When did paying an individual from nonprofit sales proceeds cause a South Carolina nonprofit to lose its sales-tax exemption?

Plain-English summary

The South Carolina Department of Revenue explained when a qualifying nonprofit's sales of tangible property lost the exemption because a benefit inured to an individual. The ruling focused on compensation tied directly to a percentage of sale proceeds.

Artwork donated to the nonprofit or purchased outright for resale could be sold exempt if net proceeds were used exclusively for the organization's exempt purpose. But artwork sales became taxable when the artist received a percentage of the nonprofit's selling price.

The same line applied to a gift shop or special event. Volunteers and employees receiving reasonable salary or hourly wages did not destroy the exemption on the stated facts. Paying a manager or promoter a percentage of sales proceeds did, making those sales taxable.

What this means for you

Nonprofit fundraisers

Confirm that the organization is one of the statutory qualifying types, that net proceeds serve only exempt purposes, and that no sales-linked benefit goes to an individual.

Artists, managers, and promoters

The method of payment mattered. The ruling treated a percentage of sales as private inurement, while a reasonable salary or hourly wage not based on proceeds could preserve the exemption.

Accountants and boards

This exemption covered qualifying purchases for resale and the nonprofit's own sales. It did not exempt computers, furniture, supplies, or other property the organization bought for use.

Common questions

Q: Could a nonprofit sell donated artwork tax-free?
A: Yes, if it qualified under the statute and used net proceeds exclusively for its exempt purpose.

Q: What if the nonprofit bought the artwork before reselling it?
A: Its purchase was a wholesale sale for resale, and its later sale could qualify for exemption under the same conditions.

Q: What if the artist received a percentage of the sale price?
A: The ruling treated the sale as taxable because a benefit inured to the artist.

Q: Could a nonprofit pay gift-shop employees?
A: Yes. Reasonable salary or hourly wages not based on shop proceeds did not defeat the exemption in the described scenario.

Q: What if an event promoter received a percentage of gross sales?
A: The event's tangible-property sales were taxable under the ruling.

Citations and references

• S.C. Code §§ 12-36-910 and 12-36-90 (sales tax and gross proceeds)
• S.C. Code § 12-36-2120(41) (sales by listed nonprofits when net proceeds serve exempt purposes and no benefit inures to an individual)
• S.C. Code § 12-37-220 (organization categories referenced by the exemption)
• SC Revenue Ruling 04-8 (additional nonprofit-sale and auctioneer examples referenced by this ruling)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR09-8.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #09-8

SUBJECT:

Sales by Nonprofit Organization – Loss of Exemption Because
Benefit Inures to an Individual
(Sales & Use Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

REFERENCES:

S. C. Code Ann. Section 12-36-910 (2000, Supp. 2008)
S. C. Code Ann. Section 12-36-1110 (Supp. 2008)
S. C. Code Ann. Section 12-36-90 (2000, Supp. 2008)
S. C. Code Ann. Section 12-36-2120 (2000, Supp. 2008)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2008)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public and to Department personnel. It is an advisory opinion
issued to apply principles of tax law to a set of facts or general
category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court
decision, or another Departmental advisory opinion.

Questions:
What are the sales tax implications of the following sales by nonprofit organizations?
Scenario #1: A nonprofit organization is selling artwork of local and national
artists to raise money for its charitable purposes. The nonprofit organization is of
a type that qualifies for the exemption from the sales tax under Code Section 1236-2120(41) for its sales of tangible personal property (e.g., artwork). The
nonprofit organization will obtain the artwork from the artists in the following
manner
(a) The artist will donate the artwork to the nonprofit organization.
(b) The artist will sell the artwork to the nonprofit organization.
(c) The nonprofit organization agrees to pay the artist a percentage of the sale
price the nonprofit organization receives from its sale of the artwork.

