NONPROFIT ORGANIZATION TAX EXEMPTIONS

You asked what criteria a nonprofit organization must meet to be eligible for sales and property tax exemptions. You also asked if nonprofit status affects an organization’s employment taxes and whether there are limits or minimums on the racial breakdown of an exempt organization’s employees.

State law provides sales and property tax exemptions for qualifying organizations operated exclusively for charitable, educational, historical or similar purposes. These exemptions apply only to items and property used exclusively for the organization’s tax-exempt purpose. The state sales tax exemption is explicitly tied to the corresponding federal income tax exemption for charitable and other nonprofit organizations under the Internal Revenue Code § 501(c)(3). The property tax exemption does not refer to § 501(c)(3) but instead specifies that the exempt property be used exclusively for charitable or other exempt purposes and that the organization’s personnel derive no profit from its activities. These are also criteria for qualifying for a 501(c)(3) exemption.

The only “employment taxes” the state requires are unemployment compensation taxes. Like other employers, 501(c)(3) organizations must pay state unemployment compensation taxes, but unlike other employers, such organizations have a choice of how to pay.

Neither state nor federal law imposes any minimum employee diversity requirement on a tax-exempt organization. But federal law makes a private school ineligible for a tax exemption if it discriminates against applicants or students on the basis of race, color, or national or ethnic origin.

This report focuses on the sales and property tax exemptions that apply broadly to nonprofit organizations like those eligible for 501(c)(3) exemptions. State law also contains narrow sales and property tax exemptions for specific types of nonprofit organizations, such as hospitals, cemetery companies, youth groups, and historical societies, which are not covered here. If you would like information about these other exemptions, please let us know.

Information below concerning the qualifications for federal income tax exemptions for nonprofit charitable organizations under IRC § 501(c) (3) is derived from IRS Publication 557, Tax-Exempt Status for Your Organization. This publication contains detailed information on how various types of organizations qualify for federal tax exemptions.

Under state law, certain organizations that are exempt from federal income taxes pay no sales tax when they buy otherwise taxable items and services. To be eligible, a nonprofit organization must qualify for a federal tax exemption under IRC § 501(c)(3) and the tax-exempt items or services must be used or consumed exclusively for the purposes for which the organization was established (CGS § 12-412 (8)).

A nonprofit organization may qualify for an exemption from federal income taxes under IRC § 501(c) (3) if it is organized and operated exclusively for one or more of the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to animals or children. In addition, an organization must be organized as a corporation, community chest, foundation, or trust. Individuals and partnerships are not eligible.

An organization seeking a federal tax exemption under § 501(c)(3) must apply to the IRS and show that it meets the following conditions.

1. It is exclusively organized and operated for one or more of the purposes listed above.

2. None of the organization’s net earnings inure to the benefit of private shareholders or individuals. The organization must not be organized or operated for the benefit of private interests, such as those of its creator, its creator’s family, its shareholders, other individuals, or anyone these private interests directly or indirectly control.

3. The organization will not, as a substantial part of its activities, attempt to influence legislation or participate to any extent in a political campaign for or against any candidate for public office (IRS Publication 557, p. 17).

State law exempts from the property tax property owned by or held in trust for, any corporation organized exclusively for scientific, educational, literary, historical, or charitable purposes. The exemption applies to real and personal property used exclusively for carrying out one or more of these purposes. None of the corporation’s officers, members, or employees may receive any pecuniary profit from the organization’s operations other than reasonable compensation for services or as a proper beneficiary of the organization’s charitable purposes. Each eligible organization must file an exemption statement every four years with the local assessor or board of assessors of the town where the exempt property is located (CGS § 12-81 (7)).

Nonprofit organizations are subject to the state unemployment compensation law if they employ one or more employees for some portion of a day in 13 calendar weeks in a calendar year (CGS § 31-222(a)(1)(D)). This is the same requirement that applies to all private-sector employers. But, unlike most employers, nonprofit organizations that are exempt from federal income taxes under § 501(c)(3) may choose either to (1) pay regular unemployment compensation taxes based on the wages of their covered employees or (2) reimburse the state unemployment compensation fund in full for any benefits paid to former employees (CGS §31-225(g)). If it chooses the second of these options, an organization does not have to pay any tax unless one of its covered former employees actually collects unemployment compensation benefits.

There are no requirements concerning the racial breakdown of employees of most types of 501(c)(3) organizations. But, a private school seeking an exemption under § 501(c)(3) must include in its charter, bylaws, or other governing documents, or in a resolution by its governing body, a statement that it does not discriminate against applicants or students on the basis of race, color, or national or ethnic origin. It cannot discriminate in administering its educational or admission policies or its scholarship, loan, or athletic programs. The IRS considers it evidence of a racially discriminatory student policy if a school has a racially discriminatory employment policy for faculty and staff (IRS Publication 557, p. 22).

Since the state sales tax exemption and the special unemployment compensation tax payment option are open only to organizations that qualify for federal tax exemptions under § 501(c)(3), the nondiscriminatory requirement is a condition for a private school to receive those benefits. Since the property tax exemption is not explicitly tied to the federal tax exemption, it appears that no nondiscrimination conditions apply to private schools receiving that exemption.


June 16, 2004		2004-R-0486
NONPROFIT ORGANIZATION TAX EXEMPTIONS

By: Judith Lohman, Chief Analyst