The federal government imposes an unrelated business tax (UBIT) on nonprofits who regularly sell or trade goods or services that are unrelated to their organization’s primary mission. However, the federal government isn’t the only tax collector who comes knocking. The nonprofit will also need to pay state taxes.
To help define the types of business activity income that qualifies for the UBIT, read IRS Publication 598 entitled “Tax on Unrelated Business Income of Exempt Organizations.” For example, paid advertising is considered unrelated business income. Income from paid ads on a nonprofit’s newsletter or website is subject to UBIT.
State Regulations on the Sold Goods of Nonprofits
When a nonprofit sells goods to the public, state sales taxes need to be paid. In addition, the nonprofit may also need to acquire a seller’s permit. Nonprofits must comply with these types of general business requirements. To seek any exemptions for certain sales transactions, the nonprofit must apply for eligibility.
If a nonprofit begins selling goods without fully understanding all of it’s state rules, it may be charged back taxes and other penalties. At the minimum, most states require a nonprofit to hold a seller’s permit. They may also be required to pay state taxes at the end of the year or even quarterly if sales volume is high.
Typically, in most states, a seller’s permit is only required and sales taxes paid for sales of tangible goods like books etc. Sales of services are often exempt. To clarify exactly what the nonprofit’s state requires, contact the state’s sales tax agency for all the specifications. States like Alaska, Delaware, Montana, New Hamsphire, and Oregon don’t have sales tax and may not even demand a seller’s permit.
However, in these states and others, local governments may impose sales taxes and certain transactions may be subject to something like a sales tax, although it is disguised under a different name altogether.