Nonprofit organizations are often created and designated as Section 501(c)(3) entities under the Internal Revenue Code, which leads many organizations to believe they are not responsible for various types of taxes. In particular, nonprofit organizations selling items in fundraising settings often operate under the false assumption that they do not need to collect and remit state sales tax. Practitioners should flag this issue for their nonprofit clients and help them navigate compliance with state sales tax obligations.

In Nebraska, there are four groups of sales tax exemptions:¹

• retailer-based (often implicated in fundraisers)
• buyer-based
• product-based
• use-based

Qualifying for exemption via any of the categories is somewhat rare and we urge nonprofit organizations to assume they are subject to sales tax, unless they can establish otherwise. Further, certain of those exemptions require confirmation of exemption via filing Form 4 with the Nebraska Department of Revenue (NDOR).²

Sales Tax on Fundraising Events

In the case of fundraisers, nonprofit organizations operate as a retailer of tickets and products (e.g., donation baskets, auctioned items, etc.). Many nonprofit organizations operate under the false assumption that selling tickets to, or selling products at, a fundraiser does not trigger sales tax. But unless a nonprofit organization qualifies for exemption via one of the above-listed groupings and, if applicable, is approved as sales tax exempt by NDOR, it must collect and remit sales tax on items sold at a fundraising event.³

Just like any other retailer, nonprofits must calculate market value of the ticket or item prior to the event, and they are required to indicate this value on a separate line item on the invoice.⁴ If there is not a separate line item on the invoice, and fair market value of the good or service cannot be calculated, then the total amount on the invoice becomes taxable⁵ and the nonprofit is likely responsible for paying sales tax on the entire invoice. This can be significantly more than the price of the product or service being offered and may cost the organization more money for failing to separate out the market value of the goods and services from the total donation amount. Accordingly, nonprofit organizations must identify both the fair market value and, relatedly, the amount of the donation on any item sold.

NDOR provides the following example in the Nebraska Taxation of Nonprofit Organizations Guide:⁶

“Example 1: A nonprofit organization holds a pancake feed in Lincoln. The amount charged to contributors is $15. The fair market value of the pancake meal is $5. The organization indicates on the ticket:

Pancakes . . . . . . . $5.00
Tax @ 7% . . . . . . .  0.35
Contribution . . . . . 9.65
Total . . . . . . . . $15.00

The organization will remit 35¢ for each pancake meal.”

By contrast, if the sales tax is not separately listed, the entire transaction is subject to sales tax:⁷

“Example 2: A nonprofit organization offers a big screen TV (provided by the local furniture store) or one year of house cleaning service (provided by a local house cleaning business) in exchange for a contribution. The amount of the contribution is $3,000. The TV and the house cleaning service are each valued at $1,000 (fair market value).”

If the receipt only references the $3,000 contribution, then the organization must collect and remit sales tax on the total. If, however, the receipt states that the fair market value of the TV or the cleaning service is $1,000, then sales tax is collected and remitted only on such amount, significantly reducing the amount of sales tax owed. Accurately disclosing, calculating, collecting, and paying sales tax can have a significant impact on an organization, both legally and financially.

Penalties for Not Remitting Sales Tax

In the case of fundraisers, failure to file and failure to pay penalties can rack up quickly. The penalty for late filing sales tax is the greater between 10% of the unpaid tax or $25, plus interest as specified under Neb. Rev. Stat. § 45-104.02.⁸ Additionally, willfully failing to collect, account for, or pay sales tax in Nebraska could result in a Class IV felony.⁹ If the Nebraska Department of Revenue were to audit an organization, it would likely be over a period of years and would implicate many fundraising events, meaning exposure could be significant.

Charitable Contribution Substantiation Letter

Relatedly, nonprofit organizations hosting fundraisers are often auctioning taxable goods or services that implicate their substantiation requirements. After making a donation of more than $250 to a charitable fundraiser, the donor may be able to claim a deduction on their tax return. To claim a charitable contribution deduction on a federal income tax return, the donor must obtain a contemporaneous written acknowledgment from the charitable organization.¹⁰

On the other side of the transaction, nonprofit organizations are required to provide donors with a written disclosure statement when donors receive goods or services after making a contribution of $75 or more. The written statement should include:

• the name of the organization;
• the contribution amount;
• a description of any property contributed;
• a statement that goods or services were not provided by the organization in exchange for the contribution, if applicable;
• a description and good faith estimate of fair market value of the goods or services provided by the organization in exchange for the contribution, if applicable; and
• a statement explaining the intangible religious benefits received in exchange for the contribution, if applicable.

For fundraisers, an exception exists for goods or services considered to have insubstantial value and thus do not need to be described on the written statement.¹¹

Conclusion

Overall, it is important for nonprofits to be aware of their obligation to remit sales tax unless they have one of the four exemptions and are approved by the Nebraska Department of Revenue. Failing or incorrectly remitting sales tax can have serious implications for an organization, so it is imperative the organization is accurately recording and paying sales tax.