Nonprofits do pay sales tax in many situations, and they often have to collect it too. Federal 501(c)(3) recognition is not a sales tax exemption. Whether your organization owes tax on what it buys, or must collect tax on what it sells, depends on the state you’re operating in, the type of nonprofit you run, and the nature of the transaction.
Buying: 501(c)(3) Status Alone Doesn’t Exempt You
Federal tax-exempt status and state sales tax exemptions are separate systems run by separate agencies. To buy things tax-free, your organization has to apply for a sales tax exemption directly with each state’s revenue or taxation department. Until that certificate is in hand, purchases are taxable.
The exemption, where it exists, is meant for spending that carries out the charitable mission. A food bank buying groceries for its pantry, an animal shelter buying medical supplies, program materials, and office equipment used in the organization’s work generally qualify. Personal purchases by employees, board members, or volunteers do not, even if the organization reimburses them later. The transaction itself has to be paid with organizational funds for an organizational purpose.
How to Get a State Sales Tax Exemption Certificate
Applications typically ask for your IRS determination letter, your organizing documents such as articles of incorporation or bylaws, and your Federal Employer Identification Number. Most state revenue agencies host the application on their website, and most charge nothing to process it. Some certificates remain valid indefinitely; others require periodic renewal. Once approved, you present the certificate at the point of sale, and the vendor keeps a copy on file to document why no tax was collected.
If you operate in more than one state, you generally need a certificate from each. The Streamlined Sales Tax Agreement simplifies this across its 24 member states, which include Indiana, Michigan, Ohio, New Jersey, and Wisconsin. The Streamlined exemption certificate is accepted across all member states without registering through the Streamlined system, though you still need to confirm your specific exemption type is recognized in each state.1Streamlined Sales Tax. Exemptions
Misusing the certificate — for purchases outside your exempt purpose, or for personal items — makes the organization liable for the unpaid tax plus interest and penalties. States can and do revoke certificates from organizations that abuse them.
States That Don’t Grant a General Nonprofit Exemption
This catches many organizations off guard. A significant number of states either offer no general sales tax exemption for nonprofits or restrict it to narrow categories:
- Mississippi, Hawaii, and South Dakota offer no blanket exemption.
- California limits the exemption to specific types of nonprofits such as volunteer fire departments and certain youth organizations.
- Georgia provides no general sales or use tax exemption, though hospitals and hospices are carved out.
- North Carolina requires nonprofits to pay sales tax upfront and then apply for semiannual refunds.
Even among states that do offer exemptions, some cover all mission-related purchases while others exempt only specific categories of goods. Check your state’s revenue agency before assuming any purchase is tax-free.
Which Nonprofits Qualify
501(c)(3) charities, religious organizations, and educational institutions are the most likely to qualify for state sales tax exemptions. Other classifications — 501(c)(4) social welfare organizations, 501(c)(6) trade associations, 501(c)(8) or 501(c)(10) fraternal organizations — often get different treatment. Some states extend exemptions to several 501(c) categories; others limit the benefit to 501(c)(3) entities. A handful of states allow exemptions for veterans’ organizations or volunteer fire companies regardless of their specific 501(c) designation. If your organization isn’t a 501(c)(3), don’t assume you’re either included or excluded. Verify with the state.
The Use Tax Trap on Out-of-State Purchases
Even nonprofits with valid exemption certificates run into use tax. When you buy something from an out-of-state seller who doesn’t collect your state’s sales tax — a common scenario with online purchases — your state expects you to self-report and pay the equivalent use tax.
Whether your purchase exemption also covers use tax depends on the state. In some, the same certificate covers both. In others they’re treated separately, and you may owe use tax on out-of-state purchases even when the same item would have been sales-tax-free bought locally. Verify the use tax rules alongside the sales tax exemption.
Selling: When a Nonprofit Has to Collect Sales Tax
In the majority of states, nonprofits that sell goods — branded t-shirts, coffee mugs, books, event tickets that include tangible items — must obtain a sales tax permit and collect tax from buyers just like any retailer. The exemption exists to support the mission, not to create a pricing advantage over for-profit shops selling similar merchandise. A charity running a year-round gift shop or online store is generally treated as a retail operation for sales tax purposes, regardless of where the proceeds go.
Thrift stores are a common point of confusion. Some states exempt sales of donated goods by qualifying charities; others require sales tax on every transaction, treating the store like any commercial secondhand shop. The variation is wide enough that you can’t generalize.
Occasional Fundraising Exceptions
Many states carve out exceptions for occasional or isolated fundraising events. The details vary, but the pattern is familiar: a state may allow a set number of tax-free fundraising days per year, exempt sales at events where all merchandise was donated, or waive collection when gross receipts stay below a threshold.
The key word is “occasional.” A bake sale twice a year looks very different from a weekly farmers’ market booth. Regularly conducted sales activities almost always trigger collection obligations. If your fundraising involves selling goods on any kind of recurring schedule, treat those sales as taxable unless you’ve confirmed a specific exception applies.
Online Sales and Economic Nexus
Nonprofits selling merchandise online face the same economic nexus rules as any other retailer. Since the Supreme Court’s 2018 decision in South Dakota v. Wayfair, states can require sellers to collect sales tax without a physical presence, once sales into that state exceed certain thresholds. The most common threshold is $100,000 in annual sales, though some states set it at $250,000 or $500,000, and a few also count the number of transactions.
Branded merchandise, event tickets, or publications shipped to buyers in multiple states can push a nonprofit past those thresholds. Exempt sales may still count toward the threshold in some states, meaning transactions where no tax is ultimately owed could trigger a registration obligation. Once you exceed the threshold in a state, you need to register for a sales tax permit there and begin collecting on taxable sales to that state’s customers.
UBIT: A Separate Federal Tax on Commercial Sales
Sales tax is a state issue. On top of it, nonprofits that engage in commercial activity may owe federal income tax on the profits. This is unrelated business income tax, and it applies when a nonprofit regularly conducts a trade or business that isn’t substantially related to its exempt purpose.2Internal Revenue Service. IRS Publication 598 – Tax on Unrelated Business Income of Exempt Organizations The IRS looks at three factors: whether the activity is a trade or business, whether it’s regularly carried on, and whether it’s substantially related to the mission. If all three point toward commercial activity, the net income is taxed at regular corporate rates.
Three exceptions keep many nonprofit sales out of UBIT:
- Activities where substantially all the work is done by unpaid volunteers.3Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business
- Sales where substantially all the merchandise was received as gifts or contributions. This is why many nonprofit thrift stores avoid UBIT.3Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business
- For 501(c)(3) organizations, a business carried on primarily for the convenience of members, students, patients, or employees. A hospital cafeteria serving staff and visitors is the classic example.3Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business
If your nonprofit has gross income of $1,000 or more from an unrelated business activity, you must file Form 990-T.4Internal Revenue Service. Instructions for Form 990-T It’s due by the 15th day of the fifth month after your tax year ends — May 15 for a calendar-year organization. The $1,000 threshold is based on gross income (gross receipts minus cost of goods sold), not net profit, so even modest commercial activity can trigger the filing requirement.
Records to Keep
On the purchase side, hold on to your exemption certificates, every vendor invoice showing tax-exempt purchases, and documentation tying each purchase to your exempt purpose. If the state later questions a transaction, the burden is on you to prove it furthered the mission.
On the sales side, keep records of all taxable sales, the tax collected, and your remittance filings. If you’re claiming a fundraising exception for occasional sales, document the dates, the nature of the event, and whether the merchandise was donated. States audit nonprofits less often than commercial businesses, but when they do, they expect organized records going back at least three to four years.