Washington State and Local Taxation of Nonprofit Organizations November 2, 2017 Presented by Bob Heller Seattle, Washington Clark Nuber P.S.
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 2
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 of doing business) • Classifications – Determined based on nature of activity – Over 30 classifications – Different measures (tax base) and tax rates
Business & Occupation Tax • 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% 4
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 5
Nonprofit B&O Tax Exemptions • Exemptions are strictly construed in favor of taxation and against exemption. The organization has to meet all the requirements for exemption. • Basic considerations – Who (entity based)? – What (revenue based)? – How (activity based)? 6
Nonprofit B&O Tax Exemptions • 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 7
Nonprofit B&O Tax Exemptions • 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 8
B&O Tax & Nonprofits – Special Problems • 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. 9
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 10
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 overhead 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 31 st • Lasts forever, with maintenance and no disqualifying use
Questions? Bob Heller bheller@clarknuber.com (425) 635-7424
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