sales tax

Article Dean Dorton

By: Erica Horn, CPA, JD | ehorn@deandorton.com and Maddie Schueler, JD, LLM | mschueler@deandorton.com

Nearly two years ago, we published an article on the proliferation of dollar and other thresholds set by states that, if exceeded, would result in a business having to collect the states’ sales tax. Before a state can exercise its taxing authority over a business, the business must have “nexus” with the state. Nexus is a connection with a state, sufficient under the United States Constitution, to allow the state to require the business to pay tax.

The trend toward using dollar and other thresholds started with sales tax after the United States Supreme Court’s decision in South Dakota v. Wayfair. But, the states have expanded this approach to cover income and other taxes. This article provides an update on where the states stand on nexus for income taxes.

First, a little background…

Traditionally, states equated both sales and income tax nexus with a physical presence. This meant that unless a business had employees or property (i.e., an office, inventory, etc.) in the state, the business was not subject to the state’s income tax or required to collect the state’s sales tax. This requirement still exists in most states, but, as the economy has evolved, so have the states. States now have much broader nexus statutes. For example, XYZ Corp., located in State B, might have nexus in State A if XYZ has leased property, independent contractors, an interest in a pass-through entity, or attempts to sell goods or services in State A.

Now, to those thresholds

At least 25 states and two major metropolitan areas, Philadelphia and San Francisco, have adopted a “doing business” or “factor presence” standard. The “doing business” standard covers a broad range of business activity, and “factor presence” is a fancy name for dollar thresholds. These two standards are collectively referred to as “economic nexus.”

“Doing business” means everything from licensing intangibles in a state to leasing property, using independent contractors, or having an interest in a pass-through entity doing business in a state. “Factor presence” thresholds range from “any amount” of sales, property, or payroll to $500,000. For example, businesses have nexus for purposes of Tennessee’s excise tax (the state’s income tax equivalent) if they have more than: (a) $500,000 of sales into Tennessee or 25% of total sales into Tennessee, (b) $50,000 of property in Tennessee or 25% of total property in Tennessee, or (c) $50,000 of payroll in Tennessee or 25% of total payroll in Tennessee.

With many employees working from home due to the pandemic, the payroll factor has taken on special significance this year. An employee working from home in a different state than the employer’s office or plant location could create nexus for the employer by exceeding the state’s payroll factor. Almost half of the states have issued guidance on this issue.

What should I do to minimize my exposure?

To minimize your exposure, consider the connections you have in other states, such as property, people, and sales. These connections could create income tax nexus. If you think you may have an income tax liability for prior years, many states have a voluntary disclosure process where you can work with the state to comply with its tax laws. In exchange, the state agrees to limit the period for which you owe back taxes and may agree to waive penalties that would otherwise be due. A tax professional can help you evaluate your exposure and determine the best method for achieving compliance.

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

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Article Dean Dorton

Not much has changed from an income tax perspective since I wrote the below article. Most elections have occurred and we still have some uncertainty on a few races. But there have been no stimulus relief bills or tax law updates yet, so as year-end approaches, keep these planning ideas in mind for 2020.

This article was first published in the November 6th edition of the Blood Horse Magazine
Written by: Jen Shah, CPA

As I write this article, the elections have not yet occurred. Much of my recent conversations with our clients, many of whom are horse and farm owners with other operating businesses and/or significant investment portfolios, have focused on “what ifs” – e.g., what happens to income tax rates or the lifetime gifting exemption if there is a change of political party control in Congress and/or the White House. Perhaps by the time you are reading this article, we will know who our next President is and which political party controls each chamber of Congress. In the meantime, this article includes a few tax planning items that may be helpful as year-end approaches. The items discussed below are current as of October 29th, 2020.

Let’s first focus on some year-end income tax planning items. 2020 could be the optimal year to accelerate deductions in your horse operations (or other operating businesses) both for individuals and C corporations. The CARES Act, passed in March 2020, included two particularly beneficial provisions for industry participants:

  1. Allowing net operating losses generated in 2020 (and also 2018 and 2019) to be carried back five years (applies to both individuals and C corporations), and
  2. Temporarily postponing the new excess business loss (EBL) limitation until 2021 (applies to individuals). These provisions were discussed in our article which appeared in the May 2nd issue of the BloodHorse, so I have not included detailed information about them here.

