By Mark Hugh, Mark Hugh PLLC
It’s a basic presumption in Washington’s complex gross receipts tax system that all gross receipts are presumed taxable, unless specifically exempt. Washington’s Business and Occupation (“B&O”) tax rules use a nonprofit as an example of a taxpayer subject to the tax. Therefore, barring a specific exemption, nonprofits should be paying Washington B&O tax on all gross receipts, just like any other taxpayer. Tax is due regardless that all of the nonprofit’s gross receipts serve its nonprofit mission.
The tax rate can differ depending on the activity, but most nonprofit gross receipts are reportable in the “Service & Other” B&O classification at a rate of 1.5%. A taxable gross receipt of $500,000 would generate a tax liability of $7,500 with no deduction for any expenses whatsoever.
So, what are the four key deductions or exemptions that benefit nonprofits?
- Outright contributions and donations.
If a donor has a gratuitous intent and receives nothing in return other than an acknowledgment of their gift, no B&O tax applies.
If a grant maker has a gratuitous intent, but does restrict the gift for specific charitable purpose, then no B&O tax applies, as long as they do not receive a direct benefit, or the grant maker’s benefit is no greater than the public at large. Here are examples of taxable and deductible grants.
One common taxable grant is fee for service revenue and no deduction applies because the grant maker receives a direct benefit. Examples of taxable grants with direct benefits include money given for a report on the soil contamination levels of land owned by the donor, medical services provided to the donor or the donor’s family, or market research benefiting the donor directly.
An example of a deductible grant is revenues received as a subrecipient from another nonprofit or government organization under federal rules. While these agreements often appear to be taxable fee for service contracts, federal rules clearly differentiate between who is considered a “vendor” and who is considered a “subrecipient”. Gross income received as a subrecipient is deductible because unlike a vendor, a subrecipient, among other responsibilities, has its performance measured against whether the objectives of the federal program are met, has responsibility for programmatic decision making, and uses the federal funds to carry out a program of the organization as compared to providing goods or services for a program of the pass-through entity.
- Fund-raising activities.
No B&O tax applies on a sale of goods or services if it is not carried on from a regular place of business during regular business hours. An example would be admission fees paid to attend a gala fund-raising event.
- Receipts from Outside Washington.
For gross receipts that are taxable, consider Washington’s recently changed generous rules for B&O tax apportionment. Until 2010, Washington taxed services to where the services were performed, but that changed, effective June 1, 2010, when Washington began to source gross receipts to the customer’s location, not the place of performance. A research contract, performed in Washington, but contracted by an organization based in Virginia, was sourced and taxed to Washington through May of 2010. As of June 2010, Washington would source that contract out-of-state to the customer’s location, with no B&O tax due.
And finally, there’s just having a terrific lobbyist. Certain segments of the nonprofit industry have broad exemptions crafted for some or all of their gross receipts. Nonprofit museums and arts organizations pay no state level B&O tax whatsoever on all earned or unearned revenue. Health or social welfare organizations are allowed a deduction for gross receipts from governmental entities for certain services. Nonprofit schools pay no B&O tax on tuition received from students. Blood, bone, and tissue banks pay no B&O tax on any gross receipts to the extent the gross receipts are exempt from federal income tax. And on and on and on…