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Taxable vs. Tax Exempt CO's


Best Answer Hedgehog , 17 March 2016 - 08:34 PM

OK, this is not personal legal advice, but merely my opinion as a tax lawyer for your amusement and entertainment purposes only... 

 

1.  If the CO is a tax-exempt entity, a 501©(3) for Federal and similar exemption for state purposes, then the entity does not pay income tax on its charitable, educational, etc. operations.  However, if a tax-exempt entity operates a business that competes with other businesses, the income from that business is considered to be unrelated business income and is taxable (think gift shop or coffee shop at hospital).  For state sales tax purposes, a tax-exempt entity can engage in fundraising activities without charging sales tax.  However, if a tax-exempt entity operates a business (think the Council Scout Shop), they have to charge sales tax on all taxable transactions.  A tax-exempt entity does not have to pay sales or use tax on its purchases that are directly used for the exempt purpose (i.e., it can't buy lumber used to build the Scoutmaster a new deck).

 

2.  If the CO is a taxable entity, it pays tax on its income (which would include donations and popcorn sales) but likely would get a deduction for what it spends on the scouting program presumably because it generates goodwill toward its business (like sponsoring a Little League team).  So as long as the monies raised are spent, there probably isn't a tax issues.  The taxable entity cannot purchase anything as being exempt from sales tax.  The better idea is to set up a tax-exempt foundation to be the CO and to make donations to that foundation.

 

The profits of the coffee shop would be tax exempt?

 

I'll give you my best lawyer answer... it depends.   :p  Actually, it does depend on the frequency of the activity, whether there is a set amount per cup, whether you can get a cup without donation, whether it has a dedicated space and is open to the public and how good the coffee tastes (OK, maybe not the last one).

 

So now we have the boys "raising money" for their trips under the tax exempt status of a CO.  Is this a ministry when the CO only views the unit as someone who uses the facilities rent free or doesn't allow the unit access to the tax-exempt ID?

 

Yes.  The Unit is part of the CO and therefore its activities fall under the CO's tax exemption.  The Unit shoud be using the CO's EIN (which is it's federal identification number) for any separate banking accounts.  

 

What if a local hardware store is the CO, do the boys need to be charging sales tax and paying income tax just like the hardware store does?

 

See #2 above.

 

With some of these units having thousands of dollars spirited away, how long does one think it will take to hit the IRS and state tax departments' radar?

 

I suspect that the number of for-profit owned units that have this issue would be relatively small.

 

if the BSA was a not for profit, you might even argue it could fall under the same concept of a church... since it has a religious component, and also exists (or could exist) as a moral, educational, and religious institution... even mental health... like a supporting charity perhaps

 

The BSA is tax-exempt.  Council can purchase items without paying sales and use tax for Council events.

 

 

This might also apply to the parental groupings that CO units and do not bother to process any non-profit status with the government.  Are they then personally responsible for the taxation issues.

 

It would, unless the entity was set up as a tax-exempt entity.

 

And one other thing @Krampus, just because one does not pay SALES tax on items purchased over the internet does not mean anyone who normally would have paid sales tax isn't due to pay state USE tax instead.

 

Just as a matter of ethical considerations one must realize that in most taxing jurisdictions, when a sale/purchase is made the company is responsible for the collection of sales tax on that transaction.  If the transaction occurs over the internet where taxing jurisdiction is questionable and/or California can't force a New York company to collect it's taxes, the obligation to pay the said taxes for that transaction falls on the buyer.  In my state there is a line on the income tax form that leaves a place to declare taxes due on purchased items that are USED in the state that were not taxed elsewhere.  The rate of tax is the same as the state's sales tax and if for example, Delaware has not sales tax, but if someone from Wisconsin makes a purchase from that Delaware company they still owe Wisconsin use tax.

 

See Quill v. North Dakota which held that a mail order company without a physical presence in a state cannot be required to collect use tax (sales tax isn't due because the sale took  place outside of the state).  Although there are some exceptions to that (e.g. New York and other state's so-called "Amazon Laws" which require use tax collection by vendors that have "associates" or agents in the state). 

 

My wife is a senior tax accountant responsible for audits in a multi-billion dollar international company and when it comes to our personal income taxes, that line on the income tax return form is always filled.

 

I'm probably one of 100 people in my state that report use tax -- with me being a tax attorney and my wife working for the state brings new meaning to the word "obedient."

