardless of whether the items you sell or purchase are new, used, donated, or homemade.
Many nonprofit and religious organizations are exempt from federal and state income tax. But there is no similar broad exemption from sales and use tax in places like California. Generally, a nonprofit’s sales and purchases are taxable. In other words, California generally treats nonprofit and religious organizations just like other sellers and buyers when it comes to sales and use tax purposes.
However, there are special exemptions and exclusions available for certain nonprofit and religious organizations. Some organizations may not owe tax on any of their sales, whereas some may owe tax on certain types of sales, but not all of them. Other organizations may be responsible for tax just like other sellers. It all depends on what type of organization you are and what your organization’s practices and activities are. We’ll look at helping you determine which exemptions and exclusions may apply to your organization.
Sale Or Not A Sale?
Nonprofits commonly conduct a variety of activities considered sales. These may include:
- Food, meals, beverages, and similar items under a number of different circumstances.
- Tickets that buyers will exchange for food, beverages, or other physical products
- Booklets, books, pamphlets, and so forth.
- Tickets for fundraising events when the ticket price includes amounts for food or beverages.
- Items at rummage sales, bazaars, carnival booths, community events, and other fundraisers.
- Merchandise in internet, live, and silent auctions.
- Tickets for game booths where prizes are guaranteed to each ticket purchaser, even when the prizes have little value. Examples are white elephant, fish pond, grab bag, and “pitch-’til-you-win” games.
These activities constitute an unrelated business taxable income (UBTI). Read our previous article to learn more about UBTI.
Some nonprofit activities are not subject to sales or use tax. Examples include:
- The gifting of merchandise for a true donation. This is an amount someone gives your organization without expecting to receive merchandise of equal value in return. For example, a member donates $100 and receives a tote bag worth $5. This would generally not be considered a sale.
- Sales of tickets for concerts, movies, plays, shows, and similar events, when ticket prices don’t include food and meals.
- Sales of tickets for game booths and raffles when prizes are not guaranteed to every ticket purchaser.
- The sale of things of value that are not physical products. Examples are travel, home rentals, guide services, personal services, and tutoring.
- Sales of gift cards, gift certificates, and coupon books.
- Membership drives and other fundraising activities that do not involve the exchange of merchandise or that include merchandise premiums of a much lower value than the donation or membership amount.
- Sales of advertising not involving exchanges of merchandise or goods.
And here is an important note: nonprofit organizations generally need a seller’s permit if they make sales of goods or merchandise in California. This is true even if the sales are not taxable. In limited instances, when the organization makes sales only occasionally, they can get a temporary seller’s permit. For more details, check out this awesome resource from the Board of Equalization.
Aplos does much more than make great software to help nonprofits and churches manage their organizations, and their accounting and bookkeeping. We have actual people who can work directly with you. Our expert bookkeepers can help with: monthly bookkeeping and financial statements, preparing your 1099s, catching up on your books, running payroll, and much more. Save countless hours with our specialized nonprofit and church bookkeepers so you can focus on the fun parts of your mission.