State Finds Subtleties in Nonprofit Tax Query

By:
RICHARD J. KORETO
Published Date:
Feb 18, 2014

Among other things, the recent passing of New York's Nonprofit Revitalization Act may have focused attention on a wide variety of special tax issues charitable entities have to address. There are a lot of complex laws and rules, as highlighted in the recently released Advisory Opinion TSB-A-14(4)S. As noted in the opinion, CPAs working with or for certain nonprofits have to ask themselves if they're offering restaurant suppers or fundraising suppers—the tax department treats them differently.

The petitioner is an exempt organization devoted to promoting the cultural heritage of Italian-Americans in its region. As a fundraiser, it operates a banquet facility on its premises in a large ballroom and adjoining café. It rents the facility to outside users and collected and remits sales tax in connection with those rentals.

Some dining events are offered only to the organization's members and families, and others are open to the public. They all take place at the facility. At many of these events, volunteer members help prepare beforehand and clean up afterward, while at others, paid caterers do the work. The petitioner charges for these events, which include a bi-weekly luncheon open to the public, a semiannual dinner-dance, an celebration of St. Frances and an annual Valentine dinner-dance, for example. The petitioner also holds a weekend-long fundraising event that about 4,500 people attend, paying $5.00 each.

The many questions can be resolved into one: under which circumstances does the petitioner have to collect and remit sales taxes?

No Simple Answer

Deputy Counsel Deborah R. Liebman started by reviewing the guidance. With only a few exceptions, she said, the state imposes a sales tax on the sale of food or drink sold by restaurants, caterers and similar entities. And that includes exempt organizations: although most sales by certain charitable institutions are exempt from sales tax, Liebman noted, sales of food and drink are generally not exempt.

Then the rules get tangled. The details on food sales are covered in NYCRR § 529.7(i)(3). These regulations tend to be very specific, and the authors of this section outdid themselves with more than a dozen examples of different ways an exempt organization might handle a sale and how that affects the tax status. The petitioner was especially confused about the differences between two of the examples:

 

  • Example 7: An exempt organization occasionally holds a covered dish supper in its hall. The food is prepared and donated by the organization's members. The organization charges $2 for tickets to the supper. The $2 charge is not taxable.
  • Example 12: An exempt organization holds a monthly supper. The suppers are subject to tax.

To the petitioner, these seem like differences without a distinction—why is one taxed and the other not? Is it due to the frequency of events or perhaps the donation of food and cooking services? And does the use of the term "suggested donation" make a difference?

Tax Department Publication 843, A Guide to Sales Tax in New York State for Exempt  Organizations, offers some explanation, according to Liebman, and frequency does play a role. Is the entity running a restaurant? If an organization holds just two dinners a year, for example, it is clearly not operating a restaurant, since the meals are only occasional. Therefore, dinner tickets are exempt from sales tax. It's the same with having just two fund-raising dinners a year—with no "regularity, frequency and continuity," as one would find in a restaurant, there's no sales tax for an exempt organization.

However, the petitioner holds more than 20 luncheons a year and easily passes the "regularity, frequency and continuity" test. It is essentially running a restaurant and so tax on the receipts from all sales to all events involving the sale of food and drink are taxable. It doesn't matter if the event is members-only or public, and it makes no difference whether professionals prepare the food or members donate and cook it.

Fine Points of Language

The "suggested donation" label merited a lot of consideration in the opinion, with no immediately obvious answer. Liebman said the term by itself is not a free pass on the sales tax, automatically turning all payments into charitable donations. She said the tax department would have to "consider all the facts and circumstances surrounding the event (such as advertising, invoices and whether amounts are listed as suggested donations or actual payments) in order to determine if the receipts were really suggested donations and not mandatory."

That is, if would-be diners really would not get a meal without the fee, said Liebman, then you can call it anything you want, but it's still a fee and still subject to tax. But if the organization is giving away food and merely requesting donations to defray the cost, then the amounts given would be exempt.

It hardly seems to matter that this opinion, like others, applies only to this petitioner for this situation: There's a wealth of material here applicable to any CPA who works for or with nonprofits. The opinion is full of references to the many laws, rules and precedents applicable to nonprofit sales, and they're all worth review. On a broader level, the "suggested donation" ruling shows yet again the department's focus on the actual transaction as opposed to the language that surrounds it: An old joke goes, "How many legs does a dog have if you call its tail a leg?" The answer is "Four. Calling it a leg doesn't make it so."

Click here to see more of the latest news from the NYSSCPA.