When Are Tax Exempt Entities Not Exempt From Taxes?

Any entity that qualifies for tax exemption under Section 501(c) of the revenue code is exempt from paying taxes, except when they aren’t. In general, an IRS exempt entity is exempt from paying taxes on its income; however, there is a key exception to this rule that results from what the IRS calls Unrelated Business Income (“UBI”). UBI is income that an exempt entity receives from a source that is not sufficiently related to its exempt purpose. This is one of the biggest pitfalls for not-for-profit organizations because it is sometimes hard to tell when income is taxable and when it is not. The key point to remember is that whether income is taxable or not is determined by the source of the income, not the final product for what it is ultimately used.

The other big exception is sales and use tax. Although an entity is registered as an exempt entity with the IRS and the state for income tax purposes and may be registered as exempt from paying sales tax for qualifying purchases, that does not exempt them from collecting sales tax from the sale of goods. Florida provides a few exemptions that can be used to relieve your entity from collecting and remitting sales tax, but they are very fact specific and there is no one-size fits all answer to whether or not a particular sale qualifies for an exemption.

As you can see, an exempt entity that is considering performing a fundraising sale is wise to consider consulting with an attorney before offering the items for sale. Planning ahead can be paramount in preventing headaches from penalties and interest imposed by the Department of Revenue.