Iowa Tax Issues for Nonprofit Entities

 

Income Tax Exemption

Nonprofit entities may request exemption from income tax from the Internal Revenue Service (IRS). See the IRS brochure Applying for Tax-Exempt Status (pdf).

Iowa does not make this determination. An entity is automatically exempt from Iowa income tax if exempt status is granted by the IRS.

See ABC's for Exempt Organizations on the IRS Web site.

Iowa corporation income tax forms

An exempt entity does not have to file an Iowa corporation income tax return unless it has unrelated business income. Unrelated business income is taxable at the regular Iowa corporation income tax rates to the same extent it is taxable at the federal level. The exempt entity may also be subject to the Iowa alternative minimum tax.

To report unrelated business income, file Iowa form 1120. Complete form IA 4626 if subject to the alternative minimum tax. Iowa estimated tax payments must be made if an income tax liability of $1,000 or more is anticipated.

Sales Tax - Sales Made TO Nonprofit Entities

Nonprofit entities are not automatically exempt from paying sales tax on goods and taxable services, even if they are exempt from state and federal income taxes. Sales tax must be paid unless some other general sales tax exemption applies. Local option sales tax must also be paid on purchases made in jurisdictions that impose the tax.

In other words, a nonprofit entity is treated the same as any other person for sales and use tax purposes.

Purchases for resale

Purchases made for resale are exempt from sales and local option taxes. Purchases for resale are exempt even if the entity does not have a sales tax permit.

Tax paid to another state

When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.

Examples

Example 1 - Church

A church purchases hymn books to be used by the congregation. The church pays sales and local option tax, if any, to the seller.

A church purchases canned goods and meat to feed the homeless. The sales tax and local option tax, if any, do not apply because grocery items are exempt for everyone.

A church purchases Bibles from a book publisher to resell to its members. Since the purchase is for resale, the church does not pay sales tax to the publisher.

Example 2 - Nonprofit Corporation

A nonprofit corporation purchases heating oil and electricity for its office building from a local utility. The corporation will pay sales tax and local option tax, if any, to the utility company.

A nonprofit corporation pays to have its monthly newsletter printed. The corporation will pay sales tax and local option tax, if any, to the printer.

Example 3- Nonprofit Animal Shelter

A nonprofit animal shelter sells T-shirts and sweatshirts as a fundraiser. The shelter does not pay sales tax or local option tax, if any, on the T-shirts and sweatshirts because they will be resold. Items that are not for resale, such as dog or cat food used by the shelter, are taxable.

Sales Tax - Sales Made TO Educational Institutions

Iowa private nonprofit schools do not pay sales tax on the purchase of goods and taxable services used for educational purposes.

Note: Schools must pay the 5% state excise tax and any applicable local hotel / motel tax on sleeping room rental.

Educational Institution

An institution which primarily functions as:

Purchases for resale

Purchases made for resale are exempt from sales and local option taxes. Purchases for resale are exempt even if the entity does not have a sales tax permit.

Tax paid to another state

When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.

Purchases by a school and a church

When goods and taxable services are shared by a school and a church, the primary use determines if the purchase is taxable.

School Organization

Organizations such as a PTA or school booster club are not automatically exempt from paying or collecting sales tax.

Examples

Example 1 - Textbooks

A private nonprofit school purchases textbooks to be used by its students. The school does not pay sales tax or local option tax, if any, to the seller because the textbooks are used for an educational purpose.

Example 2 - Purchase for rental property

A private nonprofit school purchases an air conditioner for a rental property owned by the school. The school will pay sales tax and local option tax, if any, to the seller since the purchase is not for educational purposes.

Example 3 - Convent

A convent purchases 10 beds. The convent is used by the religious order that teaches in a parochial school, but the convent is not part of the school. The convent will pay sales tax and local option tax, if any, to the seller since the purchase is not for educational purposes.

Example 4 - Purchase for school and church

A parochial school and a church purchase an organ together, which is used by the school's music teacher for student lessons and during Sunday services. If the organ is used by the school more often than it is used by the church, it is not taxable.

Sales Tax - Sales of Taxable Services TO Nonprofits

Certain services are subject to sales tax. Nonprofits generally must pay tax on taxable services.

