Did federal nonprofit status and fundraising for youth programs qualify this organization for a Florida sales-tax exemption certificate?

Subject

Qualifications for a Consumer's Certificate of Exemption

Plain-English summary

The nonprofit did not qualify for a Florida Consumer's Certificate of Exemption under either exemption it claimed. Its federal section 501(c)(3) status and nonprofit incorporation satisfied only part of the charitable-institution test.

For the charitable-fundraiser route, the Department treated fundraising costs as operational expenditures. The financial statement showed that approximately 18% of total expenditures went to the recipient foundation, not more than 50% as required by the Department's primary-function test. The foundation's existing exemption was also under the separate provision for organizations benefiting minors, not as a charitable institution.

The youth-program exemption did not apply either. Although the corporation contributed money supporting the foundation's youth programs, the corporation itself did not provide the educational, cultural, recreational, or social activities to minors.

What this means for you

Federal tax-exempt status does not automatically create a Florida sales-tax exemption. A fundraising organization must meet the specific Florida requirements for the exemption it claims, including the operational-expenditure test, and an organization claiming the minors provision must itself provide the qualifying activities.

Common questions

Q: Was section 501(c)(3) status enough? No. It established nonprofit status, but the organization still had to satisfy Florida's separate statutory requirements.

Q: Why did the charitable-fundraiser claim fail? The ruling says only approximately 18% of total expenditures was given to the foundation. The applicable rule required more than 50% of operational expenditures to go toward a qualified charitable service, and fundraising expenses counted in the denominator.

Q: Did the foundation's exemption make the corporation eligible? No. The foundation held an exemption under the provision for organizations benefiting minors, not under the charitable-institution provision. The Department did not need to decide whether the foundation could separately qualify as a charitable institution because the corporation failed the spending test anyway.

Q: Why did the youth-program exemption fail? The corporation financially supported youth programs, but it did not directly provide the activities to minors.

Citations and references

• Fla. Stat. § 212.08(7)(o) — charitable-institution exemption
• Fla. Stat. § 212.08(7)(n) — exemption for qualifying organizations providing benefits to minors
• Fla. Admin. Code r. 12A-1.001(3)(g) — charitable organizations and the primary-function expenditure test
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-043

Original ruling text

SUMMARY

A nonprofit corporation which holds an exemption from
federal income tax under s. 501(c)(3), I.R.C., and which
sponsors fundraisers for another nonprofit organization,
does not qualify for a Consumer's Certificate of Exemption.
The nonprofit corporation does not qualify as a "charitable
organization" because it does not contribute more than 50%
of its operational expenses to its recipient and the
recipient is not a "charitable organization" as required by
s. 212.08(7)(o), F.S., and Rule 12A-1.001(3)(g), F.A.C.
The nonprofit corporation does not qualify as an
organization providing special educational, cultural,
recreational, and social benefits to minors because even
though the corporation contributes funds which support
youth programs, the corporation itself does not provide the
activities as required by s. 212.08(7)(n), F.S.

Jun 27, 1997

Re: TAA 97A-043
Sales Tax
Qualifications for a Consumer's Certificate of Exemption
Sections 212.08(7)(o), 212.08(7)(n), Florida Statutes
XXX (Foundation)
F.E.I. XX

Dear :

This response is in reply to your letter dated August 9,
1996, in which you request, on behalf of your client,
Corporation, the issuance of a Technical Assistance Advisement
pursuant to s. 213.22, F.S., concerning Corporation's
qualifications for a Consumer's Certificate of Exemption. Your
request has been carefully examined and the Department finds it
to be in compliance with the requisite criteria set forth in
Rule Chapter 12-11, F.A.C. Therefore, the Department is herewith
granting your request for the issuance of a TAA and the ensuing

discourse shall embody said ruling.

Your letter of August 9, 1996, provides, in pertinent part,
the following information:

1. Description of the Corporation and Its Purpose

The corporation was established pursuant to Chapter 617,
Florida Statutes on August 31, 1994, and received an
advance ruling from the Internal Revenue Service ("IRS") on
February 16, 1995, (recognizing it as described in section
501(c)(3) of the Internal Revenue Code of 1986). Copies of
the Corporation's Articles of Incorporation, and the
advance ruling are attached hereto as Exhibits 1 and 2.

The IRS recognized that the Corporation possessed several
charitable purposes; however, since its inception the
Corporation has focused its efforts exclusively on
financially supporting one segment of the operations of the
[Foundation]... The DOR has issued a Consumer's Exemption
Certificate to the Foundation.

Each year, the Corporation donates a large portion of its
net income to the Foundation. A copy of the Corporation's
Profit and Loss Statement for the 1995 calendar year is
attached....

In your letter, you take the position that Corporation
should receive exemption as a "charitable institution" pursuant
to Section 212.08(7)(o)2b., F.S. or as an organization providing
special educational, cultural, recreational, and social benefits
to minors, pursuant to Section 212.08(7)(n), F.S. Each of these
exemptions will be discussed below.

Section 212.08(7)(o)2.b., F.S.: Charitable Institutions

As to the "charitable institutions" exemption, you state
the following:

Since the Foundation currently holds a Consumer['s]
Certificate of Exemption, it can be assumed that it is a

charitable service[;] the only question remaining is
whether it provides this charitable service as its sole or
primary function. A review of the Corporation's profit and
loss statement for 1995 clearly reveals that more than 50%
of its operational expenditures are geared toward
charitable services: without sponsoring the... Speakers
Series, the Corporation would be in no position to benefit
a client population which is disadvantaged or suffers a
hardship; the corporation's grants are earmarked for
participation in the Florida Prepaid College Fund. The
Corporation operates in ... an affluent area in which
scores of nonprofit entities must compete for every
philanthropic dollar. In order to set itself apart from
other nonprofit entities (and to benefit the community by
bringing eminent speakers to the area), the Corporation
sponsors the speakers series.

