Beginning July 1, 2018, nonprofits will be required to collect and remit 6% sales tax to the Kentucky Department of Revenue on “admissions,” which includes tickets to charitable fundraising events, gym membership fees, facility rental fees, and entry fees for charity tournaments. Nonprofits will also be required to collect and remit sales tax on items it sells at events and charitable auctions.
This new mandate comes as a result of H.B. 487, passed this April, which imposed Kentucky’s 6% sales tax on sales of “admissions,” which is defined as “the right of entrance to a display, program, sporting event, music concert, performance, play, show, movie, exhibit, fair, or other entertainment or amusement event or venue” as well as “the privilege of using facilities or participating in an event or activity.”
H.B. 487 wasn’t entirely responsible for the policy change, however; in March, the Kentucky Supreme Court ruled that the charitable exemption from tax found in Section 170 of the Kentucky Constitution applied only to property taxes, not to sales and use tax. See Dep’t of Revenue v. Interstate Gas Supply, Inc., 2016-SC-000281-DG (March 22, 2018). Unsurprisingly, Department representatives have stated they were left with little choice but to enforce H.B. 487’s sales tax collection and remittance requirements against nonprofits.
Many nonprofits were unaware of the change, though organizations like the Kentucky Nonprofit Network and the Center for Nonprofit Excellence have been working
with the Department to disseminate information and ensure stakeholders are familiar with the policy. The change appears to apply not only to 501(c)(3) nonprofits but other types of nonprofits as well. Importantly, pursuant to KRS 139.495, 501(c)(3) organizations remain exempt from paying sales or use tax on their purchases, so long as the item purchased is used in an organization’s educational, charitable, or religious function.
The Department has affirmatively stated that the tax applies to ticket sales for fundraising events. The tax applies to the full amount charged for the event, even if part of the ticket price is designated as a charitable donation. The tax would also apply to the full price paid for a silent auction item, even if the value of the item was lower than what was paid at auction. The Department has stated that the tax would not apply to summer day camps or after school programs as long as they are educational in nature.
Note that under KRS 139.496, the first $1,000 of sales made in any calendar year by nonprofit organizations not engaged in the business of selling and not conducting regular selling activities in competition with private business are not subject to tax. However, this relatively low threshold is limited to garage or yard sales by individuals and families and fundraising events held by nonprofit civic, governmental, or other nonprofit organizations.
What does this mean for your nonprofit? If your organization holds fundraising events which gross over $1,000 in ticket sales each year, you should consult with a tax professional to determine how the new law applies to your organization and what requirements you may have under it. This could include:
- Registering for a sales and use tax account with the Department
- Purchasing sales tax software, hiring additional staff, training staff, or retaining a third-party provider to manage the sales tax collection and remittance process
- Collecting 6% sales tax on sales of admissions to events or facilities, including tickets to charitable fundraisers, certain memberships or other recreational fees and remitting the amount collected to the Department on a monthly basis
- Collecting and remitting 6% sales tax on sales of tangible personal property, including silent auction items or merchandise sold to raise funds
- Changing advertisements for events or memberships and/or invoices to separately state the admissions price and the sales tax
- Advising donors that federal charitable tax deductibility does not include amount paid for sales tax
Again, nonprofits are urged to consult with a tax professional to develop a plan for implementing collection responsibilities. Sales tax collection is a serious responsibility; organizations that fail to collect and remit such tax from their customers or donors could be left paying the difference out of their own pocket. Perhaps more startling, under KRS 139.185, Kentucky can even pursue collection activity against the corporate officers of an organization that fails to properly pay the tax if those officers were responsible for financial oversight of the organization. While the Department has promised to issue more guidance on this topic, nonprofits are advised to do all they can to prepare for this huge change in Kentucky’s tax law.