Sales tax when your charity sells things

This guide is for the treasurer or volunteer who runs your charity's T-shirt table, bake sale, online shop or auction. A common belief is that a tax-exempt charity never charges sales tax. In most states that's not true: being exempt usually covers what your charity buys, not what it sells. After reading, you'll know when your sales may be taxable, the breaks some states give for occasional fundraisers, the difference between a resale certificate and an exemption certificate, and how federal income tax fits in.

Sales tax is set by each state, and sometimes cities and counties add their own. This guide uses three states' official guidance as examples: Texas, New York and Washington. Your state's rules may be quite different, so check with your state's revenue department before you sell. Our state tax exemptions guide explains how to apply for exemption on purchases.

Exempt doesn't mean you never collect tax

The three states put it plainly:

• Texas: the Comptroller says "exempt organizations and other nonprofit organizations must each get a sales tax permit" and collect tax on taxable items they sell, unless an exception applies.
• Washington: the Department of Revenue says "nonprofit organizations must collect and remit retail sales tax on their sales of goods and retail services," with some exemptions for fundraising.
• New York: the Tax Department's guide for exempt organizations says "certain sales made by these organizations are subject to tax," and that any exempt organization that makes taxable sales "is required to register as a vendor and collect and remit sales tax."

So before your first sale, find out whether your state taxes what you plan to sell, and whether you need a sales tax permit.

When sales are usually taxable

The details differ, but the three states' guidance points the same way: the more your selling looks like a regular shop, the more likely it's taxable.

• A shop that's open regularly. New York taxes sales from any shop or store an exempt organization runs, meaning a place where goods are sold "with a degree of regularity, frequency, and continuity," including gift shops, bookstores and thrift stores. Washington's fundraising exemption doesn't apply to sales "at a regular place of business during regular hours," such as a thrift shop with set hours.
• Regular online sales. New York taxes an exempt organization's sales over the internet, by phone or by mail when they're made regularly. Washington treats continual sales from a website as sales at a regular place of business.
• A booth among other sellers. New York treats a charity's booth at a craft fair or county fair, where other vendors collect tax, as a "temporary shop or store," so its sales of taxable items are taxable.
• Regular food service. New York taxes food sold by a restaurant, snack bar or concession stand run with regularity, such as a stand open daily for a season. Monthly dinners count as regular; two dinners a year don't.

Breaks for occasional fundraisers

Many states go easier on a fundraiser that happens once or twice a year. Some examples from the official guidance:

• Texas: two tax-free days. Qualifying exempt organizations "can hold two one-day, tax-free sales or auctions each calendar year," after they've been approved for sales tax exemption. The two days may run back to back, for up to 48 hours. The exemption doesn't cover items sold for more than $5,000, unless the organization made the item or it was donated and isn't sold back to the donor.
• Texas: bake sales and banquets. Baked goods sold by a nonprofit "are not taxable when sold without eating utensils." A volunteer nonprofit may also hold a tax-free annual banquet or food sale if only its members prepare, serve and sell the food. Alcohol and non-food items are still taxable.
• New York: up to two auctions a year. If an exempt organization holds no more than two auctions in a calendar year, not at a commercial auction house, and doesn't sell similar items in a shop, those auction sales aren't taxed. Plan a third, and sales at all of them become taxable.
• New York: once-a-year sales. The guide's example of a church's annual rummage sale of donated items isn't treated as a shop, so the sales aren't taxed.
• Washington: fundraising activity. Sales by qualifying nonprofits during fundraising activities can be exempt from retail sales tax and the state's business tax, if the fundraiser isn't held at a regular place of business and the money furthers the organization's goals.

Catalog fundraisers

Selling candles, wrapping paper or cookie dough from a catalog raises its own question: who is the seller? New York's guide explains that if your charity buys the goods and resells them door to door, the sale may not be taxed. If you only take orders and the company delivers to the customer, your volunteers are acting for the company, and sales tax must be collected on the full price and passed to the company. Other states frame it differently. Texas says that when a charity markets the items, collects the money and forwards the agreed share and the sales tax to the fundraising company, the company is the seller and reports the tax. Ask the fundraising company how it handles sales tax in your state before you sign up.

Resale certificates and exemption certificates

These two documents are easy to mix up.

In Texas, an organization holding a tax-free sales day can give its supplier either a resale certificate, if it has a sales tax permit, or an exemption certificate. Washington's guide says a nonprofit that only holds fundraisers may apply for a free reseller permit, and one with a regular place of business must have a reseller permit to buy inventory tax-free.

Never use either certificate for personal purchases. New York's guide says an exempt purchase certificate may not be used by an officer or member "to make personal purchases."

Federal income tax: a separate question

Sales tax is a state tax on the sale. Federal unrelated business income tax (UBIT) is a separate question about your charity's profit. IRS Publication 598 explains that income from a regular trade or business that isn't substantially related to your mission can be taxable, even for a charity.

Publication 598 also lists exceptions that often cover small charities' sales, including a business where substantially all the work is done by unpaid volunteers and the sale of donated goods. Our earned income guide explains the three tests, these exceptions and when you'd file Form 990-T. A sale can be free of income tax and still subject to sales tax, or the other way round, so check both.

Your selling checklist

• We checked whether our state taxes the items we plan to sell
• We know whether we need a sales tax permit, and have one if we do
• We know whether our fundraiser qualifies for an occasional-sale or fundraising break, and its conditions
• We count how many tax-free sales days or auctions we've held this year
• We use a resale certificate for items we'll sell, and an exemption certificate only for items we use
• Nobody uses our certificates for personal purchases
• We've checked whether the sales are unrelated business income for federal tax
• We keep records of every sale and the tax collected