501(c)(3) nonprofits (NPOs) are tax-exempt charitable organizations that promote a social cause or provide a public benefit. Examples of nonprofits can include everything from churches to art museums to political organizations.
What Is a Nonprofit?
The IRS defines NPOs as organizations that are “operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes.”
Unlike for-profit companies, nonprofits are accountable to their donors, paid staff, volunteers, the public, and—above all—those they serve.
The main difference between nonprofits and for-profit organizations is that nonprofits cannot legally distribute profits to shareholders, directors, officers, or private individuals (with the exception of reasonable compensation for services).
It’s a myth, however, that nonprofits can’t have any extra money in their coffers. In fact, maintaining some level of positive revenue can help these organizations stay resilient in the face of economic downturns and financial rough patches.
Are 501(c)(3) Exempt from Sales Tax?
Given the charitable nature of their work, the Internal Revenue Service (IRS) exempts nonprofits from paying federal income tax. Most states also apply this exemption to state income tax.
Sales tax is more complicated. That’s because sales tax is managed at the state level, and states do not automatically apply an exemption for nonprofits.
Forty-six states (plus Washington DC) have sales tax, and each one makes its own rules and laws around how nonprofits are required to pay and charge sales tax.
Keep reading to find out how sales tax applies to 501(c)(3) nonprofits and how to get a nonprofit sales tax exemption certificate.
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