Law and Discussion--"Charitable Institutions"

The statute granting the charitable institution exemption
contains a number of requirements which must be met before the
exemption will be allowed. These requirements, pursuant to
statute, are "strictly defined, limited, and applied." See s.
212.08(7)(o)2., F.S.

Section 212.08(7)(o)2.b., Fla. Stat., provides for three
broad categories of "charitable institutions." Each category
must meet requirements set forth in the statute. These
categories are as follows:

1. "Providers"--these organizations directly provide one or
   more of the services listed in the statute;

2. "Fundraisers"--these organizations provide funds to
   "charitable institutions";
   and,

3. "Volunteers" --these organizations provide volunteers to
   "charitable institutions."

You have stated in your letter that Corporation is a

fundraiser for Foundation. Thus, only those statutory
requirements applicable to "fundraisers" for "charitable
institutions" will be examined herein.

Corporation, as a "fundraiser" under the "charitable
institutions" exemption statute, must meet the following
requirements:

A. Non Profit Corporation must be a non-profit entity.
Since Corporation holds IRC Section 501(c)(3) status and was
organized under Chapter 617, Florida Statutes, as a non-profit
corporation, Corporation meets this requirement.

B. Recipient of Funds must be "charitable institution" The
recipient of the funds must hold exemption as a "charitable
institution" under Florida law, or, if the organization does not
hold current exemption as a "charitable institution," it would
be entitled to receive such exemption, if it applied for such
exemption.

The recipient of Corporations's funds, Foundation, does not
hold current exemption under Florida law as a "charitable
institution." Foundation's consumer's certificate of exemption
was issued under Section 212.08(7)(n), F.S., rather than Section
212.08(7)(o)2.b., F.S. In order to make a determination whether
Foundation would qualify for the "charitable institutions"
exemption if it were to apply for that exemption, substantial
additional information would be needed. However, this is
unnecessary, because, as discussed immediately below in
paragraph C., even if Foundation would qualify as a "charitable
institution," Corporation does not meet the "sole or primary
function" test.

C. 51% Test The "sole or primary" function of the applicant
must be to raise funds for "charitable institutions." If we
were to assume that Foundation is a "charitable institution"
under Florida law, Corporation would still not qualify for the
"charitable institutions" exemption as a fundraiser because it
does not meet the "sole or primary" function test.

Rule 12A-1.001(3)(g)3.e., F.A.C., defines "sole or primary

function" for organizations (other than hospitals) as spending
in excess of 50% of its operational expenditures towards a
"qualified charitable service." Since Corporation is seeking to
qualify for exemption as a fundraiser, it must provide more than
50% of its operational expenditures to a charitable institution.
Pursuant to the financial statement provided, total expenditures
for 1995 were $XX. The amount given to Foundation was $XX or
approximately 18% of total expenditures. Thus, even if we were
to assume that Foundation is a "charitable institution," the
amount given Foundation is insufficient to satisfy the "sole or
primary function" test.

Corporation argues that the fundraising expenses should not
be included in "operational expenditures." However, the
Department's historical and current position, one that has been
supported in litigation, is that operational expenditures do
include fundraising expenses. See Junior League of Tampa, Inc.
v. Department of Revenue, DOAH Case No. 95-5635, Final Order
Entered April 8, 1997. A copy of this case is provided with this
TAA.

Section 212.08(7)(n), F.S.: Organizations Providing Special
Educational, Cultural, Recreational, and Social Benefits to
Minors:

As to the exemption granted in Section 212.08(7)(n), F.S.
for organizations providing special educational, cultural,
recreational, and social benefits to minors (referred to herein
as "exemption for minors"), you state, in pertinent part:

For the same reasons the Corporation is a "charitable
institution" under Rule 12A-1.001(3)(g), F.A.C., the
corporation should be found to be exempt under Rule 12A1.001(3)(k), F.A.C. The Corporation has as its primary
purpose the educational development of minors, and it gears
its operations toward that purpose.

Law and Discussion--Exemption for Minors

Section 212.08(7)(n), F.S., provides:

(n) Organizations providing special educational, cultural,
recreational, and social benefits to minors. --There shall
be exempt from the tax imposed by this part nonprofit
organizations which are incorporated pursuant to chapter
617 or which hold a current exemption from federal
corporate income tax pursuant to s. 501(c)(3) of the
Internal Revenue Code the primary purpose of which is
providing activities that contribute to the development of
good character or good sportsmanship, or to the educational
or cultural development, of minors. This exemption is
extended only to that level of the organization that has a
salaried executive officer or an elected nonsalaried
executive officer. [E.S.]

In regard to the Corporation's qualifications for the
exemption provided by Section 212.08(7)(n), F.S., the exemption
is extended to organizations whose primary function is directly
providing activities that provide special educational, cultural,
recreational, and social benefits to minors. Corporation may
contribute funds which support the youth programs operated by
Foundation, but the Corporation itself is not providing the
activities. Therefore, the Corporation would not qualify for
the exemption under s. 212.08(7)(n), F.S.

CONCLUSION

Based on the above foregoing analysis, Corporation does not
qualify for a Consumer's Certificate of Exemption as either a
"charitable institution" or as an organization providing special
educational, cultural, recreational, and social benefits to
minors.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than

expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Bonnie Everton
Senior Tax Specialist

/e
Enclosure
Cont. #26458