Taxable vs. Tax Exempt CO's

[Stosh]

I'm not a tax lawyer, but maybe there's someone out there that can clarify this for me.

 

A CO with a tax-exempt status, is exempt from paying income tax, but what about sales tax on some of their operations.

 

I have seen churches running coffee shops within their churches where the coffee is sold at a price and not "free" pending a good-will offering.  Does that coffee shop operation need to be charging sales tax?

 

The profits of the coffee shop would be tax exempt?

 

I don't see this as a charitable fund raiser, but maybe the case could be made.  They are however selling a product.

 

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?

 

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?

 

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?

[qwazse]

Depends on the state, I suppose. "Thousands of dollars" amounts to $70 - $700 in revenue, perhaps. Not earth-shattering to most treasuries ... even when multiplied by the number of units who take advantage of their CO's exemption.

 

Scale matters. If it costs more to enforce a ruling (many of which have not held up in court) than the revenue gained, it is unethical for a government to pursue it. The tea just winds up being dumped in the harbor.

 

Now if we were talking "Tens of thousands of dollars" of purchases annually, then the unit would have an ethical obligation to ensure that those purchases are tightly in sync with the CO's mission. Even so. Round here, municipalities who've tried to use the heavy hand of the law against large non-profits in court have come up short.

 

They do better negotiating a settlement ... usually a contribution to the coffers in exchange for a little name recognition.

[blw2]

This touches on where I was going in that other thread.... maybe just easier to forget about the non-profit all together....

 

Honestly as I'm thinking about it.... it seems like a better way to go with all of this back in the day, might have been for the BSA to set up the charters differently.

Think about it....

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

So then units use the BSA's EIN

units are owned by the BSA, taking all liability and financial concerns off of the charter orgs

so then the Charter contract could just be about supporting the unit with a room, to be open and willing to assist with recruiting of scouts and scouters

etc...

 

OR units could have been set up as individual independent charters with the BSA being the responsible party (in IRS terms), like the church/CO is now...

 

 

Yeah Yeah, I know BSA would mess it up, it would be a monstrosity, etc....

I'm just pie in the sky spitballin' here....

and keep in mind I'm frustrated at the moment since our CO is being a little problematic because of this confusion that is caused by the way it is now.

 

Probably easier if dealing with a small independant church as opposed to a catholic parish, which falls under a diocese, which falls under a ecclesiastical province.... it just gets huge and complicated real quick

[Krampus]

In Texas our  tax-exempt non-profit CO does not pay sales tax. That said, everyday purchases for the unit (food for camp outs, other supplies) we typically DO pay tax on. Bigger ticket items (tents, stoves, other gear) we tend to buy online and don't pay tax on. We COULD avoid sales tax on food, it's just hard to get the stores to review and approve the non-profit form in a timely manner.

[Stosh]

In Texas our  tax-exempt non-profit CO does not pay sales tax. That said, everyday purchases for the unit (food for camp outs, other supplies) we typically DO pay tax on. Bigger ticket items (tents, stoves, other gear) we tend to buy online and don't pay tax on. We COULD avoid sales tax on food, it's just hard to get the stores to review and approve the non-profit form in a timely manner.

 

As a unit of a non-profit, one does not pay sales/use tax when making a purchase or when making a sale to another.  They do not pay any income tax either on the proceeds coming into the non-profit.

 

However, if the CO is not a non-profit, such as a hardware store and there is no tax exempt status in the picture, do they have to pay sales/use tax, charge sales tax on items sold and report all net income as taxable?

 

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.

 

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.

 

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.

 

Contrary to popular when a company is saying that because they are from out of state, you do not owe sales tax, it is true.  They are not responsible for collecting sales taxes for another state.  But what they don't tell you is that tax obligation is now your responsibility to pay.... have nice day.

Edited March 16, 2016 by Stosh

[qwazse]

As a unit of a non-profit, one does not pay sales/use tax when making a purchase or when making a sale to another.  They do not pay any income tax either on the proceeds coming into the non-profit.

 

However, if the CO is not a non-profit, such as a hardware store and there is no tax exempt status in the picture, do they have to pay sales/use tax, charge sales tax on items sold and report all net income as taxable?

 

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....

I know the big companies around here create benevolence foundations for just such purposes. So, for example, sponsorship of a league or unit could go through their books under whatever exemptions they've applied for. (There's also things like naming rights, etc ... and I'm not sure how that comes into play.)

 

Not sure if that's more trouble than it's worth for a mom-and-pop that sponsors one unit in their building.

 

We operate pretty much like @@Krampus. Unless it's a store that keeps our numbers on file, we don't bother flashing the CO's EIN, Those venduors who they have us on file do so usually for materials for fundraisers. Even then, often times, a store would rather just donate the materials than spend the accountant's time writing them off.

[Stosh]

I know the big companies around here create benevolence foundations for just such purposes. So, for example, sponsorship of a league or unit could go through their books under whatever exemptions they've applied for. (There's also things like naming rights, etc ... and I'm not sure how that comes into play.)

 

Not sure if that's more trouble than it's worth for a mom-and-pop that sponsors one unit in their building.

 

We operate pretty much like @@Krampus. Unless it's a store that keeps our numbers on file, we don't bother flashing the CO's EIN, Those venduors who they have us on file do so usually for materials for fundraisers. Even then, often times, a store would rather just donate the materials than spend the accountant's time writing them off.

 

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.

