NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Sales Made by a Nonprofit

Authority: IC 6-2.5-2-1; IC 6-2.5-5-25; IC 6-2.5-5-26; IRC § 501(c)(3); 45 IAC 2.2-5-25; 45 IAC 2.2-5-58; Sales Tax Information Bulletin #10 (October 2022).

A taxpayer ("Nonprofit") is seeking an opinion as to whether it is eligible for the exemption for sales made by nonprofits from the Indiana sales tax.

Nonprofit is a youth-oriented organization. Nonprofit is exempt from federal income tax under Internal Revenue Code ("IRC") § 501(c)(3) that operates under the umbrella of a national nonprofit organization. Nonprofit operates a store in Indiana. Nonprofit provides the following information regarding the transactions at issue, reproduced exactly as submitted in its request for a ruling with certain details redacted:

Indiana imposes an excise tax, known as the state gross retail tax ("sales tax"), on retail transactions made in Indiana. IC 6-2.5-2-1(a). Absent a specific exemption, the person who acquires property in a retail transaction is liable for the tax on the transaction and is required to pay the tax to the retail merchant as a separate added amount. IC 6-2.5-2-1(b).

To that point, Nonprofit asks that the department issue a ruling addressing whether it is eligible for the exemption from the sales tax under IC 6-2.5-5-26, the exemption generally applicable to sales made by nonprofit entities. IC 6-2.5-5-26 states the following in relevant part:

This statute essentially provides for two separate exemptions, one with a dollar threshold on the on the amount of sales that a nonprofit can make within a year before they are required to collect sales tax, and one without. The Department's regulation at 45 IAC 2.2-5-58, interpreting IC 6-2.5-5-26(c), provides in relevant part:

The Department's guidance regarding this exemption is found in Sales Tax Information Bulletin #10 (October 2022), which summarizes the exemption as follows:

Nonprofit has confirmed that their sales exceed $20,000 each year. This means that once Nonprofit makes more than $20,000 in sales, they could only make exempt sales if they met the requirements under subsection (c). Otherwise, they would be required to collect sales tax on their sales exceeding $20,000.

First, the department must answer the question of whether Nonprofit is an organization described in section 25(a)(1) of IC 6-2.5-5, the preliminary requirement set forth by IC 6-2.5-5-26(c). If Nonprofit is such an organization, then the three part test in subsection (c) would need to be applied. The organizations described in IC 6-2.5-5-25(a)(1) include:

Nonprofit meets the first requirement of section 25(a)(1)(B) as they are a nonprofit corporation under IC 6-2.5-5-25(a)(1)(B)(vi). Furthermore, Nonprofit is "organized and operated exclusively for . . . educational [and] civic purposes," - thus meeting the "exclusive purpose" test - and evidence presented by Nonprofit shows that no part of its income is "used for the private benefit or gain of any member, trustee, shareholder, employee, or associate" - thus meeting the "private benefit" test.

Having established that Nonprofit is an organization described in Section 25(a)(1), the three part test in subsection (c) must be applied, all elements of which are dispositive. If these three issues are answered in the affirmative, then Nonprofit may sell the property exempt from sales tax even if they exceed $20,000 in sales.

First, there is no question that Nonprofit is not an organization operated predominantly for social purposes. Accordingly, Nonprofit satisfies the exemption's first requirement set forth by IC 6-2.5-5-26(c)(1).

The next part of the test in IC 6-2.5-5-26(c) is that "the property sold is designed and intended primarily . . . for the organization's educational [or] cultural . . . purposes, or for improvement of the work skills or professional qualifications of the organization's members," pursuant to IC 6-2.5-5-26(c)(2). The following examples are provided in 45 IAC 2.2-5-58(c) to show how this exemption would apply to various scenarios:

The uniforms, badges, merit badge books, camping items, and literature sold by Nonprofit are designed and intended primarily to further the organization's cultural or educational purposes, as they are used in the program to train their youth members in Nonprofit's principles, patriotism, courage, self-reliance, ethics, character and kindred values. Therefore, these items would meet IC 6-2.5-5-26(c)(2). However, as for the "other items" Nonprofit mentions, if they are not designed and intended primarily to further the organization's cultural or educational purposes, then Nonprofit would be required to collect sales tax on those items.

Regarding the third requirement of IC 6-2.5-5-26(c), that the property sold is not designed or intended primarily for use in carrying on a private or proprietary business, neither the statute nor the Department's regulations explain what is meant by private or propriety business activity. As it pertains to the exemption for purchases made by governmental agencies and subdivisions, 45 IAC 2.2-5-25(c) provides the following:

Nonprofit indicates that the income derived from these sales go back into their organization to support, develop and deliver the Nonprofit's program. Further, sales are made to members to help teach them skills and character building which are taught in Nonprofit's program. The property sold is clearly not designed or intended primarily for use in carrying on a private or proprietary business, and therefore, all elements of IC 6-2.5-5-26(c) are met. As such, the sales of the tangible personal property would be exempt from sales tax even if Nonprofit exceeds $20,000 in sales in a calendar year.

Nonprofit is eligible to make sales exempt from Indiana sales tax under IC 6-2.5-5-26(a), as Nonprofit is a nonprofit organization organized and operated exclusively for educational or cultural purposes and no part of its income is used for the private benefit or gain of any member, trustee, shareholder, employee, or associate. Once it exceeds $20,000 in sales, Nonprofit may continue to make exempt sales pursuant to IC 6-2.5-5-26(c) of its uniforms, badges, merit badge books, camping items, and literature because Nonprofit:

However, it should be noted that the exemption only applies to tangible personal property that is designed or intended primarily for Nonprofit's educational or cultural purposes. Any items sold by Nonprofit that are not designed or intended primarily for Nonprofit's educational or cultural purposes are subject to Indiana sales tax once Nonprofit exceeds $20,000 in sales.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.