See Iowa Sales and Use Tax: Taxable Services.

Examples

Example 1 - Garbage collection

A local business collects garbage from a church. Garbage collection and disposal for nonresidential commercial customers is taxable. The church will pay sales tax and local option tax, if any, to the seller.

Example 2 - Exterminator

An organization has its building sprayed for bugs and insects. Pest eradication is taxable. The organization will pay sales tax and local option tax, if any, to the seller.

Example 3 - Auto repair

A church van breaks down and has to be repaired. Automobile repair is a taxable service. The church will pay sales tax and local option tax, if any, to the seller.

Sales Tax - Sales Made BY Entities/Organizations

When are Sales Exempt?

Sales made by entities or organizations engaged in educational, religious, or charitable activities are exempt on proceeds expended for qualifying educational, religious, or charitable purposes. See below for explanations of educational, religious, or charitable.

Net proceeds must be used by or donated to one of the following to be exempt:

Example:

A local Jaycees chapter raises $10,000 from a haunted house fundraiser. The chapter gives $9,000 to the United Way and retains the other $1,000 for a pizza party for the chapter members and for others who helped with the event. Sales tax is not due on $9,000. The Jaycees must remit sales tax on the remaining $1,000. However, if the Jaycees collected sales tax from its customers on the entire amount, it must remit all the tax collected.

Is Gambling Taxable?

All receipts from gambling activities sponsored by nonprofit entities are subject to sales tax, regardless of the ultimate use of the proceeds.

What is “Educational Purpose”?

“Educational purpose” includes the following:

Example:

The South River Little League is a baseball organization. This organization purchases baseballs, baseball gloves, uniforms, and equipment for the teams in the league. The organization must pay sales tax and local option tax, if any, on these purchases.

The organization also has a concession stand on its property and sells candy, beverages, and other snacks and refreshments. The food and beverage items purchased by the organization for the concession stand are exempt because they are purchased for resale. All of the net proceeds from the sales by the concession stand are used by the organization to pay operational costs and make the previously-mentioned purchases.

If the Little League is an IRC 501(c)(3) organization, it does not collect tax, since it qualifies as a nonprofit youth athletic group. If the Little League is not an IRC 501(c)(3) organization, it must collect sales tax and local option tax, if any, on sales from the concession stand because the organization is not a qualifying nonprofit youth athletic group, is not affiliated with a school, and its activities are not intramural sports.

What is “Religious Purpose”?

“Religious purpose” is any activity that promotes religious worship. In the broadest of terms, religious worship includes all forms of belief in the existence of superior being(s) capable of exercising power over the human race. As commonly accepted, it means the final recognition of a deity. It encompasses forms of worship, reference to one's views about the deity, or the relationship to one's creator. It also includes the use of property by a religious society or by a body of persons as a place for public worship.

For profits to be exempt for religious purposes, they must be used:

Example:

Connie's Consignment Shop is selling church cookbooks for a local church. The net proceeds from the sales will be used by the church to sponsor ministry work in the United States. Net proceeds from the sale by Connie of the church cookbooks are exempt from sales tax because the proceeds will be used for religious activity.

What is “Charitable Purpose”?

“Charitable purpose” is applied to almost anything that promotes the well-doing and well-being of people. It includes:

However, there must be no profit to the one performing the service or in any way benefit any private shareholder or individual involved in the activity.

Profit-making organizations may engage in charitable activities, even though they are not charitable organizations.

Example:

A local nonprofit animal shelter provides shelter, medical care, socialization, and adoption services for homeless animals. As a fundraiser, it sells T-shirts and sweatshirts depicting rescued animals. All the profits from the sales will go to and be used by the animal shelter to defray its costs. Sales of the T-shirts and sweatshirts are exempt from tax since the net proceeds will be spent on a charitable purpose.

Proceeds Used for the Organization's Purpose

An organization will sometimes conduct fundraising activities where the net proceeds are used to further the organization's purpose. In these cases, the net proceeds are exempt if the organization itself is considered educational, religious, or charitable and is exempt from income tax pursuant to IRC 501(c)(3).

