Recently, Kentucky House Bill 487 passed, which contained significant changes to Kentucky tax laws. For purposes of this communication, we would like to highlight one major change regarding Kentucky Sales Tax and its effect on nonprofit organizations.
This new bill requires that, as of July 1, 2018, organizations charge and collect 6% sales tax on service sales. The following services have been included in the list of transactions now subject to sales tax:
- Labor and services for certain repair, installation and maintenance of personal tangible property, including digital property
- Extended warranties
- Facilities/Event admission fees
- Indoor skin tanning services
- Janitorial and laundry services
- Landscaping services
- Limousine services
- Diet and weight reducing centers (non-medical)
- Rentals of campsites
- Pet care services
- Veterinarian services
Click the links above for general detail about each of these categories.
The recent decision in Department of Revenue v. Interstate Gas Supply, Inc., 2016-SC-000281-DG (March 22, 2018) provided opportunity for the sales tax changes of HB 487 to impact nonprofit organizations. The Kentucky Supreme Court held that the Ky. Const. Section 170 exemption for charitable institutions applied only to property taxes and not to sales and use taxes. This ruling means nonprofits are subject to the sales tax collection and remittance responsibilities of traditional businesses.
Impact on Nonprofits
We identified common transactions specific to nonprofits and outlined the application of the new sales tax law to each type of transaction below:
- Facilities/Event Admission Fees
- Auctions & Raffle Tickets
- $1,000 Exemption
- Exempt Purchases
Facilities/Event Admission Fees
Facilities/event admission fees for purposes of the new sales tax law means fees paid for:
- the right of entrance to a display, program, sporting event, music concert, performance, play, show, movie, exhibit, fair or other entertainment or amusement event or venue; and
- the privilege of using facilities or participating in an event or activity including but not limited to: bowling centers; skating rinks; health spas; swimming pools; tennis courts; weight training facilities; fitness and recreational sports centers; and golf courses
Sales tax applies to these fees regardless of whether the fee is per use or in any other form, including but not limited to an initiation fee, monthly fee, membership fee, or combination thereof.
The Department of Revenue (“DOR”) has provided further guidance on what types of fees will be subject to sales tax:
- Sports league fees to participate in games
- Shelter rentals for picnics
- Gyms, ball fields, tennis courts, disc golf courses, miniature golf
- Rental of pool facilities and party rentals
- Locker rentals at health clubs, gyms, golf courses
- Slip rental at boat docks – the privilege of using facilities in the context of sporting activities
- Entry fees for fishing tournaments
- Entry fees for bridge tournaments or other competitive, amusement activities
- Gun clubs, shooting ranges
- Go-karts, batting cages, zip-lines
- Team membership fees – payment to join a team will not be considered a taxable admission. This treatment is consistent with memberships to fraternal orders, professional organizations, etc. The new admissions language refers to membership fees in the context of participating in an event or activity not to join an organization.
- Professional or fraternal order memberships
- Instructor-led recreational classes or one-on-one instruction for swimming lessons, fitness classes, personal trainer exercise instruction, riding lessons, golf lessons, etc.
- Classes to obtain a professional designation, continuing education credits, or certified training programs such as lifeguard certification classes are exempt. School tuition, registration fees, or charges paid to attend instructional seminars, conferences, or educational workshops are not taxable sales of admissions if the primary intent of the program is for education rather than entertainment.
- Day care or child care facilities and fees
- Summer resident camps and day camps with educational/instructional components
- Personal training received for music lessons, dance lessons, art classes – painting, pottery, etc.
- Driver’s license, hunting license, or fishing license fees
- General facility rentals – conference rooms, ballrooms, temporary storage facilities
- Health fairs
Most non-profit organizations and other governmental agencies will be required to collect and remit sales tax on taxable admissions. The entities excluded from this obligation are horse racetracks, historical sites, county fairs, elementary, and secondary schools and 501(c)(3) school-sponsored clubs and organizations. Under this exemption, tours of historic properties are not subject to sales tax.
For nonprofits that charge membership fees, if the membership provides fringe benefits, such as discounts, access to certain events, etc., those fringe benefits do not make the membership subject to sales tax.
Many nonprofits hold fundraising events and sell tickets for admission. The DOR has indicated that charges to attend a fundraising event held by a nonprofit entity are subject to sales tax. Often, the majority of the cost of the ticket is attributable to a donation to the nonprofit, and the value of any benefits received by the purchaser in exchange is negligible (such as dinner or admission to some type of program or show). If the donation portion is part of the charge of admission, it is included in receipts subject to sales tax.
