Florida Tax Exempt Entities – Sales and Use Tax Help
Over the past year, we have received an increased number of inquiries regarding religious, not-for-profit, and other exempt organizations. It is somewhat surprising that there is very little on the Florida Department of Revenue's website regarding the subject matter. Schools, churches, governmental agencies, and other nonprofit organizations often seek us for help regarding issues they have from a sales and use tax perspective. Therefore, I thought this would be a good platform to address some of the issues we are seeing somewhat regularly in our practice.
Like most business entities, not-for-profits come in all different shapes and sizes. However, from a very general perspective, most exempt organizations are usually organized under section 501(c)(3) of the Internal Revenue Code. Under section 501(c)(3), the organization has to meet several requirements in order to be exempt. In short, the organization must operate for an exempt purpose described in section 501, which is typically some kind of charitable or religious purpose. Other exempt organizations operate under 501(c)(7), which governs social clubs. The other major category is entities organized under the state or federal governments. If an organization is properly organized as an exempt organization, then it will be granted a Florida exemption certificate when it registers for sales and use tax in Florida. If only the sales and use tax problems stopped at this stage.
One common scenario that is presented in this area is the exempt entity purchases tangible property. As a general rule, if tangible personal property is purchased in Florida, it is taxable unless an exemption applies. However, Florida law permits an exemption of purchases made by an exempt entity if the purchase is used in carrying on its nonprofit or exempt purpose. This exemption is very broad and it permits most purchase made by an exempt entity to be exempt. From the seller's side, it need only receive an exemption certificate in good faith from the exempt entity and it should not charge tax on its sale of otherwise taxable tangible personal property.
What if instead of selling, we donate to exempt entities? Many companies for moral, tax, or other reasons often donate large amounts of tangible items to exempt entities. From a sales tax perspective, no sale has taken place and the entity donating the item cannot properly accept an exemption certificate. To a company's surprise on audit, they come to find out that all of those items so generously given to other organizations are subject to tax. Under this scenario, I have seen dozens of companies hit with a hefty use tax bill for the cost of items given to charity by our comrades from Tallahassee. Why not charge the charity for items at a significant discount? If a company made the same "donation," but charged the exempt entity a penny, then it seems to follow a sale has taken place and an exemption certificate would eliminate the sales tax obligation.
While sales to exempt entities appear to be straightforward, a problematic or confusing area seems to be in the real property improvement world. As stated above, if an exempt entity purchases tangible personal property for its exempt purpose, then the purchase is exempt. However, many real property contractors believe an exemption certificate works for real property purchases as well. As such, many real property contractors incorrectly fail to pay tax on their purchases used for a real property job, and then correctly does not charge tax upon sale. This would be the correct procedure if they were selling tangible personal property. Conversely, they should still pay tax on purchases of items that are used in real property jobs. This often blindsides many real property improvement contractors on audit. It is noteworthy to point out that there are some creative planning techniques when providing real property to an exempt entity. If you or your client find yourself in this position please do not hesitate to contact us or another professional well versed in Florida sales and use tax law.
From the other side of the coin, sales made by an exempt organization are generally taxable. Our legislature has determined that from a fairness perspective, this has to be the right result. Imagine having many exempt organizations selling the same items sold by Walmart, Best Buy, or McDonalds. They could purchase items at the same cost but always out price the competition because they would not have to charge sales tax. Fairness dictates that this cannot be the case and as such, sales by exempt entities are usually taxable.
Florida sales and use tax law would not be nearly as "fun" if there wasn't some twist or caveat to the general rule. In the exempt entity world, it is admissions sales. Exempt entities regularly put on and help run events for its members. The world of admissions for exempt entities is incredibly complex and if you or your client is going to attempt to comply with Florida sales and use tax law, it is HIGHLY recommended that rule 12A-1.005, Florida Administrative Code, be consulted. As a very general proposition, admissions sold sponsored by an exempt entity are generally exempt. However, to illustrate the complexity with this rule, membership fees sold by 501(c)(3)'s are generally exempt, but membership fees sold by 501(c)(8)'s are generally taxable. But what if the exempt entity charges an admission to the event which entitles the guest to free food, beverages, or other items? One can quickly see that a myriad of unique issues emerge and each can have opposite results from a tax perspective.
Looking at an exempt entity from a tax perspective seems like a fairly straightforward analysis. It is an "exempt" entity so tax must not apply. While this may be a good inclination from a federal tax perspective, from a sales and use tax perspective it can get you or your client's organization in a world of trouble. IN addition to the complex Florida sales and use tax laws that apply to exempt entities, sales and use tax is incredibly form driven. Therefore, how a transaction is structured can produce very different results, especially when an exempt entity is thrown into the mix. It also seems apparent that by our increased inquiries over the past several months, the Florida Department of Revenue has exempt entities on its radar. Therefore, it would be wise to speak with someone well versed in Florida sales and use tax laws before it is too late.
About the author: Mr. Donnini is a Florida Attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., in Fort Lauderdale, Florida. Mr. Donnini's primary practice is Florida tax controversy. Mr. Donnini worked as an accountant for a public REIT prior going to law school and has since earned an LL.M. in Taxation from NYU. If you have any questions please do not hesitate to contact the firm by phone or email via the links at the top of the page.
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ADDITIONAL RESOURCES
FL TAX - VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, by Jerry Donnini, Esq., published October 5, 2012