21st Annual Legal & Accounting Institute: Federal & State Tax Issues Arising from Nonprofit...

Federal and State Tax Issues Arising from Nonprofit Fundraising

December 6, 2013

Katherine E. DavidStrasburger & Price, LLPSan Antonio, TX 78205

[email protected]

Introduction

Texas Sales and Use Tax

The Texas Sales and Use Tax (the “Texas Sales Tax”) applies to sales of tangible personal property and to taxable services (collectively, “taxable items”). Texas Sales Tax is collected by the seller of the taxable item and remitted to the Texas Comptroller.

Sales Tax ExemptionA nonprofit organization that applies for and obtains a determination letter or a group exemption ruling letter from the Internal Revenue Service that states that the organization qualifies for exemption from federal income tax under I.R.C. §501(c)(3), (4), (8), (10), or (19) may qualify for state sales tax exemption.

For the exemption to apply, the item sold, leased, rented, stored, used, or consumed must relate to the purpose of the exempted organization and the item must not be used for the personal benefit of a private stockholder or individual.

The purchaser must provide the seller with an exemption certificate.

Obtaining Exempt Status

In order to obtain exempt status, an organization must apply for and obtain a letter of exemption from the Comptroller. If the organization is claiming exemption on the basis of an exemption under I.R.C. §501(c)(3), (4), (8), (10), or (19), the organization must include a copy of all pages of a determination letter or a group exemption ruling letter from the Internal Revenue Service.

Taxable Sales by Tax-Exempt Organizations

An exempt organization that sells taxable items generally is required to obtain a sales tax permit and is responsible for collection and remittance of tax on all sales of taxable items that the organization makes, unless those sales are otherwise exempt from the Texas Sales Tax.

Sales that are Exempt from Sales Tax

There are several limited exceptions to the rules regarding sales of taxable items by exempt organizations.

Also, a number of items commonly sold for fundraisers by exempt organizations are not taxable items.

Nontaxable Food Items

Texas Sales Tax is not due on sales of nontaxable food items. Examples of such items include cookie dough, pizza kits, cheese spreads, meat sticks, jelly, salsa, fresh fruit, and mixes packaged for preparation at home.

Bake Sales

Texas Sales Tax is not due on sales of bakery items (e.g., bread, rolls, buns, biscuits, bagels, croissants, pastries, doughnuts, Danishes, cakes, pies, tarts, muffins, cookies, large pretzels, tortillas, etc.) as long as the items are sold without plates or eating utensils.

Meals and Food ProductsNormally, sales of food, prepared food, candy, and soft drinks normally are subject to tax. These sales are exempt if are exempt if sold by certain organizations:

• A church or at a function of a church.

• A public or private elementary or secondary school, school district, bona fide student organization, or parent-teacher organization if the items are sold or served during a regular school day pursuant to an agreement with the proper school authorities.

• A parent-teacher organization or association during a fund-raising sale if the proceeds do not go to benefit an individual.

• A group associated with a private or public elementary or secondary school if the sale is part of a fund-raising drive sponsored by the organization for its exclusive use.

• A Member or volunteer for a nonprofit organization devoted to the exclusive purpose of education or religious or physical training of persons under 19 years of age if the sale is part of a fund-raising drive sponsored by the organization for its exclusive use.

• Hospitals, day care centers, summer camps, or other institutions licensed by the state for the care of humans if sold or served to the patients, children, students or residents of the facility. Sales to visitors or employees are taxable.

• Retirement facilities if the sale is to its permanent residents.

Magazine Subscriptions

Texas Sales Tax is not due on sales of subscriptions to magazines entered as periodicals-class (formerly called “second-class”) mail and sold for six months or more. Texas Sales Tax is due on single issues and subscriptions for fewer than six months.

Gift Certificates and Passbooks

Texas Sales Tax is not due on sales of intangibles such as gift certificates and coupon passbooks. Retailers collect Texas Sales Tax when certificates or coupons are redeemed for purchases of taxable items.

Car Washes

Washing a car is not a taxable service, so Texas Sales Tax is not due on sales of car washes.

