State tax exemption for nonprofits

When your IRS determination letter arrives, it is natural to think the tax work is done. It is not quite. The letter recognizes your exemption from federal income tax. Each state decides for itself whether your organization owes state taxes, and most states want you to ask.

Why federal exemption is not enough

States tax organizations in several ways, and each tax has its own rules:

• Income or franchise tax. A tax on a corporation's income or on the privilege of doing business as a corporation in the state. Some states, California among them, accept the federal decision once you file a short form with a copy of your determination letter.
• Sales and use tax. A tax on retail sales of goods (and some services), collected by the seller, and a matching use tax on taxable purchases. Exemption from sales tax is often narrower than income tax exemption, and in some states nonprofits have no general exemption at all.
• Property tax. A tax on land, buildings and sometimes business personal property, usually assessed locally. Exemptions typically depend on who owns the property and how it is used.

Rules vary by state. Some states have no income tax or no sales tax at all, and the agencies, forms and timing differ everywhere. The three examples below show how different the systems can be.

California

Income and franchise tax. The Franchise Tax Board's instructions are blunt: all corporations and unincorporated organizations, even if organized on a nonprofit basis, are subject to California corporation franchise or income tax until the FTB gives them exempt status. The California Secretary of State's welcome letter for new corporations makes the same point: nonprofit corporations are not automatically exempt from California franchise or income tax.

There are two routes:

• Form FTB 3500A, Submission of Exemption Request. If you have a federal determination letter under section 501(c)(3), (4), (5), (6), (7) or (19), you file Form FTB 3500A with a copy of the letter. The FTB then sends a letter acknowledging the exemption and stating its effective date.
• Form FTB 3500, Exemption Application. If you do not have a federal determination letter, or the FTB previously revoked your exemption, you use the longer Form FTB 3500 instead.

Sales and use tax. The FTB instructions say not to use Form FTB 3500A for sales tax. That tax is handled by the California Department of Tax and Fee Administration (CDTFA), whose Publication 18 states that there is no general sales and use tax exemption for nonprofit organizations. Certain types of organizations qualify for specific exemptions or exclusions, so check the organization-specific sections of Publication 18. If you plan to sell goods, for example through a thrift store or an auction, read Publication 18's sections on sales before you start.

Texas

Franchise and sales tax. The Texas Comptroller says organizations exempt under section 501(c)(3), (4), (8), (10) or (19) are exempt from Texas franchise tax and sales tax, but a qualifying organization must apply. You file Form AP-204, Texas Application for Exemption – Federal and All Others, with a copy of your IRS determination letter. If the IRS letter was issued more than four years ago, the Comptroller asks for a current IRS verification letter as well.

Once exempt, you give sellers a completed Form 01-339, Texas Sales and Use Tax Resale/Exemption Certificate, when you buy taxable items for the organization. The Comptroller's main exempt organizations page describes the sales tax exemption as applying to purchases necessary to the organization's exempt purpose.

A change of structure means a new application. The Comptroller warns that a federal exemption applies only to the specific organization it was granted to. Its example: an unincorporated foundation with a federal exemption incorporates; the new corporation must reapply for both federal and state exemption. See changes after 501(c)(3) status.

Property tax. Texas property tax exemptions are claimed locally. The Comptroller explains that applications are filed with the appraisal district in the county where the property is located, that the general deadline is before May 1, and that the district's chief appraiser decides whether the property qualifies.

New York

Sales tax. The New York State Department of Taxation and Finance lists not-for-profit religious, charitable and educational organizations (often 501(c)(3) organizations) among those that must apply for sales tax exempt status. You file Form ST-119.2, Application for an Exempt Organization Certificate, with the documents its instructions require and, if you have one, a copy of your 501(c)(3) determination letter.

If approved, the Department issues Form ST-119, Exempt Organization Certificate, with a six-digit New York sales tax exemption number, and sends Form ST-119.1, Exempt Purchase Certificate, which you present to sellers. The Department notes that your nine-digit federal EIN is not a sales tax exemption number. The certificate may be used only for purchases on behalf of the organization, never personal purchases.

New York's income tax and real property tax rules for nonprofits are separate from sales tax; check with the Department and your local assessor.

A practical sequence

For most new 501(c)(3) organizations, the order looks like this:

1. Receive your IRS determination letter. See Form 1023, explained and processing time and user fee.
2. Notify or apply to the state revenue agency for income or franchise tax exemption, if your state requires it.
3. Apply for sales tax exemption with the agency that handles sales tax, if your state offers one for your type of organization.
4. Apply for property tax exemption with the local assessor or appraisal office for property you own, before the local deadline.
5. Check whether you must collect sales tax on anything you sell, even if your purchases are exempt.
6. Note any renewal or update requirements each state sets, and file changes of name, address or structure with each agency.

Keep copies of every state exemption letter with your permanent records.

How state tax exemption fits with other state filings

State tax exemption is one of three separate state tracks. The second is charitable solicitation registration with the attorney general or secretary of state (see state charitable solicitation registration). The third is corporate good standing, kept current through annual or biennial reports (see state annual reports and registered agents). Falling behind on one can affect the others. In California, for example, the Secretary of State notes that failing to file the required Statement of Information can lead to penalties assessed by the Franchise Tax Board and suspension.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.