However, DOR has indicated that if a donation is not part of the admission or ticket price, and the admission/ticket(s) are later provided to the donor as a thank you, then the donation would not be subject to sales tax. Additionally, if the admission fee is separated from contributions entirely, then only the admission fee portion is subject to sales tax. These distinctions may provide opportunities to reduce the burden of sales tax on donors; limiting the amount to payments in exchange for services received, instead of penalizing the donor for making a charitable contribution. Furthermore, the charitable contribution portion may already be part of your fundraising tracking procedures for the Form 990 and donor reporting purposes.
Nonprofits provide sponsors various benefits in exchange for sponsorship contributions. Examples of these types of benefits are event tickets and acknowledgement of the sponsor’s name, logo, or product line. The following information has been provided by the Department of Revenue regarding these transactions:
- If an admission is provided as part of a single sponsorship charge, the entire charge will be subject to sales tax
- If the sponsorship is part of the charge for admission, it would be subject to sales tax
- Separated charges for a sponsorship, where the sponsorship is not part of the charge for admission, are not subject to sales tax
Organizations should review their sponsorship agreements to make sure they are complying with the guidance from DOR regarding sponsorship transactions and restructure these agreements where appropriate to minimize the sales tax burden on sponsors.
Auctions & Raffle Tickets
Nonprofits hold silent auctions and sell raffle tickets as part of their fundraising efforts. A portion of these transactions is generally considered a contribution to the organization. The DOR has provided the following information regarding auction and raffle transactions:
- Sale of a gift certificate at auction: not subject to sales tax (this is because the sales tax is due and collected by the retailer at the time of the sale of the taxable property or service that is purchased/redeemed by the gift certificate)
- Sale of donated goods at auction: subject to sales tax
- Raffle ticket sales: not subject to sales tax
If the item sold at the auction is subject to sales tax, then the tax basis for this transaction is the final bid price, even if a portion of the bid price is considered a charitable donation.
Donors need to be made aware of the fact that the additional 6% sales tax will not be eligible for a charitable contribution deduction
Nonprofits are exempt from collecting and remitting sales tax on fundraising activities for the first $1,000 of sales made in any calendar year. This exemption applies only if the nonprofit is not engaged in the business of selling and not conducting regular selling activities in competition with private businesses.
Resident, nonprofit educational, charitable and religious institutions exempt under 501(c)(3) have maintained their exemption on sales and use taxes for their purchases. The purchases are exempt if they are purchases of tangible personal property, digital property, and services for use solely within the nonprofit’s educational, charitable, or religious function.
Across State Lines
2018 has been a very busy year for sales tax developments. A recent Supreme Court Ruling (South Dakota v. Wayfair, Inc.) addressed sales tax on out-of-state and online sales. We do not expect this ruling to have a significant impact on the sales tax required to be collected by many nonprofits; however, if your organization engages in out-of-state or online sales, further information on this decision can be found here.
Sales tax is a destination tax. As such, sales tax, where applicable, is paid to the state to which the product is shipped. Gross receipts from sales to an out-of-state agency, organization, or institution exempt from sales and use tax in its state of residence are exempt in Kentucky if the Kentucky retailer maintains proof of the tax-exempt status on file. Other states maintain similar sales-tax exemptions for nonprofits. As states revise their sales tax laws because of the Wayfair decision, nonprofits are likely to see sales tax being charged on more of their online purchases, even though the purchases should actually be exempt. You can imagine the compliance nightmare if nonprofits will be required to register in every state in which they make purchases merely to provide an exemption certificate for sales tax. This issue has not been addressed yet, but we will keep you informed as information becomes available.
The new Kentucky sales tax law went into effect on July 1, 2018. If your organization is selling services subject to sales tax under the new law, you may need to start charging, collecting, and remitting sales tax. You may also need to apply for a sales tax account number if you do not already have one. Kentucky tax registration forms and instructions can be found here. Organizations are liable for sales tax that they do not collect. Sales tax returns and payments are generally due monthly (although the frequency may be less depending on your annual gross receipts). Sales tax can be reported and paid electronically on the Kentucky One Stop Business Filing website, or reported and paid with a pre-printed paper form available by calling (502) 564-5170, or visiting one of the Department of Revenue’s field offices.
As valued clients, please do not hesitate to contact Carrie Merrill, Amy Sandlin, or your local Blue & Co. advisor with any questions or concerns you may have regarding this or any other tax law changes.