Annual Banquets

All volunteer, nonprofit organizations can hold one tax-free banquet or other food sale per calendar year if all food is prepared, served and sold by members of the organization. The banquet cannot be professionally catered, held in a restaurant, hotel or similar place of business and cannot directly compete with a retailer required to collect tax.

Auctions, Rummage Sales and Other Fund-Raisers

Religious, educational, charitable, eleemosynary organizations as well as organizations exempt under I.R.C. §501(c)(3), (4), (8), (10), or (19) may have two one-day (twenty four hours) tax-free sales or auctions each calendar year. Each bona fide chapter of a qualifying organization also may have two one-day tax free sales or auctions each year.


During a tax free sale or auction, the organization is not required to collect sales tax on the sales price of taxable items sold for $5,000 or less. If the item is manufactured by the organization or donated to the organization (and not sold to the donor), the organization may sell the item during a one-day tax-free sale or auction regardless of price.

Organizations that hold a joint one-day tax-free sale or auction is each considered to have held one tax-free sale or auction during the calendar year; however, each such organization may hold one additional tax-free sale or auction during that calendar year. The organization may employ an auctioneer to conduct the sale or auction and pay the auctioneer a reasonable fee not to exceed 20 percent of the gross receipts.


Texas Sales Tax is not due on sales of amusement services by a nonprofit organization, educational if the proceeds do not go to the benefit of an individual, except as a part of the services of a purely public charity.

Examples:• live or recorded performances • musical concerts• exhibitions or displays• arts and crafts shows/fairs• carnivals

Amusement Services

Federal Substantiation and Disclosure Rules

Organizations that are not eligible to receive tax-deductible contributions must include a disclosure on all fund-raising solicitations in a conspicuous and easily recognizable format that contributions or gifts to the organization are not deductible as charitable contributions for federal income tax purposes.

This rule applies to a variety of organizations, including:• social welfare organizations• civic leagues• homeowners’ associations• business leagues • fraternal organizations

Disclosure of Nondeductible Contributions

In order to claim a charitable contribution deduction, the donor must maintain a written record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the recipient (such as a receipt or a letter) showing the name of the organization, the date of the contribution, and the amount of the contribution.

Substantiation Rules—All Cash Contributions

Substantiation Rules—Single Cash Contributions Over $250

In order to claim a charitable contribution deduction, the donor must have a written acknowledgement from the recipient stating:

• the name of the organization;

• the amount of the contribution;

• a statement that no goods or services were provided by the organization (if that was the case); and

• a description and good faith estimate of the value of goods or services (if any) that the organization provided in return for the contribution.

A separate acknowledgment may be provided for each single contribution of $250 or more, or one acknowledgment, such as an annual summary, may be used to substantiate several single contributions of $250 or more.

Substantiation Rules—All Noncash Contributions

In order to claim a charitable contribution deduction, the donor must obtain a receipt from the recipient organization containing:

• the name of the organization;• the date and location of the charitable

contribution; and• a reasonably detailed description of the

property.

Reporting Rules—Noncash Contributions in Excess of

$500

If all of a donor’s noncash gifts exceed $500, the donor must file Form 8283, which is used to report information about noncash charitable contributions.

Substantiation and Reporting Rules—Noncash Contributions

in Excess of $5,000If the value of a contributed item (or group of items) exceeds $5,000, the donor must obtain an appraisal from a qualified appraiser in order to claim a charitable contribution deduction.

The done organization must complete and sign the donee acknowledgement on Form 8283 unless the donated property is publicly traded securities.

Dispositions of Donated Property

If an organization disposes of property for which it signed an appraisal summary on Form 8283 within 3 years of the donation, the organization must file Form 8282, Donee Information Return, which includes:

• The name, address, and TIN of the donor; • A description of the property;• The date of the contribution;• The amount received on the disposition;

and• The date of the disposition.

Dispositions of Donated Property

Form 8282 must be filed within 125 days after the disposition. The organization must provide a copy of Form 8282 to the donor. An organization that fails to file Form 8282 when required, may be subject to penalties.

Quid Pro Quo Contributions

The value of goods or services a donor receives in exchange for a contribution reduces his charitable contribution deduction.