 

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 whole issue is more than just paying sales taxes on purchases.  A non-profit CO can take in income without owing income tax, a for profit CO can't   And as I posted before when a scout unit buys at a local store a non-profit CO unit doesn't pay sales tax, but a for profit CO unit does, and if over the internet will need to pay use tax instead. 

 

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.

[T2Eagle]

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.

 

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.

 

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.

 

In terms of paying or not paying sales tax for purchases for the unit, what Krampus' (and my) unit do is perfectly above board.  As a subset of the CO we are legally exempt from paying sales tax, there simply is no obligation under the law for the unit to pay that tax.  Whether a CO does or does not allow the unit to use their EIN is not something that needs to come to a resolution, either or both sides can simply choose to continue to operate and ignore the disagreement.  

 

Our unit operates much like Krampus': there are some local vendors, including the Scout Shop, where our CO's EIN is on file and we don't pay sales tax.  At other stores it just isn't worth the trouble to get the exemption.  If we are making a big purchase we might go to the trouble of filing paperwork, but if we purchase online and don't have to pay sales tax we know we're not legally obliged to do so and our conscience can be clear.

 

 

 

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?

 

 

Edited March 17, 2016 by T2Eagle

[T2Eagle]

 

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.

 

The whole issue is more than just paying sales taxes on purchases.  A non-profit CO can take in income without owing income tax, a for profit CO can't   And as I posted before when a scout unit buys at a local store a non-profit CO unit doesn't pay sales tax, but a for profit CO unit does, and if over the internet will need to pay use tax instead. 

 

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 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.

 

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.

[Stosh]

We have two units in our council that are for profit CO's that I know of.

 

Also if one looks closely at the process, this originally started off in another thread as the ISA issue.

 

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.

 

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.

 

  Driving 56 mph in a 55 zone is still speeding.

[Hedgehog]

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.     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.

 

 

Edited March 18, 2016 by Hedgehog

[Stosh]

Thanks, Hedgehog.  Your non-binding we're-not-going-to-sue-you answers are very helpful. 

[meyerc13]

In Wisconsin, the State has a nice PDF that explains whether a non-profit (such as a Scouting unit) needs to collect sales tax on their fundraising activities:  https://www.revenue.wi.gov/pubs/pb206.pdf

 

I am not a Lawyer, but basically as I read it, if you are a non-profit in Wisconsin selling for 20 or less days per year, or collecting $25,000 or less per year, then you aren't engaged in a trade or business and aren't required to collect sales tax.  If you exceed both of those standards, then you might owe sales tax on your sales.

[Stosh]

In Wisconsin, the State has a nice PDF that explains whether a non-profit (such as a Scouting unit) needs to collect sales tax on their fundraising activities:  https://www.revenue.wi.gov/pubs/pb206.pdf

 

I am not a Lawyer, but basically as I read it, if you are a non-profit in Wisconsin selling for 20 or less days per year, or collecting $25,000 or less per year, then you aren't engaged in a trade or business and aren't required to collect sales tax.  If you exceed both of those standards, then you might owe sales tax on your sales.

 

Yet that doesn't take into consideration the handful of units out there that are chartered by for-profit businesses.  In the long run, I don't think the issue of sales tax is as big an issue than is the income tax of money brought into an organization that may be jeopardizing their not-for-profit status of individual self gain under the cloak of charitable contributions to an organization, not any specific individual within that organization.

[CalicoPenn]

It really depends on the laws of your state and they can become a bit complicated.

 

In Illinois, your organization first has to qualify, and receive Exempt status - this exempts the organization from paying taxes.

 

Sales tax exemptions are given to

• Churches
• Exclusively charitable organizations
• Licensed not-for-profit day care centers
• Not-for-profit organizations that are operated primarily for arts or cultural purposes
• Qualifying senior citizen organizations
• Schools
• State, local, and federal governments

Civic and fraternal organizations like American Legions, Elks Clubs, etc. are not eligible to received exempt status. 

 

If the organization is exempt from paying sales taxes on its purchases, it still must collect sales taxes on items it sells, except in the three instances below.

• The items are sold only to the organization's members, students, patients, or inmates.
• The sales are from occasional dinners open to the general public, no more than twice in any one year.
• The sales are not in direct competition with businesses in the community (such as gift shops and rummage stores).

 

That being said, there is an additional rule for Not-for-profit hospitals and nursing homes that qualify as exclusively charitable institutions.  They are not subject to sales tax collections when selling food or medicine to their patients. Hospital dining facilities that are not open to the general public are also exempt.

However, a hospital or hospital auxiliary incurs a sales tax liability when selling candy, chewing gum, tobacco products, and razor blades, since these items aren't necessary for basic hospital service and place the hospital in competition with community businesses.

 

Now to try to make sense of it based on the original questions.

 

If the church "coffee shop" is only open to members, then they can sell coffee tax free.  If it's open to the general public, then they must charge sales tax.

 

If your Scout Unit is sponsored by a church and you only sell popcorn to church members, it's probably tax exempt.  Selling to the general public?  Technically sales tax needs to be collected.

 

As I recall, our Boy Scout Council qualified for Exempt status - though not sure why.  The Girl Scouts likely qualified for Exempt status as well.  Even with exempt status, it could be argued that popcorn and cookie sales compete against community businesses - technically, sales tax would need to be collected - the easiest way to do that is build it in to the cost of a tn or box and Council pay at the end of the sales - I suspect that there might be an exception made for certain youth groups