If the goal is to accelerate deductions this year, then consider purchasing and placing in service (meaning the asset is ready to be used for its intended purpose) assets which qualify for the 100% bonus depreciation by 12/31/20. Qualifying assets, which must be used predominantly in the United States, include equipment, fencing, land improvements, barns, and most horse purchases (with some exceptions). In addition to the above favorable depreciation write-off, many horse and farm owners qualify to use the cash method of accounting when filing annual tax returns.  If you are cash-basis, consider pre-paying expenses by year-end. Please note, however, that you should have a non-tax reason for doing so. Non-tax reasons may include bulk or early payment discounts obtained for expenditures such as feed, supplies, or advertising or for access to a particular stallion.

The above commentary assumes your horse operations are conducted as a business and you are either an active participant under the material participation rules (a description of which is beyond the scope of this article) or have enough other passive activity income to offset these losses.

For individuals who are charitably-inclined, cash contributions made to qualified public operating charities (NOT including donor-advised funds, however) by year-end may offset up to 100% of your adjusted gross income for 2020 only. For C corporations, these contributions may offset up to 25% of 2020 taxable income (up from the normal 10%).

In addition to year-end income tax considerations, it may be prudent to address estate planning matters. One of the most effective ways to do this is via lifetime gifts. First, a few basics regarding gifting – Annual gifts of $15,000 may be given to US citizens free of gift and generation skipping tax (GST). In addition to this annual gift limit, the 2020 lifetime gift and GST exclusion is $11.58 million per person. If the lifetime threshold is exceeded, then the gift is taxable to the person who makes the gift at a 40% gift tax rate and a 40% GST rate (if applicable). The GST is charged in addition to the gift tax if gifts are made to a person who is more than 37.5 years younger than the person making the gift, the intent being to capture the additional tax on gifts that may skip a generation (the most common of which may be gifts to grandchildren).

The lifetime gift and GST exemption significantly increased in 2018 as part of the Tax Cuts and Jobs Act (TCJA) and is scheduled to be at an increased level through 2025 (amount adjusted annually for inflation). In 2026, this lifetime exemption is scheduled to revert to the 2017 limitation of $5 million (plus subsequent inflation adjustments). If the Democrats take control of the White House and/or Congress, many expect a push to pass legislation that reduces these increased annual gifting and GST exemptions sooner than the scheduled 2026 reduction.

An ideal asset to gift is property that is expected to appreciate in value. If you gift something worth $100,000 today and it appreciates to $500,000 at your death, then you’ve gotten $500,000 out of your estate and only used $100,000 of lifetime gifting exemption. On the other hand, if that $100,000 gift depreciates to a $40,000 value, then you’ve potentially wasted $60,000 of lifetime gifting exemption.

Equine assets may also be included in your gifting plan, albeit some equine assets may be more effective than others. Horses are tricky with regard to gifting as it certainly can be difficult to determine whether or not they will appreciate in value. If you want horses to be part of your gifting plan, consider stallion shares from an already profitable stallion (which produces cash-flow) or a broodmare interest versus younger racing prospects. Of course, the person receiving this gift will then be responsible for care of the horses, so that ongoing expense should be considered. Farms, on the other hand, tend to be held long-term which hopefully will lead to appreciation over time.

To maximize the gift, assets are often contributed to a pass-through entity (holding company) by parents or grandparents. Non-controlling interests in this holding company are either gifted or sold at a discount to the children or grandchildren (or trusts for their benefit) with the voting interest retained by the original owner.

Those who made large gifts prior to 2018 may still have substantial exemptions remaining due to the significant increase in the exemption. I recommend discussing this now with your advisors if you are interested in considering gifts by year-end and gaining the benefit of the current historically high exemptions.

As the saying goes, nothing is certain in life except death and taxes. The first is unavoidable, but exposure to the second may be managed via effective tax planning, some of which is mentioned above. It will be interesting to see what impact, if any, the results of the election have on tax planning.

Article Dean Dorton

This article was first published in Blood-Horse Magazine

In the United States more than 10,000 state and local jurisdictions impose sales and use taxes. The majority of the taxing jurisdictions are city, county, or other local governments, as only 45 states and the District of Columbia impose the taxes. Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose a sales or use tax, although Alaska permits local jurisdictions to levy the taxes. Based on the number of taxing jurisdictions, sales and use taxes account for approximately 25% of total state and local tax collections.

Every taxing jurisdiction has its own set of laws related to sales and use taxes. When that fact is combined with the number of taxing jurisdictions, it comes as no surprise that sales and use taxes are riddled with complexities. This article focuses on making sense of those complexities in the context of buying and selling horses for racing and breeding, with emphasis on the states of California, Florida, Kentucky, and New York.

