Could a nonprofit make Rhode Island tax-exempt purchases while awaiting its IRS 501(c)(3) determination and state exemption certificate, receive a conditional certificate, or obtain a refund for tax paid during review?

Plain-English summary

The nonprofit could not make tax-exempt Rhode Island purchases while it waited for its IRS determination and state exemption certificate. The Division required the applicant to submit an IRS 501(c)(3) determination letter, would not issue a conditional certificate, and would not refund sales tax paid during the review period.

Rhode Island's nonprofit exemption covered qualifying nonprofit educational institutions, churches, orphanages, and organizations operated exclusively for religious or charitable purposes. But the exemption was administered through an application to the Division of Taxation. The Division required an IRS determination letter as proof supporting the organization's claimed activities.

The ruling explained that describing an organization as a church or religious organization was not enough by itself. The applicant bore the burden of proving that it operated exclusively for the qualifying purpose, and the Tax Administrator could require the IRS determination as part of that proof.

An approved organization received a Rhode Island Certificate of Exemption. Under Regulation SU 07-48, the organization had to present a properly executed certificate to the vendor for the purchase to be treated as exempt. The certificate covered purchases made by the organization itself for its own purposes, not purchases by individual members.

The Division said a conditional certificate during review was not feasible and that a properly documented application could be reviewed quickly. It separately found no legal provision allowing a refund of sales tax paid between formation or application and issuance of the certificate. Until the certificate was issued and presented, the purchases remained taxable.

What this means for you

New nonprofits

Plan for sales and use tax during the application period. This ruling did not allow exemption based only on pending federal or state paperwork.

Churches and charitable organizations

Keep the IRS determination letter and Rhode Island exemption certificate with procurement records. The organization must make the purchase for its own qualifying purposes and provide the certificate to the vendor.

Vendors and bookkeepers

Do not treat a purchase as exempt merely because the buyer says it is a nonprofit or has an application pending. The ruling required the properly executed Rhode Island certificate for the transaction.

Common questions

Was the IRS 501(c)(3) letter required? Yes. The Division required it with the Rhode Island exemption application as proof of the claimed charitable, educational, or religious activities.

Could the Division issue a temporary or conditional certificate? No. The ruling said a conditional certificate during review was not feasible and that a properly documented application could be reviewed in a short period.

Could the nonprofit recover tax paid while the application was pending? No. The Division found no legal provision allowing a refund for purchases during the review process.

When could exempt purchasing begin? After the Division issued the Certificate of Exemption and the organization presented a properly executed certificate to the vendor.

Did the exemption cover purchases by members? No. Regulation SU 07-48 limited the exemption to purchases by the organization itself for its own purposes.

Citations and references

• R.I. Gen. Laws §§ 44-18-18 and 44-18-20 — sales and use taxes.
• R.I. Gen. Laws § 44-18-25 — taxability presumption and required exemption documentation.
• R.I. Gen. Laws § 44-18-30(5)(i) — exemption for qualifying nonprofit educational, religious, and charitable organizations.
• R.I. Gen. Laws § 44-1-4 — Tax Administrator's authority to administer and enforce the tax laws through rules and regulations.
• Regulation SU 07-48 — exempt-organization applications, certificates, and qualifying purchases.
• American Hoechst Corp. v. Norberg (R.I. 1983) — taxpayer's burden to prove a statutory exemption, as cited by the ruling.
• Church of Pan v. Norberg (R.I. 1986) — an organization's own characterization is not determinative, as cited by the ruling.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2016-02

Original ruling text

Ruling Request No. 2016-02

Ruling Request No. 2016-02

Request for Ruling Regarding the Taxability of Purchases Made by a Nonprofit Organization as it Awaits a Decision from the Internal Revenue Service on Their Application for Tax-Exempt Status.

Taxpayer requested a declaratory ruling to determine the taxability of purchases made by a nonprofit organization as it awaits a decision from the Internal Revenue Service on their application for tax-exempt status. R.I. Gen. Laws § 42-35-8 and Regulation DR 03-01 govern declaratory ruling requests.

Facts

The facts set forth herein are taken from the statement of facts presented in the request for ruling dated October 24, 2016.

R.I. Gen. Laws § 44-18-30 (5)(i) provides a sales tax exemption for sales made to and from the storage, use or other consumption in this state of tangible personal property by … “ educational institutions as defined in subdivision (18) not operated for a profit; churches, orphanages, and other institutions or organizations operated exclusively for religious or charitable purposes …”. This exemption is granted by the Tax Administrator based upon an application made by the qualifying organization to the Division of Taxation.

The application requires the organization include its 501(c) (3) determination letter from the Internal Revenue Service (IRS).

The organization may not make tax exempt purchases until a certificate is issued. Nor can the organization apply for a refund of taxes paid during the time between the application for a determination letter from the IRS and when the Tax exempt certificate is received from the Division of Taxation.

