In a previous article in the Non-Profit Advisor (see Tax Exempt Organizations: Don't Forget About New York State Sales Tax), the author reviewed the rules regarding New York State sales tax. Because these rules "are" so complex, it was decided that the New Jersey sales tax laws would be discussed in another issue of Non-Profit Advisor, and that is the intent of this article.
Since revenues raised by a New Jersey Tax Exempt organization and used to fulfill the organization's mission are generally not subject to income tax, every dollar that is saved with respect to the payment or collection of sales tax can be used to further the organization's purpose. Therefore, learning viable methods to achieve tax savings and avoiding the expense of collecting and reporting sales tax can only benefit the organization. With that in mind, this article will focus on New Jersey sales tax exemptions that are available to tax exempt organizations.
New Jersey has developed intricate rules for determining which transactions made by tax-exempt organizations require the collection of sales tax. A basic knowledge of these rules will help such organizations avoid possible sales tax assessments in the future.
New Jersey Form ST-5:
The first item of importance in regards to New Jersey sales tax exemptions is that the organization must become familiar with the New Jersey Form ST-5 exempt organization certificate. When this certificate is received by the organization from the New Jersey Division of Taxation, the organization is exempt from the requirement of paying sales tax on certain purchases of tangible personal property (hereinafter "TPP") and collecting sales tax on exempt sales. Keep in mind that New Jersey will not recognize out-of-state exemption certificates. Thus, out-of-state tax-exempt organizations must also apply for and receive a Form ST-5 certificate to be exempt from paying sales and use tax on New Jersey purchases. The New Jersey Division of Taxation issues these certificates on an entity-by-entity basis; therefore, each organization must apply for and receive the Form ST-5 certificate. New Jersey will not allow the sharing of certificates by affiliated organizations.
When the organization receives a Form ST-5, it becomes exempt from paying sales tax on purchases of TPP and taxable services when the expenditures are paid with organizational funds and are directly related to the organization's purpose. This exemption applies to all purchases, other than natural gas and energy, including the purchase and rental of goods and equipment, services (including janitorial and telecommunication services), meals, admissions and hotel and motel occupancies. However, if the purchases are made with personal funds, the exemption will not apply even if the purchaser is reimbursed by the organization.
Exemption for occasional fundraising sales and thrift shop store sales:
Additionally, with the Form ST-5 certificate in hand, exempt organizations are not required to collect sales tax on occasional fundraising or "thrift shop" sales when the proceeds are maintained by the exempt organization. Examples of occasional fundraising sales include:
- Annual book and/or greeting card sales lasting a few weeks;
- Gift merchandise sales, such as plant or crafts sales, which occur several times a year and last one or two days; or
- A little league exempt organization operating a seasonal hot dog and refreshment stand open only while games are being played.
Thrift Shop sales:
A store is considered an exempt thrift shop if:
a) At least 75% of the store's merchandise consists of donated items, and
b) At least 75% of the work to operate the store is performed by volunteers.
Both elements must be met for the organization's store to qualify as a thrift shop. For example, if an organization operates a thrift shop in which all of the merchandise is donated, but 50% of the work is done by paid employees, the store must collect sales tax on those sales.
If the organization's store qualifies as a thrift shop, it must file a New Jersey Form C-6205-ST (Request to Be Placed On a Non-Reporting Basis) with the Division of Taxation to stop collecting sales tax.
Organizations often raise funds by charging admission fees and annual membership dues, and distributing periodicals produced by the organization as a form of membership benefit. These organizations are exempt from collecting and remitting sales tax on these items when certain criteria are met.
Charges for admission to events that are conducted by an exempt organization are not subject to sales tax when all of the proceeds from the admissions are for the exclusive benefit of the qualified organization and do not benefit any individual shareholder or member of that organization.
Carnivals, rodeos, circuses: An organization that organizes a carnival, rodeo or circus that has professional performers or operators who are compensated by the organization is required to collect sales tax on the related admission charges.
Membership fees and magazine subscriptions:
Organizations such as the YMCA are not responsible for collecting sales tax on initiation fees, membership fees or dues paid to use their facilities. Similarly, membership periodicals distributed by all exempt organization to its members as a membership benefit are not subject to sales tax in New Jersey.
Although tax-exempt organizations are generally not subject to income tax, they could be required to collect and remit sales tax to New Jersey on certain sales of TPP and services. Failure to properly collect and remit sales tax could lead to large tax assessments and penalties.
For more information, please contact Andrew Cohen at (212) 842-7649 or your Friedman LLP professional or engagement partner.