“Since this decision was issued, we are seeing an increase in the types and number of sales tax audits by the Minnesota Department of Revenue.” — Mike Herold, Tax Partner
Minnesota Court Narrows Nonprofit Sales Tax and Fundraising Exemption
A recent Minnesota Tax Court decision is changing the way state auditors scrutinize fundraising activities and sales tax collection by nonprofits.
“Since this decision was issued, we are seeing an increase in the types and number of sales tax audits by the Minnesota Department of Revenue,” says Mike Herold, a tax partner with CliftonLarsonAllen. “We recommend nonprofits examine their revenue streams and affiliations with for-profit groups to determine whether the sales and fundraising exemptions are in compliance with the current Minnesota law.”
The case, Washington County Agricultural Society v. Commissioner of Revenue, addressed whether sales tax must be collected during a fair held in Washington County, since the admission signs said sales tax was included in the admission price. The fairgrounds claimed that since it was a nonprofit organization its admissions were not taxable, and therefore, it did not actually collect any sales tax.
The court ruled the fairground is a for-profit group, since its nonprofit exempt application had been rejected by the state. It also decided the aforementioned entrance signs meant the fairgrounds were required to collect sales tax, regardless if tax was actually owed or collected.
The 24 fundraising days
The court also examined what activities can be included in the 24 days a nonprofit is allowed to fundraise tax-free per year. If a nonprofit exceeds the 24 day annual limit, it must pay sales and use tax on all of its fundraising revenue.
The issue arose when the fairgrounds rented the facility to for-profit groups, such as car shows, youth soccer clubs, and horse riding clubs. The fairground claimed it did not exceed the 24-day allotment, since the only days of the year it fundraised were during the six days it hosted the fair.
Although this issue was moot since the fairgrounds were a for-profit organization, the court ruled the fairground had exceeded the 24-day limit for nonprofits. The court stated that its facility rentals to for-profit groups were considered a fundraising event, because they were “commercial activities” that generated revenue. Since the number of fair days and other fundraising events exceeded 24 days, the judge decided all admission and rental income from these events were subject to sales tax.
Herold says he has noticed an increase in sales tax audits for nonprofits following this court decision. Many of the audits address the following issues:
- The type of entity a nonprofit is renting a meeting room to
- The situations in which a nonprofit charges admission fees
- Whether a nonprofit is considered an active or passive agent of a for-profit entity
- What a nonprofit considers a fundraising event
- How a nonprofit generates revenue
- Whether other revenues exceed incidental commercial activities and are considered fundraising
How we can help
It is important to know whether your organization’s revenue streams are abiding by current laws and regulations. Ask your tax advisor to examine your revenue, and determine whether you may be susceptible to an audit.
Mike Herold, Tax Partner firstname.lastname@example.org