As a New York State tax- exempt organization, the revenues you raise to fulfill your mission are generally not subject to Income Tax. However, there may be other tax obligations, such as collecting and remitting sales tax to New York State. These obligations generally depend on the type and frequency of sales. New York State 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 you avoid possible sales tax assessments in the future.
Several types of fund-raising activities that generate tax-exempt revenue may require the collection of New York State sale tax. These activities include the sale of taxable tangible personal property ("TPP") and the performance of taxable services.
Sale of taxable tangible property: Generally, retail sales of TPP made from a shop or store (including a temporary shop or store) are taxable sales, unless the items being sold are exempt from sales tax. A shop or store is defined as any place where items are displayed for sale with a degree of regularity, frequency, and continuity. Such stores include gift shops, book stores, and thrift shops. Temporary shops or stores are stores operated on the same premises as other individuals or vendors who are required to collect sales tax. Examples of temporary stores include booths or stands operated at a flea market, craft fair, antique store or similar premises where there are other vendors required to collect sales tax.
An important consideration in determining whether there will be sales tax obligations is the regularity, frequency, and continuity of the exempt organization's selling activities. A church that holds an annual rummage sale and sells donated property would not be considered to be engaging in frequent enough activity to be deemed to be operating a shop or store. However, if that same church operates a counter in the back of the church each Sunday from 1:00PM to 4:00PM, the church would be viewed as operating a shop or store. Additionally, if a volunteer fire department sells holiday items (such as Christmas trees) which are on display at the firehouse every day for a three- week period during the holiday season, the fire department would meet the criteria of operating a shop or store and would be required to collect sales tax. Moreover, remote sales through telephone calls, mail order catalogues, the internet and similar methods are subject to sales tax if the sales occur with sufficient degree of regularity, frequency and continuity.
Fundraising sales: Door-to-door solicitations, or the distribution of order forms or catalogs to prospective customers also have sales tax implications. Here, the issue becomes whether the tax exempt -organization takes title to the TPP before selling the items to customers. If it does, the sales are not subject to sales tax because, as owners of the TPP, the tax exempt organization did not sell the TPP in a manner that's tantamount to being made in a shop or store.
However, if the tax- exempt organization does not take title to the products, it will be required to collect sales tax upon completion of the sale. In this case, the tax- exempt entity is deemed to be acting as a sales representative for the vendor and must collect sales tax on the vendor's behalf.
Other fundraising activities may also be subject to sales tax. For example, if a tax- exempt organization sells candles at a country fair where other vendors are required to collect sales tax, those sales would be deemed to be made at a temporary store and subject to sales tax. The significance here is that the sales were made on properties where other vendors are required to collect sales tax.
Sales in or by restaurants, taverns or other establishments:
Sales of food at restaurants, taverns or other establishments may be subject to sales tax. As with shops and stores, in order for sales of food to be subject to sales tax, they must be regular, frequent and continual. For example, if a tax-exempt youth organization operates a food truck during May and July, the food truck would be considered a restaurant or other establishment and sales tax must be collected. Additionally, sales of food at a country fair are sales made at a temporary restaurant, as other vendors at the fair would be required to collect sales tax.
Auction sales: Certain sales occurring at traditional or remote auctions are subject to sales tax. A traditional auction is an auction where the bidder (or a representative) is physically present at the auction. Remote auctions are auctions where no bidders or representatives are physically present, such as auctions conducted by telephone, mail order or through the internet. Auction sales are subject to sales tax if the sales are made with a degree of regularity, frequency, and continuity as in a shop or store. The determining factor is the number of single auction events that occur in a given year. If a tax-exempt organization conducts no more than two auctions, the sales from those auctions would not require the collection of sales tax. This exemption applies if the organization does not sell similar items in a shop or store and the auction does not occur at a location where other auctions are taking place.
If however, the tax- exempt organization conducts, schedules, or intends to conduct three or more traditional auction events during a given year, the sales of TPP at those auctions would be subject to sales tax. Note that if the organization does not schedule or otherwise intend to conduct two auction events, but then conducts more than two auctions that year, sales tax must be collected on sales made at the third auction and beyond. The sales tax rules that apply to traditional auctions also apply to remote sales. It is important to note that whenever an auction takes place at an auction house or location where other auctions are taking place, sales tax must be collected despite the above discussed rules.
Sale of parking services: The parking, garaging and storing of motor vehicles is subject to sales tax, unless such services are provided at a one- or- two- family dwelling.
Admission services: Admission charges for events that benefit the tax-exempt organization are generally exempt from sales tax. However, this exemption does not apply to admissions at athletic games or exhibitions (other than events that benefit an elementary or secondary school) and carnivals or rodeos in which professional performers or operators participate for compensation.
Lease and rentals of tangible personal property: The lease or rental of TPP is subject to sales tax. Thus, if a local hospital leases radiology equipment to a group of doctors for use in their radiology practice, the doctors' lease payments to the hospital are subject to sales tax.
Sales of services to real property: The sales of services to real property are subject to sales tax. These taxable maintenance and repair services include, but are not limited to, painting and cleaning services, landscaping and lawn services, snow plowing and property repair services.
Although tax-exempt organizations are generally not subject to income tax, they could be required to collect and remit sales tax to New York State 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 your Friedman LLP professional or engagement partner.
For those in New Jersey, we plan to do a follow up article on the impact of New Jersey sales tax on tax exempt organizations - stay tuned!
If you have any questions about the content of this article, please contact Andrew Cohen at ACohen@FriedmanLLP.com.