State tax exemptions for charities

This guide is for founders who have just received their IRS determination letter (the letter confirming your 501(c)(3) status) and assume the tax side is done. It isn't quite. After reading, you'll know which state taxes to check, who handles each one, what a few states actually require, and when to apply.

Federal exemption is not state exemption

Your 501(c)(3) letter exempts your charity from federal income tax. Each state decides its own taxes, and many have their own steps. The Texas Comptroller, for example, says plainly that a qualifying 501(c) organization must apply for state tax exemption.

Other states work differently. North Carolina's Department of Revenue says there's no formal application or fee for its franchise and income tax exemption, but, except as state tax law provides, a nonprofit corporation that doesn't ask the department for an exemption letter is considered subject to those taxes. Rules vary a lot from state to state, so check yours rather than assuming.

The three state taxes to check

Local governments can have their own rules too, so check with your city or county if you're unsure.

Income and franchise tax

This is the state version of the federal income tax exemption. Here's how three states handle it:

• Texas: apply to the Comptroller on Form AP-204 with a copy of your IRS determination letter. If the IRS letter is more than four years old, the Comptroller asks for a current IRS verification letter. Organizations exempt under 501(c)(3), (4), (8), (10) or (19) are exempt from Texas franchise tax and sales tax once approved.
• North Carolina: no formal application or fee for nonprofits formed under the state's nonprofit law. Ask for an exemption letter by sending your documents; without one, the department considers you subject to franchise and corporate income tax. The department doesn't issue exemption numbers; you use your federal EIN on state returns. Unrelated business income (income from a business that isn't related to your mission) is still taxed.
• New York: apply on Form CT-247, Application for Exemption from Corporation Franchise Taxes by a Not-for-Profit Organization, signed by an authorized person, with your IRS exemption documents. The form notes that nonprofits with unrelated business income in New York report it separately, on Form CT-13.

Sales and use tax: buying is not selling

Sales tax exemptions usually cover what your charity buys, not what it sells. Keep the two apart.

When you buy

Many states let qualifying charities buy items for their exempt work without paying sales tax, once the state has approved them. You show the seller an exemption certificate, a form that proves your status.

• Texas: once approved on Form AP-204, give sellers a completed Form 01-339 exemption certificate when you buy taxable items. If a seller won't accept it, the Comptroller says to ask the seller for a completed Assignment of Right to Refund so you can claim the tax back from the state.
• New York: apply on Form ST-119.2. If approved, the department issues Form ST-119, the Exempt Organization Certificate, with a six-digit New York sales tax exemption number (different from your federal EIN). It also sends Form ST-119.1, the Exempt Purchase Certificate, which you show at the store when you buy.
• Pennsylvania: apply on Form REV-72 or online through myPATH. The department asks for your articles or governing document, your most recent financial statement (a new organization can send a proposed budget), your IRS determination letter if you have one, and your latest Form 990 if you file one.

Not every state offers a broad purchase exemption, so check your state's revenue department before you assume you can buy tax-free.

When you sell

Selling T-shirts, cookbooks or raffle prizes is different. The Texas Comptroller's guide for nonprofits says exempt organizations must get a sales tax permit and collect and pay sales tax on taxable items they sell, unless an exemption or exception applies. Texas does allow qualifying organizations two one-day tax-free sales or auctions each calendar year, after they've been approved for sales tax exemption, with limits on high-value items.

Property tax

If your charity owns a building or land, you may qualify for a property tax exemption. This is usually decided locally. In Texas, for example, an organization primarily engaged in charitable activities first gets a determination letter from the Comptroller, then applies to its local appraisal district on Form 50-299. The chief appraiser makes the final decision, the property must be used exclusively for charitable purposes, and organizations must reapply for a new determination letter every five years.

When to apply

Apply right after you receive your IRS determination letter. Many state applications ask for a copy of it, and the sooner you're approved, the sooner you stop paying sales tax on supplies.

If you're still forming, see the Forming your charity step for where state tax fits in the order of steps.

Keep your certificates on file

• Keep every approval letter and exemption certificate with your IRS determination letter.
• Note any expiry or renewal date on your calendar. In Texas, for example, organizations primarily engaged in charitable activities must get a new property tax determination letter every five years.
• Give copies of purchase certificates only to the people who buy for the charity.
• If your name, address or structure changes, tell the state. The Texas Comptroller notes that a restructured organization must reapply for both federal and state exemption.

Where to look for your state

• Your state's revenue or tax department (in Texas, the Comptroller) for income, franchise and sales tax.
• Your county assessor or appraisal district for property tax.
• Our state guides for state-by-state notes.
• The regulators section of our directory for official links.

State tax checklist

• Find out whether your state requires an application for income or franchise tax exemption
• Apply for sales tax exemption on purchases, if your state offers it
• Get a sales tax permit if you sell taxable items
• Ask your county assessor about property tax, if you own property
• File copies of every certificate with your IRS determination letter
• Put renewal dates on your calendar