The test is the fair market value of the consideration received by the donor, not the cost to the organization. Thus, a quid pro quo contribution occurs even where the goods or services were donated to the organization.


An organization that provides a donor with property or other services in exchange for a contribution in excess of $75 must comply with certain disclosure requirements.

The organization must provide the donor with a written statement that contains a good-faith estimate of the value of the goods and services that the organization provided to the donor and must inform the donor that the donor’s contribution is deductible only to the extent that the donor’s payment exceeds the value of those goods and services.


The full fair market value of admission, property, or services must be taken into account.

Where the event is reasonably comparable to events for which there are established charges for admission (such as theater or athletic performances), the fair market value is equal to the established charges.

Where the event has no counterpart, the organization should estimate the reasonable fair market value of the admission.


No written statement is required if the contribution is less than $250 and the goods or services provided by the organization are intangible religious benefits or are de minimis, token goods or services such as:

• Lapel pins;• Keychains, bookmarks, calendars, mugs, etc.;• A newsletter that is not a “commercial quality

publication.”


Membership benefits such as free parking, gift shop discounts, discounted admissions, and “low cost” member events are treated as de minimis if they are given in exchange for a payment of $75 per year or less.

SubstantiationIn all cases, the donor must have his required substantiation records by the earlier of:

• the date he files his original return for the year the contribution is made;

• or the due date, including extensions, for filing the return. The Internal Revenue Service has not prescribed forms for the acknowledgment. Letters, postcards, or computer-generated forms with the required information are acceptable. An organization can provide either a paper copy of the acknowledgment to the donor, or an organization can provide the acknowledgment electronically, such as via an e-mail addressed to the donor.

SubstantiationFor non quid-pro quo contributions, the donor is responsible for requesting and obtaining the written acknowledgement from the donee. As a matter of good practice and donor stewardship, donees should proactively provide acknowledgements to donors.

For quid-pro quo contributions, the organization is responsible for providing the written acknowledgement. Penalties of $10 per contribution, up to $5,000 per year apply for failure to provide the acknowledgement to a donor.

Unrelated Business Taxable Income

A tax-exempt organization’s income (in excess of $1,000) from a trade or business, regularly carried on, that is unrelated to its tax-exempt purpose is subject to income tax at the regular corporate income tax rates.

Trade or Business

A trade or business is an activity carried on for the production of income from the sale of goods or performance of services and that otherwise possesses the characteristics required to constitute a “trade or business” for purposes of I.R.C. §162.

An activity that does not possess the characteristics of a trade or business does not give rise to unrelated business taxable income.

Example: an organization sends out low cost articles incidental to the solicitation of a charitable contribution. The organization is not competing with taxable organizations, and this activity is not a trade or business.

Regularly Carried On

Consider the frequency and continuity with which the activities are conducted compared to nonexempt business endeavors with which they compete.


Conduct of year-round business activities for a few days each year is not “regular.”Example: organization’s operation of a fajita stand during Fiesta.


Conduct of year-round business activities one day each week is “regular.”Example: operation of a commercial parking lot each Sunday.


Conduct of seasonal activities on a seasonal basis is “regular.”Example: operation of a Christmas tree lot during November and December.

Unrelated to Organization’s Exempt Purpose

A trade or business is “related” to an organization’s exempt purpose only if the conduct of the business activity has a causal relationship to the achievement of the exempt purpose and it is “substantially related.”

Example: a performing arts school derives admission revenue from recital performances. The recitals are an essential part of the students’ training.

Unrelated to Organization’s Exempt Purpose

In determining whether activities contribute importantly to the accomplishment of an exempt purpose, consider the size and extent of the exempt function that they purport to serve. The trade or business cannot be on a scale larger than is reasonably necessary.

Disposition of Products of Exempt Functions

Disposition of products of exempt functions furthers an exempt purpose.

Example: sales of articles made by handicapped persons as part of their rehabilitation.

Disposition of Products of Exempt Functions

Rule only applies so long as the products are not further utilized or exploited in further business endeavor beyond that reasonably appropriate or necessary for disposition in the state it is upon completion of exempt functions.