In the beginning

Understanding sales and use taxation of horse transactions begins with a general understanding of sales and use taxes. These taxes are imposed on a particular “transaction,” i.e., a transfer of a taxable product or service for a consideration. In particular, sales taxes apply to retail sales of tangible personal property, digital property, and some specifically enumerated services. Tangible personal property includes property that might be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses. Because horses fall within this definition, sales of horses are taxable unless the transaction qualifies for a specific statutory exemption.

Jurisdictions that impose a sales tax also impose a complementary use tax, which is imposed on the storage, use, or other consumption of taxable property in a state if no sales tax was paid to that state when the property was purchased. Most states allow a credit against the use tax due for sales tax paid to another state at the time of purchase. Because horses might be purchased in one state and trained, boarded, or raced in other states, use tax is especially relevant in the equine industry. Unlike the sales tax, which the seller generally is required to collect from the purchaser and remit to the taxing authority, the use tax typically is the obligation of the purchaser.

All gross receipts derived from the retail sale of tangible personal property, other than sales for resale, are presumed taxable. However, states and localities often carve out exemptions from tax for certain types of transactions. In most circumstances, the seller must obtain and maintain in its records a properly completed exemption certificate from the purchaser as proof that the sale is exempt from tax. Examples of types of exempt transactions in various states include sales and purchases: (a) in interstate or foreign commerce; (b) of horses for breeding purposes; and (c) of racehorses. The following sections explore how these exemptions apply in California, Florida, Kentucky, and New York.

Interstate and foreign commerce

In all four states, sales in interstate and foreign commerce are exempt from tax. For this exemption to apply, the purchaser must take possession of the horse outside the taxing state. Buyers and sellers can take advantage of this exemption by structuring the transaction so that the seller is obligated, as a condition of the sale, to ship the horse by common carrier to the purchaser at a point outside the state. For example, if a seller in Kentucky makes physical delivery of a horse by common carrier to a purchaser in New York, the sale is exempt from Kentucky’s sales tax. However, New York’s use tax might apply to the transaction.

Horses purchased for breeding

California, Florida, Kentucky, and New York all offer preferential treatment to horses purchased for breeding purposes. The exemptions for sales of horses for breeding purposes are broader in Florida and Kentucky because the exemptions in California and New York are limited to racehorses purchased for the purpose of breeding. Additionally, California’s exemption does not apply to local taxes.

In California and Kentucky, the purchaser must intend to use the horse solely for breeding purposes to qualify for the exemption. Guidance issued by New York is conflicting as to whether the purchaser must intend to use the horse exclusively (i.e., 100%) or predominately (i.e., more than 50%) for breeding purposes. Florida law requires only that the horse be purchased for breeding purposes and does not mandate that this be the purchaser’s sole intent.

Sales of horses by the breeder also are exempt from tax in Florida. This exemption applies even if a horse is registered with a breeders or registry association prior to the sale and the sale takes place at a show or race meeting, as long as the sale is made within Florida by the original breeder.

Racehorses

New York offers the most favorable treatment when it comes to racehorses. In New York the purchase of a Thoroughbred or Standardbred racehorse is exempt from tax if the horse is: (1) registered with The Jockey Club, the United States Trotting Association, or the National Steeplechase and Hunt Association (or is no more than 24 months old and eligible to be registered with one of these associations), and (2) purchased with the intent of entering the horse in a racing event in which pari-mutuel wagering is authorized by law. Sales of racehorses are taxable in California, Florida, and Kentucky. However, Kentucky exempts the sale of horses less than 2 years old at the time of sale, provided the sale is made to a non-resident of Kentucky. A non-resident includes an individual who is not a resident of Kentucky, as well as a business that is not commercially domiciled in the Commonwealth.

Use tax considerations

Finally, because horses often are transported to multiple states for training, racing, or other purposes, special consideration should be paid to the use tax laws of each state. In some states, including California and Florida, property purchased and used outside of the state for a certain length of time might be exempt from use tax if subsequently brought into the state. For example, property used more than 90 days from the date of purchase to the date of entry into California is accepted as proof that the property was not purchased for use in California and, thus, is not subject to use tax in California. Likewise, under Florida law, property used in another state for six months or more before being imported into Florida is presumed not to have been purchased for use in Florida.

