Learn the facts behind sales tax and whether your school is required to pay it before your next fundraiser
You’re diligent about every little detail. Your team has been working hard because you know that you have to make the most of your limited fundraising opportunities. You’ve researched the types of products that you feel will sell best for your area, and you’ve meticulously planned how to best motivate your students to make sales.
You even sat down with a group of parents to discuss the most pressing needs in order to establish a good purpose for your school fundraiser.
You’re all set. Everyone on the planning team feels ready. What more is there to think about?
There is one thing that many nonprofit groups either overlook, or assume doesn’t apply to them. Sales tax. Have you thought about whether your sale is going to be taxable or not?
You may be thinking, “We’re a not-for-profit so we’re automatically tax exempt”. Not so fast. Your school may be obligated to pay sales tax after all. There is a distinction that needs to be made between income tax and sales tax. Income tax may be exempt under IRC 501(c) rules; however, sales tax is dependent on individual state rules.
The most commonly recognized 501(c) is 501(c)(3), which is primarily related to religious, charitable, scientific and educational purpose. Of course, the types of entities that we’re focusing on here are public and private schools. As it turns out, most states require the payment of sales tax unless the state allows for an exemption. Not all states do.
Arizona is one state that doesn’t provide nonprofit entities with an overall exemption. In general, schools and other nonprofit entities are subject to Arizona TPT (Transaction Privilege Tax) and Use tax.
Another example is Texas. Schools are required to pay sales tax if they’re doing a brochure fundraiser. The reason is they’re acting as an ‘agent for the seller’. The ‘seller’ in this case is the company which is not tax exempt. And because the school is using the company’s materials to generate sales, tax must be collected and remitted to the state.
As it turns out, there’s a lot of confusion about this. While many nonprofits question it, others assume they're tax exempt and don’t bother to confirm one way or the other.
7 Primary Tax Situations
Depending on your state, your school may be required to pay tax. You may fall into 1 of following 7 categories:
- Not tax exempt.
- Tax exemption certificate required.
- Allowed a defined period of tax-free days to have a school fundraiser.
- Limited to a certain number of tax-free sales days per school year.
- Only certain types of sales are eligible for tax exemption. (I.e. purchasing product up front)
- Type of product sold (I.e. non-prepared food like cookie dough may not be taxable).
- Not required to pay tax.
Of course, we all know that tax is a complicated subject so there may be other variables to consider for your state. But if you know that your school is required to pay sales tax, here are some additional things to consider.
Tax on Retail or Wholesale?
Ok, so you need to pay sales tax, but on what? Some states require the collection of tax on retail while others, only on the invoice or wholesale amount.
The retail amount is the price that your customers pay as shown in a brochure for example. Or, you may only pay tax on the billable amount. In other words, the amount that you pay the company.
For example, if you’re paying tax on the wholesale and an item is priced at $10, then you would pay tax on the $6 assuming that you’re making 40% profit.
On the other hand, you would pay tax on the entire $10 if your state requires that you pay tax on retail.
Every state has different tax rates which may be based on both your separate local and statewide rate added together. For more information, see our brochure sales tax guide.
Tax-Included School Fundraiser Brochures
Your company may offer to collect and remit the tax on your behalf. If you work with one that doesn’t, you’ll be responsible for taking care of the tax yourself. You can always ask your students to collect the additional tax with each transaction but this may hamper sales. If schools want to do this, we provide tax charts.
However, there’s an easier way. Instead of having your sellers collect the additional tax, some companies offer the same brochure with slightly higher priced items. This will help offset the tax difference so schools can retain more profit. Plus, it doesn’t potentially slow down the sales process with tedious tax calculating.
In this case, think of the tax as being collected with the retail amount. You’ll still make the profit off of the retail while at the same time taking care of your tax obligation. Otherwise you’ll only options are to pay the tax out of your profit or go to the trouble of having your sellers collect the additional tax amount.
If you’re not required to pay sales tax in your state then you have nothing to worry about. However, before you start your fundraiser be sure to confirm this with your school district or state department of revenue first.