Ask the Nonprofit Specialists

Do Arizona Nonprofit Organizations Pay and/or Collect Sales Taxes?

Do Arizona nonprofit organizations pay and/or collect sales taxes?

In many states, nonprofit organizations are exempt from paying sales tax. In Arizona, what is often thought of as a sales tax is, technically, a Transaction Privilege and Use Tax and is actually a tax on a vendor or company doing business, not a true sales tax.

The tax is generally passed on to purchasers, including nonprofit organizations, but it is in fact a tax on the vendor, not the consumer. This is helpful to the understanding of whether or not nonprofit organizations are exempt from this tax.

In general, nonprofit organizations in Arizona are not exempt from the Transaction Privilege and Use Tax passed on by vendors. However, as vendors themselves, nonprofits in Arizona may potentially be exempt from the transaction privilege tax for specific sales if certain requirements are met.

In other words, sales to nonprofit organizations are (with some exceptions) not exempt, but retail sales by 501(c)3 nonprofit organizations potentially may be exempt.

Nonprofit purchases

The Transaction Privilege and Use Tax includes business activities such as retail sales, restaurants, lodging, leasing, amusements, construction, transportation, communications and other activities.

Vendors are not required to pay the transaction privilege tax on business with qualifying health care organizations, community health centers, organizations providing free meals to the indigent or providing job placement, training and rehabilitation services for the mentally or physically handicapped.

Qualifying health care and other nonprofit organizations must annually apply for an exemption letter with the Arizona Department of Revenue. For more information on this process, visit: https://azdor.gov/business/transaction-privilege-tax

In other words, nonprofits that provide the services just listed above are exempt from paying 'sales tax.'

Unrelated Business Income Tax (UBIT)

Unrelated Business Income Tax (UBIT) regulations impact nonprofits that sell items for revenue when those activities generate income that is not directly related to their tax-exempt mission. UBIT is a tax imposed on certain income generated by nonprofits from business activities that are unrelated to their primary exempt purpose. UBIT regulations require nonprofits to carefully assess income-generating activities that are not directly related to their mission. It's essential for nonprofits to understand these rules, report taxable income accurately, and consult with tax professionals or legal advisors to navigate UBIT compliance effectively while selling items for revenue.

For more information, visit: https://azdor.gov/forms/exempt-organization-tax-highlights

Nonprofit sales

501(c)3 nonprofit organizations are generally not required to pay the Transaction Privilege and Use Tax on retail or food sales sold by the organization that are directly related to their mission.
Nonprofit organizations should send a letter to the Department of Revenue requesting an exemption from the Transaction Privilege Tax on items purchased for resale. The letter should include a description of the organization's charitable purpose and activities and a copy of the 501(c)3 Determination letter from the IRS.

Send the letter to:
TPT Audit
Nonprofit
1600 W. Monroe St.
Phoenix, AZ 85007-2650

If an exemption from TPT on purchases for resale is granted, the Department of Revenue will provide a letter to this effect which the organization makes available to vendors. There are some exceptions and many specific considerations. Every organization should consider its particular circumstances. More information is available at https://azdor.gov/business/transaction-privilege-tax

Examples

Here are some examples of situations and whether or not organizations are exempt from the Transaction Privilege and Use Tax.

Is my organization required to pay sales tax on office supplies?

Nonprofit organizations are generally required to pay the Transition Privilege and Use Tax passed on by vendors for office supplies and other purchases, unless the organization is a qualified health care or serves another purpose eligible for an exemption letter issued by the state.

My organization sells items related to our mission to the public. Are we required to pay the Transaction Privilege and Use Tax on what we sell?

As vendors, 501(c)3 nonprofit organizations are generally not required to pay the Transaction Privilege and Use Tax for retail or food sales by the organization. Some other nonprofit organizations, such as those sponsoring a rodeo that features farm and ranch animals or affiliated with nationally touring golf tournament may not be required to pay the Transaction Privilege and Use Tax.

How does my organization get a letter of exemption from the state and get the exemption applied in transactions?

The State of Arizona provides procedures for application for a letter of exemption at https://azdor.gov/forms/tpt-forms When conducting transactions, exempt organizations will be required to submit this documentation to vendors: https://azdor.gov/forms/exempt-organization-forms

Is my organization required to pay the transaction privilege tax on construction or remodeling costs of a building?

Nonprofit organizations are required to pay the Transaction Privilege and Use Tax passed on in construction services, unless the organization is a qualifying health care or other organization.

Is my organization required to pay the transaction privilege tax on our office lease?

Yes, your organization will likely pay the Transaction Privilege and Use Tax passed on by your lease holder, unless your organization is a qualified health care or organization or you are leasing property for religious worship.

My organization provides meals for the indigent, in addition to other services. Are all our transactions eligible for exemption from the Transaction Privilege and Use Tax? How do I find out more information?

Whether or not all transactions for all programs of an organization that serves meals to the indigent are exempt depends on how integral regular meal service is to the organization as a whole.

Organizations must meet certain criteria for regularity of meal service and this exemption applies only to meal service and not the provision of food that will be prepared by the recipient. For more guidance on this issue, please see: https://azdor.gov/forms/exempt-organization-tax-highlights

How much is the Transaction Privilege and Use Tax?

The rate paid by vendors for the Transaction Privilege and Use Tax varies by type of transaction, county and city: https://azdor.gov/transaction-privilege-tax-tpt

Do 501(c)(6) organizations need to pay or collect sales tax?

According to the Arizona Department of Revenue, 501(c)(3) nonprofit organizations are generally not required to pay the Transaction Privilege and Use Tax on retail or food sales sold by the organization that are directly related to their mission. For 501(c)(6) organizations — which include business leagues (like trade and professional associations), chambers of commerce, real estate boards, boards of trade, and professional football leagues — the ruling is less clear. However, the AZ DOR website also states: Retail sales and amusement activities by certain §501(c)(6) organizations that produce, organize, or promote cultural or civic related festivals or events.

The Arizona Department of Revenue publishes informational brochures regarding selected activities subject to state and county tax which may be helpful to review. For certain situations, businesses are not subject to transaction privilege tax. However, just because a nonprofit is exempt from one kind of tax does not mean it is exempt from paying other kinds of taxes, and rules may vary in different cities (and states). See the Arizona Department of Revenue's TPT Exemptions page for more information.

It’s also important for you to be aware of Unrelated Business Income Tax (UBIT) regulations, which impacts nonprofits that sell items for revenue when those activities generate income that is not directly related to their tax-exempt mission. UBIT is a tax imposed on certain income generated by nonprofits from business activities that are unrelated to their primary exempt purpose. UBIT regulations require nonprofits to carefully assess income-generating activities that are not directly related to their mission. It's essential for nonprofits to understand these rules, report taxable income accurately, and consult with tax professionals or legal advisors to navigate UBIT compliance effectively while selling items for revenue. For more information, visit: https://azdor.gov/forms/exempt-organization-tax-highlights

Furthermore, you may wish to engage with the Arizona Society of Associate Executives as a professional network with helpful resources: https://www.azsae.org

Lastly, it's best to consult with your accountant or tax advisor for confirmation of tax liability on your organization's specific scenario.

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Illustration by Jocelyn Ruiz.