Example 1 - Exempt

A community playhouse exempt from income tax as a 501(c)(3) presents theatrical productions, play readings, children's classes, workshops and demonstrations, children's productions, and lectures in the field of theater. Memberships are sold which entitle the purchasers to attend plays presented during the year. Individual and student tickets are also sold. The playhouse pays its operational expenses from these sales and other sources. The sales are exempt because the playhouse is a 501(c)(3) engaged in educational activities.

Example 2 - Taxable

A local model railroad club sells T-shirts depicting old steam and diesel engines as a fundraiser. All proceeds from the T-shirt sales will be used by the club to pay operational expenses of the club's building that houses the club's model railroad layout and where the meetings are held. The activities of this club are not educational, charitable, or religious, and it is not a 501(c)(3). Consequently, proceeds from the sale are subject to sales tax.

Net Proceeds and Their Taxability

“Net proceeds” are those remaining after direct expenses have been deducted from the gross receipts of the activity or event. The expenses must be necessary and have an immediate bearing or relationship to the fulfillment of the activity.

For example, the cost of food for a fundraising meal is a direct expense; however, the cost of a victory celebration because the fundraising dinner was a success is not a direct expense.

Net proceeds expended for a qualifying religious, educational, or charitable activity are exempt.

Example 1 - Charitable activity but proceeds partially taxable

A local organization (not a 501(c)(3)) has a fundraiser and collects $10,000 in net proceeds. The organization gives $9,000 to a local nonprofit homeless shelter and uses $1,000 to pay guest speakers at its meetings. The organization does not pay sales tax on the $9,000 given for a charitable activity, but must pay sales tax on the $1,000 it retained for its own use.

Example 2 - Religious purpose and purchase for resale

A church exempt from income tax as a 501(c)(3) holds a craft sale and uses the proceeds to purchase new pews for the church. The crafts can be purchased by the church exempt from sales tax as a purchase for resale. The church does not have to collect sales tax when the crafts are sold since the proceeds from the craft sale will be used for religious purposes (the purchase of new pews).

Example 3 - Gambling proceeds

A nonprofit church holds a bingo night once a week. The proceeds are used to purchase new carpeting for the church. Sales tax applies to the gross bingo receipts since gambling activities are always taxable.

Example 4 - Charitable activity and purchase for resale

A local nonprofit homeless shelter has a fundraising dinner. The shelter contracts and pays a local caterer to supply the meal and beverages. The shelter hires a printer to print tickets to be sold for the event and programs about the evening's entertainment. The net proceeds from the fundraiser will be used by the shelter to assist homeless families with shelter, food, and medical care. The shelter does not pay sales tax on the food purchased from the caterer because the food is being purchased for resale. The shelter must pay sales tax on the printing costs for the tickets and the programs. The net proceeds from the dinner are not subject to sales tax because they are being used for a charitable activity.

Example 5 - Religious purpose and purchase for resale

A nonprofit church headquarters purchases Bibles from an Iowa vendor and sells them to its member churches. The profits from the Bible sales will be placed in a missionary recruitment fund. The Bibles can be purchased by the headquarter church exempt from sales tax as a purchase for resale. The church does not have to charge sales tax when it sells the Bibles since the proceeds will be used for religious purposes.

Example 6 - Religious purpose and retailers

A nonprofit church holds a fair to raise money for new choir robes. An admission is charged. The church rents space to several local retail businesses to set up booths to sell craft items. The retailers will keep any gross receipts that are generated from the sales. The choir also has a booth at the fair and it sells books. The proceeds will also go toward the purchase of new robes. In this example, the local retail merchants are required to collect and remit sales tax on their sales, assuming the proceeds are not expended for a qualifying activity. The admission charge and the book sales are exempt from tax since the proceeds are being used for religious purposes (the purchase of the choir robes).

Food and Drink Sales That Promote Iowa Food

The gross receipts from the sales of food and beverages for human consumption by an entity or organization primarily engaged in the promotion of food or beverage products that are grown, produced, or raised in Iowa are exempt from tax.

Example

A nonprofit association that is also exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code promotes the sale of Iowa-raised turkey. The organization sells turkey sandwiches, chips, and beverages. The association does not charge sales tax on its food sales.

Sales by Certain Fairs

Sales made and services performed by a state fair organized under Iowa Code chapter 173 or by a county, district, or fair society organized under Iowa Code chapter 174 are exempt from Iowa sales and use tax.

