Taxes and Tax-Exempt

Tax Information for Student Organizations
Nonprofit Business Assistance Program
Are we required to pay state and federal income taxes?
Is our organization exempt from paying sales tax on purchases we make?
Do we need to collect state sales tax?
Can our RSO receive donations that are tax-deductible to the donor?

Tax Information for Student Organizations

The Student Organization Office's eligibility criteria for student organizations, includes a requirement that the RSO be a not-for-profit organization. This means that an organization must use any income or profit for organizational purposes, not for any individual or commercial gain. This is not the same definition as used for state and federal non-profit purposes, and thus an RSO will not obtain exemption from state or federal income tax and exemption from state sales tax on purchases simply by registering as a student organization. Thus the not-for-profit criteria as defined by your status as a registered student organization is not to be confused with the federal Internal Revenue Service (IRS) eligibility criteria for non-profit organizations. The IRS has established eligibility criteria for varying kinds of non-profit organizations. In order to be considered non-profit by the federal government, in most cases you must prepare and submit an application form. There are different application forms for different types of non-profits (e.g. 501(c)3, 501(c)4, or 501(c)7). You should carefully analyze which type of non-profit status is most appropriate for your organization. Keep in mind that different types of non-profits have different requirements and privileges; for example, not all types of non-profit status permit the organization to accept tax-deductible contributions. Please see below for additional discussion of the different types of non-profits. If it is determined that your organization meets the non-profit eligibility criteria, the IRS will issue a Letter of Determination which will specifically identify the type of tax-exempt status granted to the organization. , If your organization is determined to be non-profit by the federal government, it is most likely that the state of Wisconsin will also determine your organization to be non-profit for state tax purposes.

RSOs often ask if they need to obtain federal/state non-profit status. The three main benefits of non-profit status are (1) exemption from federal and state income tax, (2) ability of certain non-profits to make purchases without paying state sales tax, and (3) ability for certain non-profits to receive tax-deductible contributions.

In most cases we don't encourage student organizations to apply for federal non-profit status. The process involves follow up paperwork annually and most organizations will not find themselves in situations of needing formal federal or state non-profit status. In addition, since many RSOs are ineligible for 501(c)(3) status, filing for non-profit status will not enable the RSO to receive tax-deductible contributions or make purchases free of sales tax (see below), which are primary reasons many organizations seek federal non-profit status.

Further, securing federal non-profit status for tax purposes is a complicated process, which requires an understanding of the technical definitions and requirements of non-profit organizations for tax purposes. If your organization, as its own entity, wishes to apply for federal non-profit status, contact the federal Internal Revenue Service and the Wisconsin Department of Revenue, or consult your private tax advisor, for tax information specific to your organization’s circumstances. Information may be found on the IRS website at http://www.irs.gov by entering Publication 557 in the Search Forms and Publications box. This publication provides a description of the various 501(c) non-profit organizations. If you wish to apply for 501(c)(3) status, enter 1023 in the search box or for 501(c)(4) or 501(c)(7) status, enter 1024. These are the most common categories of non-profit status that student organizations would file under.

Nonprofit Business Assistance Program

The Nonprofit Business Assistance Program is another helpful resource, which can assist organizations with the application for non-profit status and in understanding the intricacies of applying for and securing non-profit status. The Program, provided by members of the Business Law Section of the State Bar of Wisconsin, is a free legal counseling service for small and emerging non-profit organizations, which provides up to two hours of counseling from a business lawyer at no cost. To sign up, contact the State Bar at service@wisbar.org to request the Nonprofit Business Assistance Program form. Once you mail the completed form to the State Bar, you will be notified of the business lawyer who was selected to address your problem. It will be your responsibility to contact the lawyer to schedule a mutually convenient time for a meeting and to forward any additional information that might be helpful to your attorney. For more information, call the State Bar at 608/250-6006 or send inquiries to service@wisbar.org.

Are we required to pay state and federal income taxes?

In general, an RSO is subject to federal and state income taxes on the income it generates or receives (including donations) unless it qualifies as a non-profit organization under federal and state law. As stated above, the Student Organization Office definition of not-for-profit, under its eligibility criteria for student organizations, means that an organization must use any income or profit for organizational purposes, not for any individual or commercial gain. This is not the same definition as used for state and federal non-profit purposes, and thus an RSO will not obtain exemption from state or federal income tax and exemption from state sales tax on purchases simply by registering as a student organization.

