Gross Receipts Tax Sales by Charitable Organization Opinion Number

Transcription

1 STATE OF ARKANSAS REVENUE LEGAL COUNSEL Department of Finance Post Office Box 1272, Room 2380 Little Rock, Arkansas and Administration Phone: (501) Fax: (501) April 18, 2016 Nina Carter, Attorney at Law RE: Gross Receipts Tax Sales by Charitable Organization Opinion Number Dear : Your letter dated March 9, 2016, to the Department of Finance and Administration ( DFA ), Revenue Legal Counsel, requesting sales tax exemption information has been referred to me for a response. Specifically, you requested an exemption for, Inc. ( ), from collecting and remitting sales taxes on all produce and value added products sold from the farm stand opened on the property of your organization. DFA does not issue sales tax exemption certificates affirming an entity s status as a charitable organization that is exempt from State sales tax. However, DFA issues legal opinions upon which may rely in the event that it must substantiate the propriety of a given tax or exemption. GR-75(A). Legal opinions may be relied upon for three (3) years from the date of issuance. See GR-75(B). Your letter provided that ( ), is a 501(c)(3) nonprofit organization with a mission to restore historic, once an orphanage, to serve the community. is an entirely volunteer run organization with no paid staff. Income is derived from fund-raising events, grants, and building rentals. The Farm Stand was opened last year on the property in an attempt to raise funds by selling locally grown produce and products to the community. RESPONSE I. DOES QUALIFY AS A CHARITABLE ORGANIZATION? The Arkansas Gross Receipts tax, commonly referred to as "sales tax", generally applies to all sales of tangible personal property and certain enumerated services unless otherwise exempted. See Ark. Code Ann (Supp. 2015). The provisions of Ark. Code Ann (2) (Supp. 2015) provide that sales of tangible personal property and

2 services by charitable organizations are exempt from tax, except when the organization may be engaged in business for profit. See also GR-39(A). Additionally, sales of new tangible personal property made by charitable organizations which compete with sales made by forprofit business are not exempt. Id. As a threshold issue, it must be determined whether qualifies as a charitable organization. A charitable organization is defined as an organization whose purpose is benevolent, philanthropic, patriotic or eleemosynary and whose function if performed, and not performed by a private party, would have to be performed at public expense. GR-37(E)(6). While may be a 501(c)(3) non-profit organization for federal income tax purposes, that does not, by itself, qualify it as a charitable organization for Arkansas sales and use tax purposes. Rather, it must first meet the definition of a charitable organization as provided in GR-37(E)(6), supra. The Arkansas Gross Receipts Act, Ark. Code Ann (Repl. 2014) et seq., and the Arkansas Gross Receipts Tax Rules do not define benevolent, philanthropic, patriotic, or eleemosynary. To provide clarification of the meaning of these terms, Webster s Third New International Dictionary, Unabridged, provides: Benevolent: 1: marked by a kindly disposition to promote the happiness and prosperity of others or by generosity in and pleasure at doing good works < a benevolent donor > 2: marked by or suggestive of goodwill or benign feelings: lacking any hostility < a benevolent judge > < a benevolent smile > 3: arising from or prompted by motives of charity or a sense of benevolence : philanthropic < a benevolent society >. Philanthropic: 1: of, relating to, or characterized by philanthropy: benevolent, humanitarian 2: dispensing or receiving aid from funds set aside for humanitarian purposes : eleemosynary < philanthropic foundation >. Patriotic: 1: inspired by patriotism : befitting or characteristic of a patriot : actuated by love of one s country : devoted to one s country < a patriotic statesman >. Eleemosynary 1: of or relating to charity : charitable, philanthropic < a rich man given to many eleemosynary activities > < eleemosynary relief > 2a: nonprofit and receiving all or a great part of sustaining funds from donations or gifts b: provided by an institution of this nature. Reading the definitions of benevolent, philanthropic, and eleemosynary together, the common theme is providing humanitarian relief or assistance to individuals in need. Examples of such assistance would include providing the necessities of life such as food, clothing, shelter, and medical care to needy individuals. Similarly, an example of a charitable patriotic organization would be an entity that provided aid to wounded or needy veterans. Based on information in your letter and information contained on your website, provides a charitable food distribution ministry, including a hunger relief garden, community 2

