Washington State and Local Taxation of Nonprofit Organizations - - PowerPoint PPT Presentation

Washington State and Local Taxation of Nonprofit Organizations

Presented by Bob Heller Clark Nuber P.S.

November 2, 2017 Seattle, Washington

Nonprofits Pay State and Local Taxes in Washington

• Unlike the Federal Government, Washington State has no

general tax exemption for nonprofits

• Potentially applicable taxes:

– Washington Business and Occupation (B&O) tax – City B&O taxes – Retail sales / use taxes – Real and personal property taxes – State income / franchise taxes (other states)

• State registration requirements

– Taxes apply to “persons” – A word about organizational structure

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Business & Occupation Tax

• Nature of the tax

– Business privilege tax – Imposed on all business activity – Not a net income tax (no deductions for the cost

• f doing business)
• Classifications

– Determined based on nature of activity – Over 30 classifications – Different measures (tax base) and tax rates

Business & Occupation Tax

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• Common classifications

– Retailing

• Gross proceeds of sale / .471%

– Wholesaling

• Gross proceeds of sale / .484%

– Manufacturing

• Value of products manufactured in Washington / .484%

– Service & Other

• Gross income of the business / 1.5%

B&O Tax Deductions, Exemptions, Exclusions for All Taxpayers

• Wages
• Investment income
• Small business credit
• Real estate exemption
• Bad debts
• Cash and trade discounts
• Advances and reimbursements

– Agency – No liability to third party except as agent

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Nonprofit B&O Tax Exemptions

• Exemptions are strictly construed in favor of

taxation and against exemption. The

• rganization has to meet all the requirements

for exemption.

• Basic considerations

– Who (entity based)? – What (revenue based)? – How (activity based)?

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Nonprofit B&O Tax Exemptions

7

• Entity based

– American Red Cross – Blood banks and tissue banks – Comprehensive cancer centers – Organ procurement organizations – Sheltered workshops, adult family homes – Credit unions – The Washington health benefit exchange – Departments and institutions of the State of Washington

Nonprofit B&O Tax Exemptions

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• Revenue based

– Membership dues and initiation fees – Contributions and donations – Grants and sponsorship – Tuition fees

• Activity based

– Fundraising – Health or social welfare services – Legal services to low income persons – Credit counseling – Day care provided by churches

B&O Tax & Nonprofits – Special Problems

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• Contributions, Donations and Grants

– Are significant goods, services or benefits provided to the “donor” in exchange for the gift or grant? – Normal accountability provisions are acceptable unless they result in a direct benefit to the donor.

• Fundraising Activities

– Fundraising activities are exempt, unless conducted at a “regular place of business” that keeps regular business hours. – Definition of regular business hours may vary depending on type of business being conducted.

Special Problems (Cont.)

• Form of Organization and Governance

– Health or Social Welfare Organizations must be organized under Chap. 24.03 RCW – Artistic or Cultural Organizations must be for “organized and operated exclusively for the purpose of providing artistic or cultural exhibitions, presentations, or performances or cultural or art education programs . . . for viewing or attendance by the general public.” – Board Composition

• Health or Social Welfare and Artistic of Cultural Organization must be

managed by a governing board of not less than eight individuals none of whom is a paid employee of the organization.

• Executive director as board member not permitted (may be a non-member

advisor)

• Employees of affiliate entities may be a problem

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Special Problems (Cont.)

• Cost Sharing

– Each legally recognized entity is a separate taxable “person” under Washington tax law – Inter-entity charges are taxable – Advances/reimbursements are problematic and require a particular form to be nontaxable

• Purchases

– Software – Digital goods and services – Telecommunications services

Special Problems (Cont.)

• Membership Organizations

– Membership dues – Conferences and seminars

City Taxes

• City B&O taxes: Seattle, Bellevue, Tacoma,

Everett, 36 other cities

• B&O tax apportionment rules
• Square footage tax: larger B&O tax cities
• Head tax: various non-B&O tax cities
• Seattle parking tax
• Admission tax

Sales Tax

• Tax on sales/rentals of tangible personal

property and specific services

• Paid by the consumer
• Collected by the seller
• Purchases for resale – must obtain reseller

permit from Department of Revenue in advance of making purchases

Sales Tax Exemptions

• American Red Cross
• Food and food ingredients
• Sales to artistic or cultural organizations
• Sales of medical supplies to blood banks, tissue

banks, organ procurement organizations and comprehensive cancer centers

• Amusement and recreation services provided by

youth organizations

• Manufacturing machinery and equipment
• Fund raising sales

Use Tax and Nonprofits

• Companion to sales tax – same rate
• Everyone owes use tax on property purchased

for use in the state when no sales tax is collected by the seller

• Generally parallel exemptions from sales tax

and use tax

• Use tax is not due on donated items

– Donor also exempt

Property Tax Overview

• All property is assumed to be taxable unless a

specific exemption exists

• Exemptions are construed narrowly in favor of

taxation

• The Department of Revenue is charged with

administering property tax exemptions, including disseminating information to taxpayers

What is a Property Tax Exemption?

• Exemptions cover real and personal property

tax and leasehold excise tax

• Does not exempt an organization from other

county imposed fees

• Not automatic, exemptions require an

application and annual renewal

General Conditions WAC 458-16-165

• Exempt property must be used exclusively for the

actual operation of the activity for which the exemption was granted

• The exempt area must not exceed the area reasonably

necessary to facilitate the exempt purpose

• Generally the not-for-profit must own the property, but

in some cases leased property qualifies

• Loan or rental of the exempt property to others is

limited to specified thresholds, depending on the user

General Conditions WAC 458-16-165

(con’t)

• Property must be irrevocably dedicated to the

exempt purpose (exception for leased property)

• Discrimination not allowed, property and

services must not be discriminatory

• Organization must comply with all licensing

and certification requirements imposed by law

• Duty to produce records, reasonable access

Qualifying Exempt Activity

• Public property (government agencies and

institutions)

• Churches, convents and cemeteries
• Property used to provide certain social services
• Hospitals, blood/bone/tissue banks, cancer

centers, and property used in medical research

• Schools and colleges
• Museums and performing arts facilities
• Public assembly halls and meeting places, if

available to all organizations and persons

Loan or Rental of Exempt Property

Always subject to use limitations:

• By another qualifying organization, generally not

limited if used by an organization that would be exempt if it owned the property

• By other users (non-commercial activities), can’t

exceed 50 days in each calendar year

• For commercial activities or to produce income,

can’t exceed 15 days in each calendar year

• And… rent or fees can’t exceed maintenance and
• verhead costs

Important Dates

• Applications for exemption should be filed within

60 days of the start of the exempt activity

• Generally exemption is effective for the

assessment year following the year when the exempt activity begins

• Annual renewals must be filed annually by March

31st

• Lasts forever, with maintenance and no

disqualifying use

Questions?

Bob Heller bheller@clarknuber.com (425) 635-7424