Kentucky and New York have equine-specific use tax exemptions. Kentucky exempts from tax the temporary use of horses in the state for purposes of racing, exhibiting, or performing. In New York, no use tax is due if a horse is purchased outside New York and brought into the state for the purpose of entering racing events or preparing for such events if the horse is not entered into racing events on more than five days in any one calendar year.

How this works in practice

The interplay between the sales and use tax laws of various states can be illustrated best by example. Suppose a California resident purchases a Thoroughbred yearling at an auction in Kentucky and takes delivery in Kentucky. Because the horse is less than 2 years old and the purchaser is a non-resident, no Kentucky sales tax is due on the transaction. However, if the horse is transported to Florida for training within six months of its purchase, a Florida use tax liability would arise. The purchaser could avoid Florida use tax by waiting six months or more before transporting the horse to Florida.

What if the California resident also has a farm in Kentucky where she spends more than half the year? Under these circumstances, Kentucky sales tax would apply to the purchase of the yearling because the purchaser does not qualify as a non-resident of Kentucky. If the horse is shipped to Florida for training within six months of purchase, the purchaser also is liable for Florida use tax. However, she can take a credit against the Florida use tax for the sales tax paid to Kentucky. Because Florida and Kentucky both impose tax at the rate of 6%, the credit for sales tax paid to Kentucky would fully offset the purchaser’s Florida use tax liability.

These are just a few examples of the impact of sales and use taxes on the equine industry. More complex scenarios arise when multiple parties, several states, and local taxes factor into the equation. Individuals and businesses engaged in the buying and selling of horses should consider sales and use taxes before entering into any transaction to avoid an unpleasant tax surprise down the road.

Article Dean Dorton

This article was first published in Blood-Horse Magazine

Federal depreciation incentives included with the Tax Cuts and Jobs Act continue to benefit Thoroughbred horse and farm owners. This article provides an in-depth look at the rules surrounding the 100% bonus depreciation, generally the most useful of these incentives to industry participants.

This discussion is intended for those active owners operating their horse and farm activities as businesses that use the cash method of accounting.

The new law significantly expanded bonus depreciation. The percentage that may be currently deducted for tax purposes increased to 100% of the purchase price for qualifying property placed in service through 2022. After 2022, the percentage drops by 20% each year until it becomes 20% in 2026. In addition, the definition of qualifying property was expanded to include assets that have been previously owned but not those being reacquired by the purchaser. Previously, assets used by a prior owner did not qualify.

Common equine assets that may qualify for this 100% write-off include racing prospects (yearlings, 2-year-olds in training), racehorses, broodmares, stallions, equipment, fencing, land improvements, and barns. To qualify, these items must be predominantly used in the United States (which makes sense given the desire to stimulate economic growth in the United States).

A person claiming bonus depreciation is not limited by taxable income. The deduction may be used to create or increase a net loss and there is not a specific dollar amount limitation on an annual basis.

For these reasons it is much more valuable than the Section 179 depreciation, which is limited to net income and also to a fixed annual dollar amount. Bonus depreciation also is not prorated based on the timing of the purchase. So a qualifying purchase made on Dec. 31, if placed in service then, is eligible for the same amount of bonus depreciation as property purchased for the same price earlier in the year.

In order to claim the bonus depreciation, the asset must be “placed in service” during the tax year. For tax purposes, racing prospects may be placed in service either in the fall of the yearling year when training begins or when they begin racing.

Breeding stock may be placed in service when available to be bred, even if the purchaser does not plan to breed the horse until the following year, or when bred. Quite commonly, mares are purchased in the breeding stock sales in the fall and placed in service upon purchase, even though they typically would not be bred in the Northern Hemisphere until the following winter to spring. The same is true for stallions or stallion shares. Once a methodology for placing horses in service is chosen, it should be followed consistently for tax reporting purposes.

However, just because the cash has been paid does not necessarily mean the horse has been placed in service. For example, if shares in a stallion prospect are purchased while the horse is still racing to secure ownership in the stallion, these would not be placed in service until the horse is retired from racing and available to be bred or begins breeding. On the other hand, a horse that has been purchased and placed in service but not yet paid for would be eligible for bonus depreciation.

In addition, some leases might be “disguised purchases” and may enable the lessee/purchaser to currently claim bonus depreciation. So, it is important to look beyond the label on the contract or the time at which cash is expended to determine whether bonus depreciation is currently available.

Those purchasing farms also may currently use bonus depreciation to deduct the purchase price allocable to qualifying items such as barns, land improvements, fencing, and equipment.

