I.Generally.
A. The Tax.
(1) Sales tax. The sales tax is a tax imposed on the retail sale of most tangible personal property and certain enumerated services in a state.
(2) Use tax. The use tax is a complementary tax to the sales tax, i.e., it is imposed on the use of most tangible personal property and certain enumerated services within a state on which the state, for some reason, cannot impose the sales tax (usually for constitutional nexus reasons).
B.Common Misconceptions.
(1) Nonprofit organizations are always exempt from paying sales and use tax on their retail purchases.
(2) Nonprofit organizations do not have to collect sales tax when they sell otherwise taxable items at retail.
C.The Realities.
(1) Purchases by certain nonprofit organizations are exempt from sales and use tax in some, but certainly not all, states.
(2) In most cases, nonprofit organizations that sell otherwise taxable items must collect sales tax from the buyer.
D.Sales and Use Tax Rates.
(1) D.C. - 5.75%
(2) Maryland - 5%
(3) Virginia - 4.5%
II.State-by-State Review of the Law.
A.District of Columbia.
(1) The law regarding purchases by nonprofit organizations.
(a) Gross sales tax does not apply to sales to "semipublic institutions", so long as: (i) the institution has obtained a certificate from D.C. that it is entitled to the exemption, (ii) the seller keeps a record of the sales, the purchaser's name, the date of each sale and the number of the certificate received from D.C., (iii) the institution is located within D.C., and (iv) the property or services will be used by the institution in furtherance of the purposes for which it was organized or for honoring the institution or its members. D.C. Code § 47-2005(3).
(b) A "semipublic institution" is a corporation, community chest, fund or foundation organized solely for religious, scientific, charitable or educational purposes, no part of the net earnings of which inures to the benefit of a private shareholder or individual. D.C. Code § 47-2001(r). Additionally, the institution must be exempt from tax under Section 501(c)(3) of the Internal Revenue Code of 1986 ("IRC").
(2) The law regarding sales by nonprofit organizations.
D.C. law does not contain specific exemptions or exclusions from tax for retail sales made by nonprofit organizations. Retail sales of taxable items, therefore, must include the tax.
B.Maryland.
(1) The law regarding purchases by nonprofit organizations.
(a) The sales and use tax does not apply to:
"a sale to a nonprofit organization made to carry on its work if the organization:
(i) 1. is located in the State;
2. is located in an adjacent jurisdiction and provides its services within the State on a routine and regular basis; or
3. is located in an adjacent jurisdiction whose law:
A. does not impose a sales or use tax on a sale to a nonprofit organization made to carry on its work; or
B. contains a reciprocal exemption from sales and use tax for sales to nonprofit organizations located in adjacent jurisdictions similar to the exemption allowed under this subsection;
(ii) is a charitable, educational, or religious organization;
(iii) is not the United States; and
(iv) except for the American National Red Cross, is not a unit or instrumentality of the United States." Md. Code § 11-204(a)(3).
(b) The sales and use tax also does not apply to certain purchases made by the following entities:
(i) cemetery companies (Md. Code § 11-204(a)(1));
(ii) nonprofit senior citizens' organizations (Md. Code § 11-204(a)(4));
(iii) volunteer fire companies or departments or volunteer ambulance companies or rescue squads (Md. Code § 11-204(a)(5));
(iv)nonprofit parent-teacher associations (Md. Code § 11-204(a)(6)); and
(v) nonprofit organizations exempt under IRC Section 501(c)(4) and engaged in environmental clean-up efforts of coastal and tidal waters (Md. Code § 11-204(a)(7)).
(2) The law regarding sales by nonprofit organizations.
Sales and use tax does not apply to retail sales bythe following groups:
(a) bona fide churches or religious organizations, if made for the general purposes of the church or organization (Md. Code § 11-205(b)(1));
(b) gift shops at a mental hospitals (Md. Code § 11-205(b)(2));
(c) certain hospital thrift shops (Md. Code § 11-205(b)(3));
(d) certain vending facilities operated under the Maryland Vending Program for the Blind (Md. Code § 11-205(b)(4));
(e) elementary or secondary schools or nonprofit parent-teacher or other organizations within elementary or secondary schools for the sale of magazine subscriptions in a fund-raising campaign (Md. Code § 11-205(b)(5));
(f) schools other than post-secondary institutions when selling food (Md. Code § 11-206(d)(1)(iii));
(g) nonprofit organizations when selling food if there are no facilities for food consumption on the premises and the food is not sold within an enclosure for which an admission charge is imposed (Md. Code § 11-206(d)(1)(v)); and
(h) volunteer fire, ambulance or rescue companies or auxiliaries when selling food if the proceeds are used to support the organization (Md. Code § 11-206(d)(3)).
