The survival of many nonprofit organizations is tied to monies received from fundraising events. Most nonprofit organizations are aware of the substantiation and disclosure requirements under federal law in connection with fundraising events. However, some may not be aware that a portion of the proceeds received therefrom may be subject to sales tax. In addition, some fundraising events include the sale of raffle tickets, many of which require a raffle license. This article discusses these requirements and the exceptions thereto.
Note that the laws governing fundraisers vary from state to state. This article discusses the applicable sales tax and licensing rules under current Nebraska law.
A. General Rule
The general rule is that nonprofit organizations operating in Nebraska must have a Nebraska sales tax permit and taxpayer identification number. Nonprofits must generally pay sales tax on purchases and charge sales tax on items sold to the general public or its members. (See below for certain exceptions for schools and churches.) For example, if a nonprofit organization has a gift shop, it must charge sales tax on the items sold at the gift shop. Another example is items sold at silent and oral auctions conducted in connection with a fundraiser. These sales are subject to sales tax regardless of whether the items are donated for the auction or purchased. Accordingly, when the items are paid for, sales tax needs to be calculated on that portion of the price that reflects the fair market value of the item purchased. Typically, the fair market value is obtained from the donor or original seller, and reflected on the bid ticket or program brochure. The value in excess of the fair market value of the item purchased is not subject to sales tax and should qualify as a charitable contribution.
With regard to fundraisers involving food, entertainment, recreation, or amusement, that portion of the amount charged for the event that represents the fair market value of the food, entertainment, recreation, or amusement is considered a sale subject to sales tax. The nonprofit organization must notify the purchaser on the ticket, receipt, or other document issued in connection with the payment, the amount on which sales tax is calculated. For example, if a ticket to a fundraising dinner is $100, the information provided to the purchaser should be the cost of the meal (e.g., $25) and the amount of the charitable donation (e.g., $75). For a golf outing fundraiser, sales tax would need to be charged on the fair market value of what was provided, which typically consists of 18 holes of golf, a box lunch, sleeve of golf balls and tees, and the reception/dinner.
Another common fundraiser is fun runs and walks. The registration fee typically includes a T-shirt and possibly bottled water and healthy snacks. The Nebraska Department of Revenue (the "Department") takes the position that the registration fee is not subject to sales tax because the fee is not for access to, or use of, a specific place. For example, many walk/run courses take place on the various streets or park areas of Omaha. However, it appears that if a part of the registration fee provides access to a specific location not otherwise available without being a registered participant, the registration fee is generally subject to sales tax. The Department’s position is that the nonprofit organization is responsible for the payment of sales tax on T-shirts, and the water and snacks are not subject to sales tax due to an exception for food purchases.
We note that failure to set forth the fair market value of what was provided (e.g., meal and entertainment) and the charitable donation portion of the admission results in the entire contribution being subject to sales tax and not deductible as a charitable contribution. This is a negative result both to the nonprofit (which is responsible for the tax if it does not collect it from the purchaser) and for the purchaser (whose federal charitable deduction may be disallowed). IRS Publication 1771, Charitable Contributions-Substantiation and Disclosure Requirements, provides great information on the federal requirements imposed on charities conducting fundraising events.
Special rules apply to school and church fundraisers, as set forth below.
Although the general rule applies (i.e., schools must collect sales tax on sales of property and services to the general public or to the school’s members), there are broad exemptions that cover most school fundraising activities. The following sales are exempt from sales tax:
1. Admissions charged to attend school events, including admissions charged by student organizations and parent-teacher associations to attend an event or activity during the regular school day or at an approved function of the school;
2. Meals and food products, including soft drinks and candy, sold by the school, a student organization, or parent-teacher association and served during the regular school day or at a school function not open to the general public;
3. Concession sales of food at events including those open to the general public; and
4. Sales by "parent-booster clubs," "parent-teacher associations," "parent-teacher-student associations," or school-operated stores if the proceeds are used to support school activities or the school itself.
Unlike other nonprofit organizations, schools can hold an annual event consisting of a dinner, dance, silent and/or oral auction and not charge sales tax on the cost of the admission, i.e., the meal and entertainment, as long as the dinner is an approved school function.
In addition, the sale of items on the silent and oral auctions is not subject to sales tax as long as such auctions are conducted by parent-booster clubs, parent-teacher associations, or parent-teacher-student associations. The Department takes the position that if the volunteers helping with the dinner and silent/oral auction are not a part of a parent-booster club, parent-teacher association or parent-teacher-student association, this subjects the proceeds from the silent/oral auctions to sales tax. Typically, the volunteers in charge of a school fundraising event, such as an annual dinner, refer to themselves as committees or chairs and not as booster clubs or associations. We therefore strongly recommend that schools take the extra step of making sure their written documentation reflects that their volunteers are a part of a specified "club" or "association."
Many schools use third party auctioneers to conduct the oral auction. The Department’s position is that if a third party auctioneer is used for a school oral auction, even if such services are provided gratis, the sale proceeds from items sold at the oral auction are subject to sales tax.
There are two exceptions to the general sales tax rule for religious organizations. The first exception allows religious organizations to have one annual sale that is not taxed. The sale in question can last up to three consecutive days and can take place at any location. If the religious organization has more than one fundraiser during the year, it can select which one it wants to qualify for the exception. The one sale exception applies to not only the items sold at the fundraiser (e.g., silent/oral auction) but also the admission charged for the dinner and entertainment. Unlike schools, the Nebraska regulations allow a religious organization to use a third-party auctioneer to conduct the sale. Anything can be sold at such sale free of sales tax except for motor vehicles, trailers, or semi-trailers, all of which would be subject to sales tax.
The second exception provides that a religious organization does not need to collect sales tax on meals sold at a function of the religious organization which function is "primarily for the members of the organization." For example, if a church has Lenten dinners and sells meal tickets to its members, it does not need to charge sales tax on the amount charged for the meal even if some of the meal tickets are sold to friends of members.
Another common fundraiser is the sale of raffle tickets. A raffle license is needed when the goal is to raise more than $5,000. If the nonprofit organization is not sure how many raffle tickets it will sell, it is better to get the license because once the nonprofit organization sells $5,000 of raffle tickets, it must stop the raffle (i.e., the nonprofit organization cannot seek a raffle license in the middle of ticket sales). The ticket sales and prizes (except for cars) are not subject to sales tax, but if the raffle requires a raffle license, the proceeds are subject to a raffle tax currently set at two percent of the gross proceeds. The cost of the raffle ticket is not deductible as a charitable contribution due to the possibility of getting something of value in exchange therefore.
"Nonprofit" does not mean "nontaxed." Though nonprofit organizations generally do not pay income tax, they typically do pay sales tax on their own purchases and must charge sales tax on their own sales, subject to exceptions such as the ones described in this article. If you work for or with a nonprofit, or contribute to a nonprofit, you should be aware of the matters discussed in this article. Please contact Karen Shuler or Roberta Christensen at (402) 390-9500 with any questions.
by Karen M. Shuler and Roberta L. Christensen