Should Your Organization be Paying Sales Tax?

Posted by: Carrie Minnich

One benefit of being an Indiana nonprofit organization is being exempt from paying sales tax on tangible personal property. But the fact that the organization is incorporated as a nonprofit corporation or has received an exemption from income tax from the IRS does not necessarily mean that it is automatically exempt from paying sales tax. In order to take advantage of this benefit, there are a few requirements for the nonprofit organization to meet.

1. Only nonprofits organized for charitable, literary, civic, religious, educational, scientific or fraternal purposes are exempt from paying sales tax. Business leagues, licensed hospitals, cemetery associations, monasteries, churches, parochial schools, convents, pension trusts and labor unions are also exempt.

2. The organization cannot be operated predominately for social purposes.

3. Complete and file NP-20A, Nonprofit Application for Sales Tax Exemption. This form should be filed with the Indiana Department of Revenue within 120 days after the organization is established. According to the Indiana Department of Revenue, the organization is considered established when it receives its employer identification number (EIN). The organization must attach a copy of its federal determination letter to form NP-20A. There is no fee for this form.

4. File annually Form NP-20, Indiana Nonprofit Organization’s Annual Report with the Indiana Department of Revenue.

5. Complete Form ST-105, General Sales Tax Exemption Certificate and provide this form to each vendor. Vendors are required to collect sales tax on all sales unless the vendor can establish that the purchase will be used by the purchaser for an exempt purchase. Form ST-105 provides support for this requirement.

6. The purchases must be used for the same purpose as that for which the organization is exempt. No purchases can be made for the private benefit of any individual.

7. The organization needs to make the purchase. In other words, employees cannot make exempt purchases with their personal credit card. Individuals are not exempt organizations and may not purchase property free of sales tax. The purchase needs to be made with the organization’s credit card or billed to the organization and paid with a check from the organization in order to be exempt from sales tax. This technicality is often overlooked by many organizations and vendors.

During the current economic conditions in which nonprofits have experienced a decrease in much needed funding, it is important for the organization to avoid spending precious dollars on sales taxes if it does not have to.