Does a grant-funded 501(c)(3) nonprofit count as a political subdivision that can buy free of Kansas sales tax?

Plain-English summary

A nonprofit 501(c)(3) corporation — funded about 90% by grants from the State of Kansas and the U.S. Government, plus private donations and city/United Way funds — provides all of its services to clients free of charge. It asked whether its purchases are taxable, or whether it should be tax-exempt, and specifically whether being mainly grant-funded would make it a "political subdivision" of Kansas.

The exemption it asked about. "Kansas law exempts from sales and compensating tax all direct purchases by political subdivisions of the state of Kansas. K.S.A. 79-3606(b)." A "political subdivision" is "any municipality, agency or subdivision of the state which is, or shall hereafter be, authorized to levy taxes upon tangible property within the state or which certifies a levy" to such an entity. K.S.A. 79-3602(n).

The holding. "It is the opinion of the Kansas Department of Revenue that your organization does not meet [the] requirements of the law to be regarded as a 'political subdivision' of the state of Kansas. Based on the information as contained in your letter I am unaware of any other statutory exemption for your organization. Your organization is required to pay sales or compensating tax on purchases [of] tangible personal property or taxable services."

Bottom line: grant funding — even overwhelmingly government grant funding — does not make a nonprofit a political subdivision. Without political-subdivision status or another statutory exemption, the organization pays sales or use tax on its purchases.

What this means for you

Government grant funding is not political-subdivision status

The test for a "political subdivision" is the power to levy property taxes (or to certify a levy) — not where the organization's money comes from. A nonprofit that lives on state and federal grants is still a private nonprofit, not a political subdivision.

501(c)(3) status does not exempt Kansas purchases

Federal income-tax exemption under section 501(c)(3) is an IRS matter. It does not, by itself, exempt an organization's purchases from Kansas sales or use tax; a separate Kansas statutory exemption is required.

Providing free services does not change the result

That all of the organization's services to clients are free, and that its purchases are used for clients, did not create an exemption. The Department found no statutory basis to exempt the organization's purchases.

Sales or compensating use tax applies

The organization must pay Kansas sales tax on taxable in-state purchases, or compensating use tax on taxable purchases where Kansas sales tax was not collected. Budget for tax on tangible personal property and taxable services.

Common questions

Q: Does being funded mostly by government grants make us a political subdivision?
A: No. The Department held that grant funding does not satisfy the definition of "political subdivision," which turns on the authority to levy property taxes, not the source of funds.

Q: We are a 501(c)(3) — aren't our purchases exempt?
A: Not automatically. 501(c)(3) status is federal; it does not exempt purchases from Kansas sales or use tax, and the Department found no other Kansas exemption for the organization.

Q: Our services are all free — does that matter?
A: No. Providing free services to clients did not create an exemption. The organization must pay sales or compensating use tax on its taxable purchases.

Citations and references

• K.S.A. 79-3606(b) — exempts from sales and compensating tax the direct purchases of the state and its political subdivisions used exclusively for those purposes.
• K.S.A. 79-3602 — defines "political subdivision" (subsection (n)); a grant-funded nonprofit without the power to levy property taxes is not one.
• K.A.R. 92-19-59 — the regulation authorizing private letter rulings; this ruling was issued under it and binds the Department only as to the requesting taxpayer.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-119

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

May 21, 1999

XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXX

Dear Sirs:

I have been asked to respond to your letter dated May 5, 1999. In it, you ask for guidance in the application sales tax.

In your letter you stated:

XXXXXXXXXXXXX is a non-profit 501(c)(3) exempt corporation which is primarily (90%) funded by grants from the State of Kansas and the U.S. Government. We also receive private donations and funds from the City of Manhattan and United Way of Riley County and United Way of Junction City/Geary County. All services of XXXXXXXXX are provided to clients free. All of the purchases we make are used either directly by clients or indirectly for clients. Are these purchases subject to sales tax? Or should we be tax-exempt from payment of sales tax? Would we be considered a “political subdivision” of the state of Kansas due to grant being the main source of our income?

Kansas law exempts from sales and compensating tax all direct purchases by political subdivisions of the state of Kansas. K.S.A. 79-3606(b). The term “political subdivision” is defined as “any municipality, agency or subdivision of the state which is, or shall hereafter be, authorized to levy taxes upon tangible property within the state or which certifies a levy to a municipality, agency or subdivision of the state which is, or shall hereafter be, authorized to levy taxes upon tangible property within the state.” K.S.A. 79-3602(n).

It is the opinion of the Kansas Department of Revenue that your organization does not meet requirements of the law to be regarded as a “political subdivision” of the state of Kansas. Based on the information as contained in your letter I am unaware of any other statutory exemption for your organization. Your organization is required to pay sales or compensating tax on purchases or tangible personal property or taxable services.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 05/27/1999 Date Modified: 10/11/2001

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