There are several different varieties of non-profit organizations that qualify for exemption from federal tax on their income. Most student organizations would likely qualify for federal income tax exemption as a 501(c)(4) “social welfare” organization or a 501(c)(7) “social club.” Student organizations that exist and are operated for charitable purposes, as defined by the IRS, may qualify as a 501(c)(3) “charitable” organization. RSOs that are exempt from federal income tax under any of the above categories are also normally exempt from state income tax. There are special rules for “unrelated business income” that sometimes require non-profits to pay federal and state income taxes on their income that is generated by activities unrelated to their exempt purpose.

An RSO that qualifies for tax exemption under 501(c)(4) or 501(c)(7) must file an application for exemption with the IRS regardless of how much money it collects. An RSO that qualifies for exemption under 501(c)(3) status is required to file an application for exemption with the IRS only if the organization receives/earns MORE than $5,000.00 in gross annual receipts per year from outside sources (interest bearing checking accounts, investments, fund-raisers, donations, etc.). An alternative to filing for non-profit status that is sometimes available to chapters of larger national organizations is to ask your parent chapter (large national chapter usually) if your subsidiary is covered by the parent/affiliated organization’s tax-exempt status. If your organization is covered by the parent organization's tax exempt status, you would want to obtain a copy of the parent organization's IRS Determination Letter which shows your organization as a subsidiary of the parent organization.

An RSO that has obtained non-profit status is required to file Form 990, the annual information tax return for non-profits. State law also requires non-profit corporations to file an annual information return. Other filing requirements may apply if the RSO generates “unrelated business income.”

Is our organization exempt from paying sales tax on purchases we make?

Student organizations are not automatically exempt from paying sales tax on purchases, but must apply to the Wisconsin State Department of Revenue (DOR), 266-2776, to obtain a sales tax exemption certificate. Apply by filling out the Application for Wisconsin Sales and Use Tax Certificate of Exempt Status form. To find this form, go to the Search only Forms and Publications box of the Department of Revenue’s website and enter S-103. The second page of the S-103 application form lists the purpose of the exemption status with examples of non-profit organizations that do and do not qualify for exemption from sales tax and instructions for filling out the form. In most cases, only those student organizations that qualify for federal 501(c)(3) status will qualify for exemption from Wisconsin sales tax on purchases.

If you have federal 501(c)(3) non-profit status, you will be asked to include the Determination Letter from the IRS as part of the documentation with your application. If your organization has not filed for 501(c)(3) status and not obtained a Determination Letter, it will need to demonstrate to the DOR that it meets the basic requirements for 501(c)(3) status in order to obtain the sales tax exemption certificate. Your organization may use the University's sales tax exemption certificate for its purchases ONLY in the unusual situation where your organization is considered part of, and is controlled by, a university department.

Do we need to collect state sales tax?

Student organizations are exempt from collecting state and county sales tax (currently 5.5%) on “occasional sales” of items sold if the student organization meets all of the following criteria:

* Is considered a nonprofit organization, per the Department of Revenue's   definition. For this purpose, the definition of “non-profit” includes most        501(c)(3), 501(c)(4) and 501(c)(7) organizations.
* Does not have or is not required to have a seller's permit
* Entertainment is not involved (either no admission is charged, or all
   payments to entertainers at the event add up to less than $500)
* Has had 20 days or less of sales in the calendar year OR has had
   earned less than $25,000 in sales in the calendar year.

If a particular sale does not meet the above criteria, the RSO is responsible for collecting and remitting state sales tax to the Wisconsin State Department of Revenue. For additional information about sales tax, visit Wisconsin Department of Revenue, and consult Publication 206, Sales Tax Exemptions for Nonprofit Organizations, and Publication 204, Sales and Use Tax Information for Colleges, Universities, and Technical Colleges.

Can our RSO receive donations that are tax-deductible to the donor?

RSOs are not automatically eligible to receive tax-deductible contributions. In most cases, only RSOs that qualify for federal 501(c)(3) status may receive tax-deductible contributions. RSOs that do not qualify for 501(c)(3) status are obligated to inform potential donors of the non-deductibility of any donations to the organization.

In unusual circumstances, a university department may be willing to accept a donation on behalf of an RSO, or with respect to an event sponsored by an RSO. In that case, the donation would be deductible to the donor since it is made to the university, and not the RSO. RSOs must be very careful to make sure the department has formally agreed to accept the donation in these circumstances, since there are university forms that need to be completed by the department and receipts that must be provided by the university to the donor in order for the gift to be completed.