Iowa Administrative Code › Agency 701 - Revenue Department › Title III - Sales, Use, and Excise Tax › Chapter 212 - Governments and Nonprofits › Rule 701-212.1 - Taxability of Profits Used by or Donated to an Educational, Charitable, or Religious Entity

Current through Register Vol. 47, No. 3, July 24, 2024
For purposes of the exemption provided in Iowa Code section
				  423.3(78), the
				  following definitions apply:
(1)
Educational.
An activity has an "educational purpose" if the
				activity has as its primary objective to give instruction. The term
				"educational purpose" includes recreational or cultural activities. Activities
				that are directly related to the educational process such as intramural sports
				and tests given to students or prospective students to measure intelligence,
				ability, or aptitude are considered educational for purposes of this exemption.
				Municipal or public or nonprofit science centers and libraries are also
				considered educational for purposes of the exemption.
EXAMPLE 1: A local nonprofit preschool that is exempt from
				  federal tax under Internal Revenue Code (IRC) Section 501(c)(3) has a chili
				  supper to raise money for playground equipment, educational materials, and
				  classroom furniture. The sales transactions from the supper are exempt from
				  sales tax because the total amount of the profits from the chili supper will be
				  used for educational purposes. In addition, purchases made by the preschool may
				  be exempt from tax if the preschool can meet the qualifications to be
				  classified as a private nonprofit educational institution. Rule
				  701-212.5 (423) contains
				  additional information regarding the sale of tangible personal property and
				  performance of services to certain nonprofit corporations.
EXAMPLE 2: A local nonprofit ballet company, which is exempt
				  from federal income tax under IRC Section 501(c)(3), promotes the arts,
				  provides classes and instruction on various types of dance, and sponsors and
				  performs at numerous recitals that are free to the public. At its location, the
				  ballet company has a gift shop in which patrons can purchase T-shirts, dance
				  wear, and costumes. All profits are utilized by the ballet company to pay for
				  its operational expenses and to perform the activities previously mentioned.
				  The sales from this gift shop are exempt from Iowa sales tax to the extent that
				  the profits therefrom are utilized to pay for the stated educational
				  activities.
(2)
Religious.
"Religious purpose" includes all forms of belief in
				the existence of superior beings or things capable of exercising power over the
				human race. It also includes the use of property by a religious society or by a
				body of persons as a place for public worship.
EXAMPLE 1: A local church, which is exempt from federal
				  income tax under IRC Section 501(c)(3), has a bake sale. All of the bake sale
				  profits are returned to the church for religious purposes. Bake sales are
				  generally exempt from sales tax unless the product is sold for "on-premises
				  consumption" (rule 701-220.5 (423) contains more
				  information on the sale of prepared food), but the bake sale profits are exempt
				  from tax in any event because they are to be used for religious purposes.
				  However, generally, any purchases made by the church that are not for resale
				  are subject to sales tax. Iowa Code section
				  423.3(2) 
				  contains the exemption for the sales price of sales for resale.
EXAMPLE 2: Another local church, exempt from federal income
				  tax under IRC Section 501(c)(3), conducts bingo games every Thursday. The
				  profits from the bingo activities will be used for religious purposes. However,
				  bingo and other gambling activities are subject to sales tax regardless of the
				  manner in which the profits are going to be used.
(3)
Charitable.
A charitable
				act is an act done out of goodwill, benevolence, and a desire to add or improve
				the good of humankind in general or any class or portion of humankind, with no
				pecuniary profit inuring to the person performing the service or giving the
				gift.
EXAMPLE 1: A local, nonprofit animal shelter that is exempt
				  from federal income tax under IRC Section 501(c)(3) provides shelter, medical
				  care, socialization, and adoption services for homeless animals and, as a
				  fundraiser, sells T-shirts and sweatshirts depicting rescued animals. All of
				  the profits from the sales will go to and be used by the animal shelter to
				  defray the costs it incurs. Sales of the T-shirts and sweatshirts would be
				  exempt from sales tax since the profits from the sales would be expended on a
				  charitable purpose. Items purchased by the shelter for resale would also be
				  exempt from sales tax. Items purchased by the shelter that are not for resale,
				  such as dog or cat food that will be used by the shelter, would be subject to
				  sales tax.