 

 

Okay, if a company donates to the scouts under the CO's EIN and it's a non-profit.  Not a problem Company gets a tax deduction.

If a company donates to the scouts under the CO's EIN and it is a for profit, then the company can't get a deduction and the scouts count that as 100% income taxable profit.

 

Agree.

 

Petty cash amounts here, I know, but what is the lesson we pass on with our boys?  A bit of fuzzy logic going on here.  At what dollar value does it become questionably unethical.  Maybe $1,000? $100? $10? $1? or maybe just a penny.  It kinda reflects on the whole issue of a scout's honesty.

 

The answer is clear -- no grey area or fuzzy logic.  If you are dumb enough to directly charter a Boy Scout Unit through a group of individuals or a for profit company, you have to pay income tax on your net income and sales tax on your purchases.  If someone falls into that catagory, find a lawyer to set up a tax-exempt entity to hold the charter.

 

BSA does not make any of this clear in any of it's literature that I have seen.  I think they are riding on ethical thin ice and as long as no one gets caught, it's okay.  Not a lesson I want my boys to learn.

 

I haven't researched what is or is not made clear in literature, but it is clear that the unit belongs to the CO and its tax status is the same as the CO's tax status.

 

Stosh,

 

How many for-profit COs do you know of?  I don't know of any at all, I am sure there are none in my district and I'm reasonably sure there are none in my council.

 

To the extent a for-profit CO is sponsoring a unit I would assume some knowledge and awareness on their part about what tax laws apply to them.  For non profits the tax laws generally say that income they generate is not taxable, you can screw this up if you work at it, like the case with the gymnastics' parents, but you do have to work at it.  The laws are actually written and designed so as to make the non-profit income non-taxable.

 

Agreed.

 

Much the same can be said about sales tax.  In my state non profits generally do not have to charge sales tax for things they sell, nor do they have to pay sales tax for things they buy.  ETA I will need to research this some more, I know my Church does not need to charge sales tax, but the Council, clearly a non-profit, charges sales tax at the Scout Shop, I'll have to look into what the difference is.

 

See above answer on difference between fundraising and operating a shop that competes with taxable businesses.

 

A scouting unit is a subset of the CO, the CO enters into a legally binding agreement that makes that so.  A CO that tells a unit not to use their EIN for purchases is probably in violation of the chartering agreement, this means that BSA could revoke the charter based on those grounds.  Whether to do so or not is up to BSA, but the legal relationship between the CO and the unit remains that the unit is a subset of the CO irrespective of how the CO may view it.

 

Agreed.

 

I am not a tax lawyer, so take this with a grain of salt, but it seems to me that the cost of a unit to a for-profit CO are probably tax deductible either as a charitable donation or general business deduction.  SO pretty much everything you mention washes itself out as far as tax having to be paid by the CO.

 

Most likely, but if the amount raised (i.e. the income) exceeds the amount spent (the expense) then the difference is taxable.

 

You first mention someone donating to the scouts and the scouts counting it as income taxable profit.  The scouts aren't an entity so they don't file a return, there is no such thing as income to the scouts.  Likely, the money donated to the scouts would be income to the CO but immediately offset as deductible because it passed through to the scouts --- so except for some bookkeeping, the tax liability of the CO doesn't change.  Sales tax is very state specific, but in my state businesses generally do not have to pay sales tax, and if they do it is deductible as an expense.  The unit's purchases are subject to the same rules so there is likely to be no tax liability for that either.

 

As a legal matter, there is no difference between the business and the unit.  The business only gets a deduction if the funds are used to purchase something.

 

 

If a for profit CO gives money to "their scouts" as a charitable donation, the problem lies in that scout unit is not a charitable entity.  They are owned by a for-profit CO.

 

But the purchase most likely is a business expense (like a little league sponsorship), not a charitable donation.

 

If a not-for-profit gives money to "their scouts" it is a charitable donation, but not if it is given to an individual.  Churches pay their clergy and staff, Red Cross does as well,... Well come to think of it they all do and they issue a W-2 at the end of the year so that person can file their income tax.

 

Giving money to anyone is income to the person receiving it.  A tax-exempt organization spending money in fulfillment of its purpose is just that.

 

 

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#21 blw2

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Posted 23 March 2016 - 02:38 PM

what ever happened to Beavah, anyway?

 

I hated his writing style, but he had some good stuff to add from time to time....


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