Ruling requested

Notwithstanding any ruling in any pending case to which the Division is a party, should an IRS determination letter be a prerequisite to obtaining tax exempt status under R.I. Gen. Laws § 44-18-30(5) (i). Also, could the Division of Taxation issue a conditional exemption certificate during the application and review process. And would the Division of Taxation permit tax exempt organizations to request a refund of sales taxes paid between the time of formation and issuance of an exemption certificate, limited to a twelve month period.

Pertinent Local Statutory and Regulatory Law

R.I. Gen. Laws §44-18-18 imposes a sales tax on all retail sales within the state. Furthermore, the state imposes a use tax under §44-18-20 on the storage, use or other consumption in this state of tangible personal property. Pursuant to R.I. Gen. Laws § 44-18-25, all gross receipts are presumed to be taxable until the taxpayer proves otherwise to the Tax Administrator. The burden of proving the contrary is on the person who makes the sale and the purchaser, unless the person who makes the sale takes from the purchaser a certificate indicating that the purchase was for resale. The certificate must be in the form that the Tax Administrator requires. Importantly, R.I. Gen. Laws §44-18-30 provides a list of specific exemptions to the sales and use tax in Rhode Island.

R.I. Gen. Laws § 44-18-30 (5)(i) provides a sales tax exemption for sales made to and from the storage, use or other consumption in this state of tangible personal property by … “ educational institutions as defined in subdivision (18) not operated for a profit; churches, orphanages, and other institutions or organizations operated exclusively for religious or charitable purposes …”.

Regulation SU 07-48 mirrors the exemption in R.I. Gen. Laws § 44-18-30(5) (i) and exempts from sales and use tax:

Sales to all other exempt organizations, including hospitals not operated for profit, educational institutions not operated for profit, churches, orphanages, and other institutions or organizations operated exclusively for religious or charitable purposes… but each such organization must file an application for and obtain from the Tax Administrator an exemption certificate covering such exempt organizations.

The exemption applies only to such purchases as are made by the organization itself for its own purposes and not to purchases by any of its members individually. An individual member or group of members belonging to such an exempt organization must pay the tax when purchasing meals, or other tangible personal property for their individual or collective use or consumption.

Finally, R.I. Gen. Laws § 44-1-4 authorizes and empowers the Tax Administrator to make rules and regulations, as the administrator may deem necessary for the proper administration and enforcement of the tax laws of this state.

Discussion

Pursuant to R.I. Gen. Laws § 44-1-4, the Tax Administrator along with the application for a certificate of exemption requires certain documents be supplied, by the organization, to substantiate the claimed tax exempt activities. One such document is an IRS 501(c) (3) determination letter. A taxpayer claiming entitlement to a statutory tax exemption has the burden of proving it falls within the terms of the statute. American Hoechst Corp v. Norberg (R.I. 1983). Therefore, when, as in the instant matter, a taxpayer seeks tax-exemption status pursuant to R.I. Gen. Laws § 44-18-30(5) (i) as a church or other religious organization, it must prove that it is operated exclusively for religious purposes. The mere fact that the claimant characterizes itself as such is not determinative. Church of Pan v. Norberg (R.I. 1986). In that the IRS already has a qualifying determination for an organization to prove its charitable, educational and religious activities, it falls under the Tax Administrators authority to require such determination letter before an exemption can be approved. Without such a requirement, the courts have stated that the proper test for determining whether an organization qualifies as “church” or other tax exempt entity, requires what has been described as a “multiple-factual-analysis test”.

An organization that has been approved for such tax exempt activities, receives a Certificate of Exemption from sales and use tax, which must be issued to vendors when purchasing tangible personal property. Regulation SU 07-48 states that the tax exempt transaction cannot be allowed unless a properly executed Certificate of Exemption be proffered by the organization to the vendor to satisfy the requirements of R.I. Gen. Laws § 44-18-25.

Ruling

Based on the facts provided, it is required that applicants, for tax-exempt status with this state, submit along with the application, their IRS 501(c)(3) determination letter in order to satisfy to the Tax Administrator proof of the charitable, educational or religious activities requested. It is not feasible to issue a conditional certificate during the review process. Once an application is received, with the proper documentation, the review process may occur in a short period of time, therefore eliminating the need for a conditional certificate. A refund of sales tax will not be allowed for purchases made during the tax exempt review process, in that no provision is allowed by law. As regulation SU 07-48 states that the tax exempt transaction cannot be allowed unless a properly executed Certificate of Exemption be proffered by the organization to the vendor to satisfy the requirements of R.I. Gen. Laws § 44-18-25.

This ruling is limited to the facts stated herein and may be relied upon by the Taxpayer and shall be valid unless expressly revoked because (1) the applicable statutory provisions of law are amended in a manner that requires a different result; (2) the underlying facts described herein materially change; or (3) a decision on point has been issued by the Rhode Island or Federal courts.

**Neena S. Savage

Acting Tax Administrator

December 13, 2016**