November 1, 2023
State law developments may impact tax-exempt organizations
The following state tax developments could affect tax-exempt organizations operating in certain states. Given the possible effects on their operations, tax-exempt organizations should consider monitoring their respective states' tax developments regularly.
In Technical Assistance Advisement 23C1-002, the Florida Department of Revenue (DOR) determined that Taxpayer is a private trust, not a corporation, and Taxpayer's unrelated business taxable income (UBTI) is subject to Florida Corporate Income Tax. The DOR reasoned that Florida does not tax nonprofit organizations, including private foundations, unless they file a Form 990-T. Because Taxpayer must file Form 990-T, the DOR concluded that Taxpayer must also file a Florida Corporate Income Tax return and pay tax on the UBTI.
Hawaii released revised guidance (Tax Facts 99-4) for nonprofit, school-related organizations (e.g., parent-teacher organizations, athletic and band booster organizations, school clubs). The guidance covers organization formation, applying for an income tax exemption, income tax filing requirements, donations, applying for a general excise tax (GET) exemption, fundraising, GET registration and filing requirements, use tax and compliance issues.
The Indiana Department of Revenue (DOR) updated Income Tax Information Bulletin #12, a Corporate Income Tax Overview, to (1) clarify the DOR's positions on apportionment and business/nonbusiness income, (2) clarify that pass-through entity taxes and other withholding taxes are treated as estimated payments for purposes of estimated tax penalties, (3) reflect the new electronic filing requirement and exceptions to the non-filing penalty, and (4) reflect the repeal of the Utility Receipts Tax.
The Iowa Department of Revenue ruled in an administrative order that a health maintenance organization (HMO) was exempt from Iowa corporate income tax because it is an insurance company under Iowa law. The DOR reasoned that (1) the legislature did not view HMOs as subject to corporate income tax when enacting special taxation provisions for those companies, (2) the legislature intended to exempt all insurance companies and associations from corporate tax, and (3) HMOs fall under the definition of insurance company under Iowa law.
Louisiana enacted L. 2023, H46 (Act 48), after Proposed Amendment 4 was passed in a state election on October 14, 2023. Effective for tax years beginning on or after January 1, 2024, nonprofit residential property that is in a state of disrepair and manifests conditions that endanger the health or safety of the public is not exempt from ad valorem taxes.
The Missouri Director of Revenue ruled in Missouri Private Letter Ruling 8243 that an IRC Section 501(c)(3) organization is not required to collect and remit sales tax on items sold at its resale thrift store. The Director reasoned that (1) the organization had received a sales and use tax exemption letter for sales related to its charitable functions and activities, (2) part of the organization's mission is to serve adoptive and foster families, (3) the organization's provision of a place where families can purchase clothing for their children at a minimal cost contributes to this mission, (4) all the inventory is donated, (5) all profits will be used to support the organization's charitable functions, and (6) the organization is not in competition with other retail stores.
North Carolina enacted S.B. 429 (2023-119), increasing the qualifying annual income threshold for exemption from charitable solicitation requirements to $50,000 (from $25,000) and describing how charitable organizations can show they received less than that amount in contributions for a particular year. The new law also modifies the charitable organization license renewal process for renewals filed on or after October 1, 2023.
Tax-exempt organizations should be mindful of these developments — whether related to income tax, sales tax or property tax — and potential avenues for qualifying for exemption from these taxes. Of particular note is the North Carolina charitable solicitation registration renewal process, as some organizations are no longer required to file for registration renewal if their income from charitable solicitations falls below the new, higher threshold.
Tax-exempt organizations should continue to closely monitor court cases, legislation and guidance furnished by their state regulators to stay updated on tax developments that may affect them.
— For more information about EY's Exempt Organization Tax Services group, visit us here.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor