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