This could result in a substantial portion of the purchase price being eligible for immediate deduction. Addressing this allocation prior to purchase via agreement with the seller in the closing documents or by an appraisal that allocates a portion of the purchase price to these depreciable assets is important to maximize potential deductions.

While bonus depreciation is a timing difference, it can be financially meaningful. To illustrate what this is worth to a horse owner, let’s use the following example. If a yearling is purchased for $500,000, this $500,000 may be fully deducted in year 1 (subject to some limitations briefly mentioned later in this article), rather than over an eight-year period. (Yearlings use seven-year lives for tax depreciation, but this is actually claimed over an eight-year period.) This is a federal tax savings of $185,000 if the purchaser is in the highest federal individual tax bracket. By accelerating this deduction versus claiming it over time, the cash savings in this specific example are roughly $30,000 if a 5% rate of return is used.

This cash savings increases if a higher rate of return is used, if the asset is depreciated over a longer life, or as the purchase price of qualifying assets increases.

Opt-out option

Owners may opt out of this immediate write-off by filing an election to do so with their tax return. So why would someone choose to elect out of this bonus depreciation?

If the horse venture is otherwise profitable, an owner might wish to report a net profit for hobby loss rules that shifts the burden of proof to the IRS if profits are reported in two out of seven years.  Additionally, horse owners might prefer to align the related depreciation expense better during the period of time that horses or the farm would produce income in future years.

Also, passive investors in the horse business participating via multi-member entities may receive little-to-no-tax benefit by accelerating this deduction and instead create a state withholding tax issue in future years when purse winnings are generated or the horse is sold with no remaining tax basis.

Alternatively, the 100% bonus depreciation may be claimed on certain classes of assets while electing out of others. So, if it makes sense to deduct the depreciation on barns over the standard 20-year life while claiming the 100% write-off on horse purchases, an election could be filed to opt out of the 20-year asset class only.

This is made on a class-by-class basis and not an asset-by-asset basis. Horses should be categorized appropriately when evaluating on a class-by-class basis, given that different types of Thoroughbred horses have either a three-year or a seven-year life.

Property acquired from a related party or via inheritance or gift does not qualify for bonus depreciation. Inventory not yet placed in service, such as typical weanling-to-yearling pinhooks, or weanlings not yet placed in service also are not eligible.

Limitations

As with most other tax incentives, a few limitations that might currently reduce or eliminate this 100% deduction may apply. The tax law created a provision that limits net 2018 losses from all business ventures for individuals, trusts and estates to $250,000 ($500,000 for individuals filing jointly). This limit is indexed for inflation after 2018. Any net business loss that exceeds the limit is converted to a net operating loss.

Bonus depreciation might significantly increase the net business loss generated and cause this business loss to be currently limited. For many industry participants who are affected, this creates a one-year deferral of this excess loss that then might be used to offset all sources of income in the subsequent year, subject to the normal net operating loss carryover rules. So owners faced with excess business losses might still want to currently claim bonus depreciation.

Another item of caution: Many states have decoupled from this favorable bonus depreciation so this may be a Federal tax benefit only, depending in which states a horse or farm owner operates.

As sales season kicks into high gear, this 100% write-off option presents some planning opportunities for those looking to reduce taxable income. It is important to speak with your tax advisors regarding your specific situation prior to making any purchases, but the potential tax benefit of utilizing bonus depreciation could be substantial.

Article Dean Dorton

By: Maddie Schueler, JD, LLM | mschueler@deandorton.com

Like most states, Kentucky imposes a sales tax on the retail sale of tangible personal property, digital property, and some services. Kentucky also imposes a complementary use tax on the storage, use, or other consumption of taxable property in the state if no sales tax was paid to Kentucky when the property was purchased.

To achieve various policy objectives, the General Assembly has enacted multiple sales and use tax exemptions. The goal of many of these exemptions is to encourage the development and continuation of industries important to the Commonwealth. This article explores basics about how sales and use taxes apply to two major industries in the state—manufacturing and equine.

The Manufacturing Industry

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Manufacturers’ products sold to end users normally are subject to sales tax in the state where the product is shipped or delivered. The sales tax on a transaction generally is collected by the seller from the purchaser. Specific exemptions may cause the sale to be nontaxable. Because manufacturers typically sell to distributors or retailers who acquire property for resale, manufacturers’ sales often are nontaxable.