3 partnerships that foster learning, independence, and dignity like community gardens and a partnership with the program for at-risk youth. Therefore, qualifies as a charitable organization as defined in GR-37(E). II. SALES BY A CHARITABLE ORGANIZATION GENERALLY Arkansas Code Annotated Section (2) (Supp. 2015) provides that the gross receipts derived from the sale of tangible personal property or services by a charitable organization is exempt from gross receipts tax except when the organization is engaged in business for profit. However, an exception to the sales tax exemption given to charitable organizations arises when the organization s sale of new tangible personal property competes with sales made by for-profit businesses. See Ark. Code Ann (a) (Repl. 2014); GR-39(A); and GR- 39(C)(1). Sales by a charitable organization will not be deemed to compete with sales by a for-profit business if the following criteria are satisfied: (1) The sale is conducted by a member of the charitable organization and not by a franchisee or licensee; (2) All proceeds derived from the sale will go to the charitable organization; (3) The sales transaction is not continuing and has not been held more than three (3) times in one year; and (4) The dominant motive of the majority of purchasers of the items sold is the making of a charitable contribution, with the purchase of an item being merely incidental and secondary to the dominant purpose of making a gift to the charitable organization. See Ark. Code Ann (b)(1)-(4) (Repl. 2014) and GR-39(C)(2)(a)-(d). To summarize the information provided in your letter, the Farm Stand sales are made by volunteers, all proceeds derived from the sale benefit, the Farm Stand was open Saturdays from mid-july to early November, and items included fresh produce grown at, produce purchased from local farms and vendors, and value added products like cheese, honey, bread, jellies, and jams made by the volunteers. The first two elements are satisfied. However, the third element will not be satisfied as the Farm Stand operates more than three times per year. It is also possible that the fourth element is not satisfied if you cannot demonstrate that the dominant motive for the majority of purchasers is to make a charitable donation. As the items being sold by the Farm Stand qualify as new tangible personal property and the sales compete with sales by for-profit businesses, the sale of products at the Farm Stand will be subject to Arkansas gross receipts tax. III. SALES OF FOOD AND FOOD INGREDIENTS Please note that the gross receipt tax rate varies upon sales of prepared food and food and food ingredients. See generally Rule Food and food ingredients are taxed at a reduced rate, but if the products sold are considered prepared food, they are taxed as any other tangible personal property. Thus, it is important to review the definitions to determine which tax rate applies to your products. Food and food ingredients are defined in Ark. Code Ann (12) (Repl. 2014), as follows: 3

4 (12) (A) Food and food ingredients mean substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value. (B) Food and food ingredients do not include an alcoholic beverage, tobacco, or a dietary supplement; Food and food ingredients do not include prepared food. See Ark. Code Ann (b)(1) (Repl. 2014). Prepared food is defined in Ark. Code Ann (17) (Repl. 2014) as: (17) Prepared food means: (A) Food sold in a heated state or heated by the seller; (B) Two (2) or more food ingredients mixed or combined by the seller for sale as a single item; or (C) (i) Food sold with an eating utensil provided by the seller, including a plate, knife, fork, spoon, glass, cup, napkin, or straw. (ii) As used in subdivision (17)(C)(i) of this section, plate does not include a container or packaging used to transport the food; Prepared food does not include food that is only cut, repackaged, or pasteurized by the seller; or eggs, fish, meat, and poultry, and foods containing these raw animal foods requiring cooking by the consumer to prevent food-borne illnesses as recommended by the U.S. Food and Drug Administration. Ark. Code Ann (b)(2) (Repl. 2014). See also GR- 3(K). The products being sold at the Food Stand fall under the definition of food and qualify to be taxed at a reduced rate. In lieu of the gross receipts or gross proceeds taxes levied pursuant to Ark. Code Ann and (Repl. 2014), a tax is levied on the gross receipts or gross proceeds derived from the sale of food and food ingredients at the rate of 1.375%. 1 See Ark. Code Ann (c)(1) (Repl. 2014). Further, the gross receipts or gross proceeds derived from the sale of food and food ingredients shall continue to be subject to the additional excise tax of one eighth of one percent (1/8 of 1%) levied under Arkansas Constitution, Amendment 75, 2, and all municipal and county gross receipts taxes. See Ark. Code Ann (d) (Repl. 2014). Thus, the sales of food and food ingredients are taxed at the reduced state sales and use tax rate of 1.5%, in addition to the full local (city and county) sales and use tax rates. CONCLUSION Accordingly, as a non-profit charitable organization, is generally exempt from sales tax on sales of tangible personal property or services made by it. However, if makes any sales of new tangible personal property that compete with those of a for-profit business, the 1 The gross receipts or gross proceeds taxes levied on the sale of food and food ingredients may be further reduced at such time a determination is made by the director that the requisite conditions have been met pursuant to Ark. Code Ann (a)(3) (Repl. 2014). 4

5 exemption would not apply and the sales would be taxable. The sales by the Farm Stand do not meet the criteria required for the sales tax exemption. The sales of food and food ingredients by the Farm Stand do, however, qualify for the reduced state sales and use tax rate of 1.5%, in addition to the full local (city and county) sales and use tax rates. This opinion is based upon my understanding of the facts as set out in your inquiry and as current Arkansas laws and rules govern those facts. Any change in the facts or law could result in a different opinion. Please be advised that this opinion may only be binding upon DFA for three (3) years from the date of issuance. See GR-75. The Gross Receipts Rules cited in this opinion may be viewed on DFA s website at Revenue Rule cited in this opinion may be viewed on DFA s website at Sincerely, Nina Samuel Carter Office of Revenue Legal Counsel 5