Leadership Letter
January-February 2023
ASK COUNSELOR TARA
ASCE’s General Counsel Tara Hoke responds to legal questions posed by Sections and Branches here each month. Send Tara an email with your question.
As a 501(c)(3), which state sales tax exemptions do or don’t we qualify for?
A common misunderstanding about ASCE’s operations is that its status as a “tax-exempt organization” means that it is exempt from all forms of taxation. Unfortunately, that is not the case; designation as a 501(c)(3) organization only entails an exemption from taxes on the organization’s exempt income. Public charities are still required to pay several types of tax. For example, they must still pay taxes related to their status as an employer – including state unemployment tax, as well as the employer share of Social Security and Medicare. Charities must also pay tax on types of activities that are not considered to be “exempt” income, for example, income derived from advertisements or certain types of merchandise sales.
More importantly, charitable status does not necessarily mean that a charity is exempt from paying sales tax on purchases of goods and services. This decision is left up to the individual state – and unfortunately, there is a wide disparity among states in their treatment of purchases made by charitable entities.
While many states will grant a sales tax exemption to any organization holding a federal 501(c)(3) exemption letter, others allow very few organizations to qualify for such an exemption. For example, several states grant sales tax exemptions only to organizations engaged in certain types of charitable activities, such as hospitals, religious organizations, or charities serving the homeless. In others, only certain types of purchases are exempt: in just one example, some states do not consider a catering purchase a sales tax exemption.
In almost all cases, a charitable organization wishing to be exempt from sales tax must apply to their state’s department of revenue for the exemption. If you do not know if your local ASCE entity is eligible for a sales tax exemption, here is a good place to start: https://www.harborcompliance.com/information/nonprofit-income-sales-use-tax-exemptions-by-state.
As always, you are also welcome to contact ASCE for assistance.