Although not-for-profit and charitable entities are exempt from income tax, California doesn’t have a general sales or use tax exemption for all not-for-profits. This means that sales of tangible goods by not-for-profits to consumers in California could be subject to sales tax. In addition, use tax can be due on purchases of tangible personal property made from out-of-California suppliers.

In light of the COVID-19 pandemic, it’s important now more than ever to understand your tax nexus.

Below, we outline sales and use tax implications for not-for-profit organizations that conduct business in California.

Sales and Use Tax Overview

California sales tax is generally applicable to retail sales of tangible goods to customers made in state. In addition to the sales tax, the state imposes a complementary use tax that applies to purchases of tangible goods for use in California where the sales tax isn’t collected by the supplier or vendor.

Application of Sales and Use Tax to Not-for-Profit and Charitable Organizations

As noted above, not-for-profit or tax-exempt organizations, including 501(c)(3)s, are exempt from paying income tax on their not-for-profit activities. However, in California there aren’t general exemptions from sales or use tax.

Qualifications

There is a narrow sales tax exemption for those not-for-profits that meet certain qualifications. To qualify, the organization must meet all of the following:

• Formed and operated for charitable purposes
• Qualify, under California Revenue and Taxation Code, Section 214, for the welfare exemption from property taxation on retail site, store fixtures, and equipment where merchandise is sold
• Carry out activities that relieve poverty and distress—for example, a rehabilitation program for recovering addicts and ex-convicts or an emergency shelter for homeless families
• Sell or donate items principally to assist purchasers or recipients in distressed financial condition
• Make, prepare, assemble, or manufacture the items it sells or donates

Thrift Store Operators

Thrift store operators may also qualify for the welfare exemption if they fulfill the below, among other things:

• Conduct a rehabilitation program recognized by the California Department of Rehabilitation
• Sell goods processed by people who are being rehabilitated through the program and are employed in the operation of the store

The California Department of Tax and Fee Administration has posted general guidance on their public website:

• California Revenue and Taxation Code (CRTC) Regulation Section 1570
• CDTFA Publication 18
• CDTFA Publication 262g

We’re Here to Help

To learn more about how sales and use tax applies to your organization, contact your Moss Adams professional.

Special thanks to Angela Huerta, Tax Senior, State & Local Tax Services, for her contributions to this article.