As not-for-profit organizations expand, many are unaware that they may be creating nexus in states, increasing state requirements.
According to a recent article, there are 5 factors that not-for-profit organizations should consider before starting business activity within a state:
The organization’s audience and interested parties - Various states could be seeking information about the not-for-profit organization including the IRS, foundations and donors, researchers and watchdog groups, legislators, news media, and state and federal agencies.
Federal tax law requires compliance with states - There is a federal requirement to furnish a copy of the not-for-profits Form 990 (Return of Private Foundation.) "Public charities should be careful to send only the public disclosure copy of Form 990 to the states to ensure that donor information (contained on Schedule B, Schedule of Contributors) and other sensitive information are not released to the public. States often publish the Forms 990 on a website or send copies to those who request them. Generally they do not check to be sure that a public disclosure copy was sent."
Regulating solicitation and annual compliance requirements - "If the organization is soliciting or conducting business, it may need to register with one or more offices within a particular state. Conducting business could mean a variety of things—including solicitation, having property or employees in the state, or selling goods or services in the state. The organization will also need to renew its status annually, which might include a simple postcard filing, a tax return filing, or filing an online form describing the organization’s activities and financial information."
Sales and use tax - Tax-exempt organizations need to comply with each state's sales and use tax rules. "The analysis to determine whether an organization has sufficient nexus to be required to collect and pay over sales taxes is the same for a not-for-profit organization as it is for a commercial business entity."
Unrelated business taxable income - "It is important for a not-for-profit to know whether it needs to file in a particular state. If the organization is not otherwise doing business in the state by soliciting contributions, then it should analyze whether it has income/franchise tax nexus in the state from specifically generating UBTI. If an organization is already registered with the state to solicit contributions, then it would need to apply the appropriate apportionment of UBTI to that particular state, if any, to determine whether it must file a return in that state."
Vertex Cloud is the perfect solution for small and medium-sized businesses. It offers a cloud-based sales and use tax automation solution designed to save time, effort, and risk associated with calculation, return, remittance, and compliance - even non-profit organizations can benefit from our solution.