Nonprofits and Sales Tax: Is your organization still affected?
by Mandy Hicks
By Leah Morrison
English, Lucas, Priest & Owsley, LLP
2018 Kentucky legislation expanded the types of services subject to sales and use tax, established economic nexus thresholds for remote retailers, and amended certain excise taxes. In other words, 2018 brought new headaches to Kentucky businesses statewide. But one group in particular was more burdened than the rest: nonprofit organizations. New legislation forced nonprofits to pay sales tax on all the extended services, if applicable, plus, most notably, on sales of admission. This cut deeply into a nonprofit’s ability to raise funds at fundraising events.
Nonprofits had to employ some creative techniques to separate sponsorships and donations from the costs associated with being allowed entry into their fundraising events. Additionally, sales tax had to be collected and paid on certain items auctioned during these events. If the auction item in question was a physical object, tax had to be paid on it – and at the auctioned price, not the actual, retail value of the item. But auction items such as lawn care services or vacations were exempt from sales tax collection. These are only a few examples of the nightmare nonprofits were forced to navigate. Compliance with sale tax laws drained their resources and significantly impacted the ability of nonprofits statewide to provide their charitable purposes in draining the resources they had available to them.
2019 legislation brought an end to this mess – sort of. Emergency legislation was passed to exempt resident nonprofit educational, charitable, and religious institutions from the imposition of sales tax on their sales of admission and fundraising event sales. Now nonprofits no longer need to concern themselves with collecting or paying sales tax on tickets to their fundraising events or items sold at auction, as an example. This was certainly a win for nonprofits across Kentucky.
However, this new 2019 legislation did not fully turn back the clock on sales and use tax for all nonprofits. Nonprofits are still subjected to the extended sales and use tax laws if they conduct sales outside of admissions and fundraising events sales. Furthermore, fundraising event sales specifically does not include sales related to the operation of a retail business. Nonprofits that run thrift stores or bookstores will still need to collect and pay sales tax. And, notably, veterinarian services provided by animal shelters at a cost will still be subjected to sales tax.
ELPO Law often works with nonprofit organizations to help navigate their complex state and local tax obligations. You can reach me, Leah Morrison, at email@example.com or 270-781-6500, and I would be happy to help you.