When manufacturers buy property for use in their manufacturing process in Kentucky, favorable sales tax treatment is tied to two major exemptions: (1) the exemption for materials, supplies, and industrial tools and (2) the exemption for machinery for new and expanded industry.

Materials that become part of a manufactured product, as well as supplies and industrial tools that are “used up” during the manufacturing process, are exempt from tax because tax ultimately will be collected when the final product is sold to the end user. All materials that enter into and become an ingredient or component part of the manufactured product are exempt from tax. Supplies and industrial tools must be “directly used in manufacturing” and have a useful life of less than one year to qualify for exemption. Notably, the exemption does not apply to repair, replacement, or spare parts.

The exemption for machinery for new and expanded industry permits manufacturers to purchase certain machinery without paying sales or use tax. For an item to qualify for exemption, it generally must meet four requirements:

Be machinery;

Be used directly in the manufacturing process;

Be incorporated for the first time into plant facilities established in Kentucky; and

Not replace other machinery.

A caveat applies to the fourth requirement: new machinery that replaces other machinery qualifies for exemption if it performs a different function, manufactures a different product, or has a greater productive capacity than the machinery being replaced.

The Equine Industry

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Breeding a horse involves producing a product, not unlike manufacturing. The mare may be thought of as “production equipment,” with the stallion’s contribution to the process being “raw material.” So, in what ways is breeding horses subjected to or not subjected to sales tax in a similar manner to manufacturing?

Sales in Kentucky of horses less than two years old at the time of sale are exempt from tax if the purchaser is a nonresident of Kentucky. A nonresident includes both an individual who is not a resident of Kentucky and a business that is not commercially domiciled in the Commonwealth. Sales of horses which are bought for resale also are nontaxable.

Horses, or interests or shares in horses, bought for breeding purposes only are exempt from sales or use tax in Kentucky. However, fees paid to breed to a stallion in Kentucky are subject to sales tax.

Kentucky sales tax law includes numerous general agricultural exemptions, but many do not apply to the equine industry. For example, Kentucky exempts from tax feed, farm machinery, and on-farm facilities. However, all of these exemptions apply in the context of raising “livestock,” which under Kentucky law excludes horses.

In Summary

In summary, both similarities and differences exist in how Kentucky applies its sale and use tax law to manufacturers, in general, and to horse breeders, who also produce items of tangible personal property.

Article Dean Dorton

Yesterday, March 26, 2019, Governor Bevin signed House Bill 354, which the General Assembly passed earlier this month. This legislation reverses the dramatic negative effect on many nonprofits caused by last year’s tax bill and the Kentucky Department of Revenue’s interpretation of it. The applicable provisions of House Bill 354 became effective upon the Governor’s signature meaning that the changes are effective today!

To whom does the new law apply?

The new law exempts from tax sales of admissions and most fundraising activities by nonprofit educational, charitable, or religious institutions that are exempt from income tax pursuant to Section 501(c)(3) of the Internal Revenue Code, and provides the same exemptions for “nonprofit civic, governmental, or other nonprofit organizations.”

For 501(c)(3)’s, House Bill 354 restores the law related to sales of admissions to the understanding of the law prior to July 1, 2018. The bill also broadens the law to allow for the vast majority of fundraising activities to be exempt from sales tax. The exemptions for the second group of nonprofits – “nonprofit civic, governmental, or other nonprofit organizations” – is new.

House Bill 354 does not provide a definition for this second group, but those surrounding the drafting process related to the bill understand the provision to apply to other groups covered by Section 501(c) of the Internal Revenue Code, such as civil leagues, business leagues, chamber of commerce, social and recreational clubs, and fraternal beneficiary societies and associations.

Tell me, again, what the law covers.

The law exempts from sales tax:

  • Admissions to events and activities sponsored by nonprofit organizations, and
  • Sales at fundraising events, with the exception of:
    • Sales related to the operation of a retail business, including, but not limited to, thrift stores, bookstores, surplus property auctions, recycle and ruse stores, or any ongoing operations in competition with for-profit retailers.

When does the law become effective?

The law became effective upon the Governor’s signature yesterday, March 26, 2019. This means you can stop charging sales tax on admissions and auctions at fundraising events. However, be sure to remit any sales tax you have already collected, and no refunds are allowed for prior periods in which sales tax was collected. Furthermore, we don’t recommend closing your sales tax account right away. The Department of Revenue will be issuing guidance on how to proceed in the near future.

If you have any questions, please contact your Dean Dorton advisor or Erica Horn at ehorn@deandorton.com.