The topic of nonprofits and sales tax in North Carolina has come up several times over the last couple of weeks. So, I thought I would take this opportunity to explain the current system and maybe even rant a little about it. We’ll see…
What is Sales Tax
Sales tax is a state-imposed tax that is charged on the purchase of goods and services and collected from the consumer by the retailer. The rate of sales tax varies depending on location, and it is ultimately used to fund government programs and necessary resources.
Overview of North Carolina Sales Tax Refund Process
Currently, nonprofits in NC have to pay sales tax on purchases made in the state. However, as tax-exempt entities, they are able to submit claims for refunds to the NC Dept of Revenue twice a year for eligible sales tax. I say “eligible” sales tax, because not all sales tax payments are refundable.
According the the NC Center for Nonprofits, North Carolina is only one of two states that has a sales tax refund system for nonprofits. In most other states, nonprofits receive a sales tax exemption certificate that allows the vendors to not charge them at the point-of-sale.
Nonprofits and Sales Tax Refunds in North Carolina
Why does NC have this current system? I don’t know. Ask your state representative. What I do know is that this system increases the record-keeping and reporting burden on nonprofits. While the sales tax refund can add up to several thousand dollars for larger nonprofits, the time and expenses needed to accurately track sales tax for smaller nonprofits could exceed the amount of prospective refunds.
Not only does this add a paperwork burden to nonprofits, it can also have a negative impact on their cashflow. Nonprofits generally have ample cash reserves and no financial problems, right? Well, if you’ve worked in pretty much any nonprofit, you know that’s not right. The NC Center for Nonprofits says that “three-fifths of North Carolina’s nonprofits lack the resources to fully meet demands for their services.” Nonprofits don’t have the reserves to simply float an interest-free loan to the state. Unfortunately, that is what’s happening.
Until NC changes this system, if they ever do, nonprofits just have to deal with it. So, to minimize the burden that the record-keeping can create, it is vital that nonprofits have a good system to track the eligible sales tax. What I’ve setup and used with some nonprofits, is create a clearing account in their accounting software, like Quickbooks Online (QBO). Then whenever an expense is entered that has eligible sales tax, you can record the sales tax to this clearing account and the rest of the expense to the applicable expense account. Then when it comes time to submit your claim for refund, you can simply pull the total from this clearing account for the time period in question.
Not only do you need to know the amount of eligible sales tax paid, but you also need to keep a record of the related receipts and bills. If the state ever questions your refund claim, you need to have your backup documentation to substantiate your claim. One option would be to file your receipts and bills away in a shoebox or file cabinet somewhere. Another option would be to use a system like QBO that allows you to upload and attach your receipts and bills when you are entering them in the system. Then you can open up the clearing account, click on a transaction and have the backup documentation right there!
In Conclusion
Would I prefer if nonprofits could simply provide a document to vendors and not get charged sales tax, thereby avoiding the whole headache of tracking, reporting, and submitting claims for refunds? Absolutely! However, since that’s not the case, I want to do everything I can to help make things as easy as possible for nonprofits to get the money they’re owed. In light of this, I have created a one-page resource with some relevant information on this topic that you can access below. I would also be happy to talk with you and help you through this process. You can schedule a meeting below or reach out to me directly at wesley@getstatera.com.