Example: sales of milk or cream produced by experimental dairy herd vs. sales of cheese and ice cream made from the milk and cream.

Exceptions

The term “unrelated trade or business” does not include any trade or business:

• In which substantially all the work in carrying on the trade or business is performed for the organization without compensation;

• Carried on by an organization described in I.R.C. §501(c)(3) or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees; or

• That consists of selling merchandise, substantially all of which has been received by the organization as gifts or contributions.

Volunteer Labor Exception

Although there is no guidance directly on point, based on how the term is used in connection with other provisions of the Code, 85 percent of the work in carrying on a trade or business probably constitutes “substantially all” of the labor.

“Compensation” is defined broadly. Free drinks for workers at an event can be considered compensation. Tips for workers at a gaming function constitute compensation.

Sales of Advertising

Profits from the sale of advertising in periodicals, journals, and magazines that an organization publishes are unrelated business income, unless the advertising activities contribute importantly to the accomplishment of an exempt purpose (such as a university newspaper that has a purpose of giving students training in journalism).

Sponsorships“Qualified sponsorship payments” are exempt from unrelated business income tax.

A qualified sponsorship payment is a payment that is made by a payor engaged in a trade or business, for which the payor does not expect any substantial return benefit.

The use or acknowledgement of the payor’s name, logo, or product lines in connection with the activities of the tax-exempt organization is not considered a substantial benefit and will not prevent a payment from being a qualified sponsorship payment.

If the tax-exempt organization endorses the sponsor or otherwise makes qualitative or comparative statements, gives price information, an endorsement, or an inducement to use the payor’s products or services, the payment is not a qualified sponsorship payment and is treated as advertising.

A payment is not a qualified sponsorship payment if it is contingent upon (i) the level of attendance at an event; (ii) broadcast ratings; or other factors indicating the degree of public exposure to one or more events.

Website Acknowledgements

If a sponsor’s website states that an organization endorses the sponsor’s products and the organization gives permission for that endorsement to appear, the endorsement is advertising.

If the organization merely posts on its website a list of its sponsors, hyperlinked to the sponsors’ websites, without promoting them or advertising their merchandise, then the list is merely an acknowledgement of sponsorships, and the entire sponsorship payment should qualify as a qualified sponsorship payment.

Member Lists

The exchanging or renting of member or donor lists between tax-exempt organizations to which tax-deductible contributions can be made is not considered an “unrelated trade or business.”

This rule does not prohibit or imply that other renting of mailing lists should (or should not) be considered as constituting unrelated business taxable income.

Affinity Credit Cards (and Similar Arrangements)

In these arrangements, a tax-exempt organization is paid a portion of revenues that a third party derives from marketing credit cards (or other products) to the organization’s members. The organization licenses its membership or mailing list (and usually its name or logo) to the third party.

So long as the exempt organization does nothing more than license the intangible property, the income the organization receives is royalty income, which is excluding from the computation of unrelated business taxable income.

Where the organization actively endorses or promotes the affinity card (or other product) to its membership or otherwise takes an active role in the sales of the end product, its revenue could constitute unrelated business taxable income.

Income Tax Withholding and Reporting


Organizations conducting raffles should be aware of accompanying withholding and filing obligations.


Form W-2G

A Form W-2G is filed by a gaming operators (including exempt organizations operating raffles) to report certain gambling winnings and any federal income tax withheld on those winnings. Form W-2G is required if the winnings are $600 or more and such winnings are at least 300 times the amount of the wager.


Withholding and Backup Withholding

Withholding is required on raffle prizes in excess of $5,000. Withholding on raffle proceeds is required at a rate of 25%.

If a winner’s proceeds total $600 or more and the organization fails to obtain the winner’s taxpayer identification number (via a Form W-9), backup withholding is required at a rate of 28%.

If the prize is not cash, the fair market value of the item won is considered the amount of the winnings, and the withholding rates are applied to this value.

Withholding and backup withholding are reported by the organization on a Form 945, Annual Return of Withheld Federal Income Tax. The Form is required to be filed annually by January 31 of the following year.

Questions/Discussion

21st Annual Legal & Accounting Institute: Federal & State Tax Issues Arising from Nonprofit...

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