C.Virginia.
(1) The law regarding purchases by nonprofit organizations.
(a) Unlike D.C. and Maryland, which provide general exemptions from sales and use tax for nonprofit organizations, Virginia's law currently is much more restrictive. Virginia Code Sections 58.1-609.4, 58.1-609.7, 58.1-609.8, 58.1-609.9 and 58.1-609.10 (the "Va. Code Sections") list three hundred eighty-three (383) very specific types of entities that are exempt from the tax. Unless a nonprofit organization falls within one of these categories (which is not as easy as one might think) or is added to the list (see Applying for Exemption from Sales and Use Tax section, below),the law currently states thatthe organizationwill have to pay sales or use tax on its purchases.
(b) On July 1, 2004, however, the process by which nonprofit organizations obtain sales and use tax exemptions willchange. Effective on that date, all five of the Va. Code Sections will be repealed, and the exemption procedure no longer will occur within the Commonwealth's legislative branch. Instead, the Department of Taxation will have the authority to grant or deny exemption requests. Given the pending disappearance of the specific exemptions found in the Va Code Sections, one should not expect to receive a nonprofit organization exemption from Virginia sales and use tax until the new process is in place on July 1, 2004.
(c) The law that sets out the new exemption procedure can be found in Virginia Code Section 58.1-609.11, the effective date of which is July 1, 2004. Pursuant to that statute, nonprofit entities that hold valid sales and use tax exemptions as of June 30, 2003 will be "grandfathered" into the new law. Additionally, the law states that the sales and use tax will not apply to purchases of tangible personal property to be used or consumed by a nonprofit organization that: (i) files an application with the Department of Taxation, (ii) meets the applicable criteria, and (iii) receives a certificate of exemption. The relevant criteria are:
(1)(a) The entity is exempt from federal income taxation (i) under § 501(c)(3) of the Internal Revenue Code or (ii) under § 501(c)(4) of the Internal Revenue Code and, if it is exempt under § 501(c)(4) of the Internal Revenue Code, it is organized for a charitable purpose; or
(b) The entity has annual gross receipts less than $5,000, and the entity is organized for at least one of the purposes set forth in § 501(c)(3) of the Internal Revenue Code, or one of the charitable purposes set forth in § 501(c)(4) of the Internal Revenue Code; and
(2) The entity is in compliance with all applicable state solicitation laws, and where applicable, provides appropriate verification of such compliance; and
(3) The entity's annual general administrative costs, including salaries and fundraising, relative to its annual gross revenue, under generally accepted accounting principles, is not greater than 40 percent; and
(4) If the entity's gross annual revenue was $250,000 or greater in the previous year, then the entity must provide a financial audit performed by an independent certified public accountant; and
(5) If the entity filed a federal 990 or 990 EZ tax form, or the successor forms to such forms, with the Internal Revenue Service, then it must provide a copy of such form to the Department of Taxation; and
(6) If the entity did not file a federal 990 or 990 EZ tax form, or the successor forms to such forms, with the Internal Revenue Service, then the entity must provide the following information:
(a) A list of the Board of Directors or other responsible agents of the entity, composed of at least two individuals, with names and addresses where the individuals physically can be found; and
(b) The location where the financial records of the entity are available for public inspection.
(2) The law regarding sales by nonprofit organizations.
Virginia law does not contain specific exemptions or exclusions from tax for retail sales made by nonprofit organizations. Retail sales of taxable items, therefore, must include the tax.
III. Applying for Exemption from Sales and Use Tax.
A. District of Columbia.
The Office of Tax and Revenue of the District of Columbia requires the completion of its Application for Exemption, FR-164, to obtain a sales and use tax exemption. This form can be obtained online or by calling, faxing or mailing a written request to the Office of Tax and Revenue.
B. Maryland.
The Comptroller of Maryland uses its Combined Registration Application for sales and use tax exemption applications. This form also is used to register for certain taxes, unemployment insurance and transient vendor licenses and can be obtained online or by calling, faxing or mailing a written request to the Comptroller's Office.
C. Virginia.
As stated above, current Virginia law requires that a nonprofit organization either must: (a) qualify for exemption from the tax pursuant to one of the existing provisions of the Va. Code Sections, or (b) apply to be added to one of the Va. Code Sections. In either case, the organization must complete Virginia's Request for Sales and Use Tax Exemption, which can be obtained by calling the Virginia Department of Taxation. Given the legislative climate regarding these exemptions, however, such a step probably would prove fruitless at this time. Additionally, the application itself will no longer be available after July 1, 2004, when the Va. Code Sections are repealed. After that date, a nonprofit organization will have to apply for exemption with the Department of Taxation. As of this date, no application or instructions have been issued.