Common Exempt Situations

Sales are exempt when the following occur:

Examples of Exempt Sales:

Common Taxable Situations

Examples of Taxable Sales:

Sales Tax and Construction Projects

Contractors, subcontractors, and builders must pay sales or use tax on building materials, supplies, and equipment when they are purchased, even if the contract is with a church or a nonprofit entity.

Sales tax does not apply to labor charges when the labor is performed on or in connection with new construction, reconstruction, alteration, remodeling, or expansion of a building or a structure.

Sales tax does apply to materials and labor charges for repair, painting, and other taxable services when not connected with new construction, reconstruction, alteration, remodeling, or expansion.

When a contractor purchases machinery, equipment, and other items to sell to the owner which remain tangible personal property (does not become part of the real estate) after the completion of the construction project, the contractor can purchase it for resale. The contractor then collects sales tax from the customer.

Examples

Example 1 - Adding new wing

A church has a new wing added, which includes 25 portable pews and a kitchen with a new refrigerator. The contractor agrees to do the entire job. The contractor must pay the sales tax on the building materials when they are purchased. The contractor must buy the pews and refrigerator for resale and then collect sales tax from the church. These items are not considered building materials because they remain tangible personal property after the project is completed. Since the labor was performed in connection with new construction of the church wing, no sales tax is imposed on that labor.

Example 2 - Paneling a basement

An Elks Lodge hires a carpenter to panel the lodge basement. Tax is due on the materials purchased for the job. No tax is due on the carpenter's labor since this paneling is considered as either new construction or remodeling, which is exempt from tax.

Example 3 - Repairing a door

An American Legion Post hires a carpenter to repair the front door of the post's hall. Sales tax applies to the materials and repair labor.

Example 4 - Fixing a leaky pipe

A church hires a plumber to fix a leaky pipe in the church basement. The church will pay tax on the materials and labor to the plumber.

Construction Contracts with Designated Exempt Entities

Designated exempt entities awarding construction contracts may issue special exemption certificates to contractors and subcontractors, allowing them to purchase or withdraw from inventory materials for the contract free from sales tax. This special exemption certificate also allows a manufacturer of building materials to consume materials in the performance of a construction contract with a designated exempt entity, without owing tax on the fabricated cost of those materials.

"Designated Exempt Entity" Includes Only the Following:

Nonprofit hospitals are NOT designated exempt entities for this purpose.

See Index to Information About Construction Contracts with Designated Exempt Entities.

List of Nonprofit Entities Always Exempt from Sales/Use Tax

Some nonprofit entities are specifically exempted from sales and use tax under Iowa law. The following is a non-exclusive list of those entities:

*These entities are also entitled to construction contract sales / use tax refunds.

Use Tax

What is Use Tax?

The Iowa use tax complements the Iowa sales tax. It is imposed on goods purchased out-of-state for use in Iowa and on taxable services when the first use occurs, or potentially could occur, in Iowa or where the product or result of the service is used in Iowa.

The Iowa use tax rate is the same as the state sales tax rate: 6%

Tax paid to another state

When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.

Retailer's Use Tax

Any out-of-state retailer who maintains a place of business in Iowa or who sells goods or taxable services through sales people or representatives who come into Iowa is required to register with the Iowa Department of Revenue to collect and remit the tax. Register to obtain a permit

If the out-of-state retailer fails to collect the tax, the Department may collect the tax from the Iowa purchaser.

Example:

XYZ, a Wisconsin publishing company, has sales people in Iowa who solicit orders for sheet music from churches. The XYZ Publishing Company should have an Iowa retailer's use tax permit and should be collecting Iowa tax when it makes a sale to a church located in Iowa . If XYZ fails to collect the Iowa tax, the Department can require the church to pay the tax.

Consumer's Use Tax

When an entity regularly purchases tangible personal property or taxable services for use in Iowa and the retailer does not collect Iowa tax, the entity should have a consumer's use tax permit.

Register to obtain a permit

Example 1

A church in Iowa purchases an organ from a music company in Chicago. A sales contract is signed in Chicago and the organ is shipped by common carrier. The church is responsible for paying Iowa use tax on the organ.