EXAMPLE 2: A nonprofit hospital, which has received exemption
				  from federal income tax under IRC Section 501(c)(3), operates a gift shop. All
				  of the profits are used to defray costs of hospital care for indigent patients
				  who are unable to pay for such care. Due to the fact that all of the profits
				  from the gift shop are used for a charitable purpose, the sales price would be
				  exempt from sales tax.
a. Profits. The
				sales price from sales at issue in this exemption is exempt from sales tax to
				the extent that the profits are used by or donated to a qualifying organization
				and used for a qualifying activity. For purposes of this rule, "profits" means
				proceeds remaining after direct expenses have been deducted from the sales
				price derived from the activity or event. The expenses should be necessary and
				have an immediate bearing or relationship to the fulfillment of the activity.
Even though an activity or an organization has been
				  recognized as one which could avail itself to the exemption provided by Iowa
				  Code section 423.3(78), it
				  can still be held responsible for sales tax on gross receipts sales price if
				  the department finds, upon additional investigation, that the proceeds expended
				  by the organization were not for educational, religious, or charitable
				  purposes.
At the time of the selling event, a presumption is made that
				  sales tax will not be charged to and collected from the consumer on the
				  property or service sold. This particular exemption is dependent upon how the
				  profits from the sale are expended, which follows the selling event. If after
				  the event a portion of the profits is expended for a noneducational,
				  nonreligious, or noncharitable purpose, tax is due on that portion of the sales
				  price in the tax period in which that portion was expended.
EXAMPLE 1: The cost of food for a fundraising meal would be a
				  direct expense. However, the cost of a victory celebration because the
				  fundraising dinner was a success would not be a direct expense.
EXAMPLE 2: An educational institution hosts an art show. It
				  invests profits from the art show into income-producing property and uses the
				  remainder of the profits to purchase books for the library.
EXAMPLE 3: A nonprofit organization hosts a concert to raise
				  money for neighborhood improvements. The cost of entertainment, if the
				  entertainment is the principal source of proceeds for the activity or event, is
				  a direct expense of the concert.
Unless a specific exemption applies to the entity, purchases
				  by qualifying organizations that are not for resale cannot be purchased free of
				  sales tax.
b. General
				information. The following is general information that is important to
				organizations involved in educational, religious, or charitable activities:
(1) There is no authority in the Iowa Code to
				grant a nonprofit corporation any type of blanket sales or use tax exemption on
				its purchases because the organization is exempted from federal or state income
				taxes.
(2) Nonprofit corporations
				and educational, religious, or charitable organizations are subject to audit
				and should keep for three years financial records that meet acceptable
				accounting procedures.
(3)
				Nonprofit corporations and educational, religious, or charitable organizations
				can be held responsible for the payment of sales and use taxes as would any
				other individual, retailer, or corporation.
(4) Nonprofit corporations and educational,
				religious, or charitable organizations are not required to obtain a sales tax
				permit or any type of registration number if they are not making taxable sales.
				There is no provision in the Iowa Code that requires that such organizations
				have a special sales tax number or registration number and none are issued by
				the department of revenue. However, if such organizations are making sales that
				are subject to tax, then a sales tax permit must be obtained.
(5) The mere renting of facilities to be used
				by another person or organization for educational, religious, or charitable
				purposes is not an educational, religious, or charitable activity.
(6) When profits from an activity are used to
				reimburse individuals for the cost of transporting their automobiles to an
				antique car show, the profits are not considered to be expended for educational
				purposes, and the gross receipts sales price from the car show are subject to
				tax.
(7) Activities to raise funds
				to send members of qualifying educational, religious, or charitable
				organizations to conventions and other similar events that are directly related
				to the purposes of the qualifying educational, religious, or charitable
				organization are within the exemption requirements provided in Iowa Code
				section 423.3.
(8) An organization whose function is to
				promote by advertising the use of a particular product that can be purchased at
				retail does not qualify for the exemption provided by Iowa Code section
				423.3(78), even though promotion by advertising may educate the
				public.
(9) Sales of tangible
				personal property or specified digital products by civic and municipal art and
				science centers are of an educational value and the gross receipts therefrom
				are exempt to the extent the profits are expended for educational, religious,
				or charitable purposes.
(10) All
				proceeds from games of skill, games of chance, raffles, and bingo games as
				defined in Iowa Code chapter 99B are subject to sales tax regardless of who is
				operating the game and regardless of how the proceeds therefrom are expended,
				except that those games operated by a county or a city are exempt from
				collecting the sales tax. When organizations operate such games, they are
				required to have a sales tax permit and a gambling license.