Example 2

A nonprofit corporation in Council Bluffs hires a Nebraska printer to print its monthly newsletter. The newsletters are shipped into Iowa by the United States Post Office. The nonprofit corporation owes use tax on the newsletters.

Example 3

A church in Council Bluffs hires an Iowa printer to print Sunday church bulletins. The Iowa printer fails to charge the Iowa sales tax. The Department can collect the tax from the printer or from the church.

See Iowa Consumer's Use Tax.

Tax Paid to Another State

When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.

Example 1

An Iowa church purchases two pews in Chicago and takes delivery of the pews in Chicago. An Illinois 6.25% state sales tax is collected by the vendor. No Iowa use tax is due since the payment of the 6.25% Illinois state sales tax is more than the 6% Iowa use tax.

Example 2

An Iowa church purchases two pews in South Dakota and takes delivery of the pews in South Dakota. A South Dakota 4% state sales tax is collected by the vendor. An Iowa use tax of 2% is due on the purchase of the pews since the South Dakota state tax rate is lower than the 6% Iowa tax rate.

Vehicles and One-time Registration Fee

Entities engaged in educational, religious, or charitable activities are not exempt from paying the 5% Iowa one-time registration fee on the purchase or lease of vehicles subject to registration. All cars, trucks, truck tractors, road tractors, trailers, and semi-trailers are subject to this fee instead of the state sales tax.

All organizations must pay the fee unless it is exempt under a specific provision of the Iowa Code. Any organization exempt from sales tax on its purchases is also exempt from the 5% one-time registration fee. See List of Nonprofit Entities Always Exempt from Sales/Use Tax.

Sales Taxes and Gambling Activities

Gambling receipts are subject to sales tax, regardless of the ultimate use of the proceeds. Nonprofit organizations and churches that conduct games of skill, games of chance, raffles, bingo, and other games are required to obtain a gambling license and sales tax permit.

To obtain a gambling license, see Social & Charitable Gambling on the Iowa Department of Inspections & Appeals Web site.

To obtain a sales tax permit, complete the Business Tax Registration form on the Iowa Department of Revenue Web site.

Gambling Activities Exempt:

Gambling Receipts

Gambling receipts include charges paid to participate, admissions, and ticket sales. Sales tax is computed on the entire gross receipts without any deductions.

See Gambling: Games of Skill or Chance and Raffles.

Local Option Sales Tax

Most Iowa towns and rural areas impose the 1% local option sales tax (LOST). There is no local option use tax.

Organizations identified as exempt from paying state sales tax are also exempt from paying local option tax.

See Iowa Local Option Tax Information.

Hotel / Motel Tax

Certain cities and counties in Iowa have imposed a local hotel / motel tax.

The hotel / motel tax is in addition to the 5% state excise tax. Lodging is not subject to local option sales tax, whether or not the hotel / motel tax is imposed.

See Iowa Hotel / Motel Tax.

Hotel / Motel Tax Is Paid By:

Exempt from Hotel / Motel Tax

If more than 31 consecutive days

Lodging furnished to a person who contracts to rent for a single period of more than 31 consecutive days is exempt. These days cannot be accumulated and must be contracted for up-front.

Sleeping rooms at universities and colleges

The renting of sleeping rooms in dormitories and in memorial unions at all universities and colleges located in Iowa are exempt.

Sleeping rooms and the federal government

Only the federal government is exempt from the 5% state excise tax and any local hotel / motel tax. All other entities must pay the 5% state excise tax and any local hotel / motel tax.

Sleeping rooms at religious institutions

The renting of a room to the guest of a religious institution is exempt if:

Motor Fuel Taxes

Gasoline, gasohol, liquefied petroleum gas dispensed into a vehicle, and undyed diesel fuel are subject to Iowa fuel tax at the time of purchase. If a fuel tax is imposed, no state sales tax is imposed.

Motor Fuel Taxes Are Paid By:

See Fuel Tax Description and Rates.

Corporations as Governmental Units

If certain requirements are met, a corporation can be considered a governmental unit for purposes of receiving a sales or use tax exemption on its purchases. A determination of whether a corporation is a government instrumentality is made on a case-by-case basis by the Iowa Department of Revenue.

Updated 03/01/11