Scenario #2: A nonprofit organization is selling tangible personal property at a
gift shop to raise money for its charitable purposes. The nonprofit organization is
of a type that qualifies for the exemption from the sales tax under Code Section
12-36-2120(41) for its sales of tangible personal property. The nonprofit
organization will operate the gift shop in one of the following ways:
(a) Volunteers will manage and operate the gift shop.
(b) The nonprofit organization will hire a manager and employees to operate
the gift shop and pay such persons a salary or hourly wage.
(c) The nonprofit organization will hire a person to manage and operate the gift
shop in return for a percentage of the sale proceeds.
Scenario #3: A nonprofit organization is selling tangible personal property at a
special event to raise money for its charitable purposes. The nonprofit
organization is of a type that qualifies for the exemption from the sales tax under
Code Section 12-36-2120(41) for its sales of tangible personal property. The
nonprofit organization will conduct the special event in one of the following
ways:
(a) Volunteers will organize the special event and make the sales at the special
event.
(b) The nonprofit organization will hire a promoter to organize and conduct the
event and the promoter will be paid a percentage of the gross proceeds the
nonprofit organization receives from the sales of tangible personal property at
the special event.
Conclusions:
Sales of tangible personal property by nonprofit organizations listed in Code Section 1236-2120(41) are exempt from the sales tax, provided “the net proceeds [from the sales]
are used exclusively for exempt purposes and no benefit inures to any individual.
Therefore,
In Scenario #1, since the nonprofit organization is of a type that qualifies for the
exemption from the sales tax under Code Section 12-36-2120(41) for its sales of
tangible personal property (e.g., artwork),
(a) sales of artwork by the nonprofit organization that were donated by the
artist are exempt from the sales tax under Code Section 12-36-2120(41),
provided the net proceeds from the sale are used exclusively for the nonprofit
organization’s exempt purpose.

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(b) sales of artwork by the nonprofit organization that were purchased from an
artist are exempt from the sales tax under Code Section 12-36-2120(41),
provided the net proceeds from the sale are used exclusively for the nonprofit
organization’s exempt purpose. In addition, the purchase of the artwork from
the artist is a sale for resale (wholesale sale) not subject to the sales tax.
(c) sales of artwork by the nonprofit organization in which the artist will
receive a percentage of the sales price received by the nonprofit organization
are subject to the sales tax. These sales do not qualify for the exemption in
Code Section 12-36-2120(41) since a benefit from the sales inure to the artist.
In Scenario #2, since the nonprofit organization is of a type that qualifies for the
exemption from the sales tax under Code Section 12-36-2120(41) for its sales of
tangible personal property,
(a) sales of tangible personal property at a gift shop that is managed and
operated by volunteers are exempt from the sales tax under Code Section 1236-2120(41), provided the net proceeds from the sales are used exclusively for
the nonprofit organization’s exempt purpose.
(b) sales of tangible personal property at a gift shop where a nonprofit
organization hires a manager and employees to operate the gift shop and pay
such persons a salary or hourly wage are exempt from the sales tax under Code
Section 12-36-2120(41), provided the net proceeds from the sale are used
exclusively for the nonprofit organization’s exempt purpose and the salary and
wages of the manager and employees are reasonable and are not based on the
sales proceeds at the gift shop.
(c) sales of tangible personal property at a gift shop where a nonprofit
organization hires a person to manage and operate the gift shop in return for a
percentage of the sale proceeds are subject to the sales tax. These sales do not
qualify for the exemption in Code Section 12-36-2120(41) since a benefit from
the sales inure to the person managing and operating the gift shop in return for
a percentage of the sale proceeds.
In Scenario #3, since the nonprofit organization is of a type that qualifies for the
exemption from the sales tax under Code Section 12-36-2120(41) for its sales of
tangible personal property,
(a) sales of tangible personal property at a special event that volunteers
organized and at which volunteers made the sales are exempt from the sales tax
under Code Section 12-36-2120(41), provided the net proceeds from the sale
are used exclusively for the nonprofit organization’s exempt purpose.
(b) sales of tangible personal property at a special event for which the
nonprofit organization hired a promoter to organize and conduct and for which

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the promoter will be paid a percentage of the gross proceeds the nonprofit
organization receives from the sales of tangible personal property at the special
event are subject to the sales tax. These sales do not qualify for the exemption
in Code Section 12-36-2120(41) since a benefit from the sales inure to the
promoter managing and conducting the special event in return for a percentage
of the sale proceeds.
Discussion:
Code Section 12-36-910 imposes “a sales tax, equal to [six]1 percent of gross proceeds of
sales, … upon every person engaged . . . within this State in the business of selling
tangible personal property at retail.”
The measure of the sales tax, “gross proceeds of sales,” is defined at Code Section 12-3690, in part, as:
... the value proceeding or accruing from the sale, lease, or rental of
tangible personal property.
(1) The term includes:

(b)

the proceeds from the sale of tangible personal property
without any deduction for:
(i) the cost of goods sold;
(ii) the cost of materials, labor, or service;
(iii)interest paid;
(iv)losses;
(v) transportation costs;

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Code Section 12-36-1110, which increased the state sales and use tax rate from 5% to 6% on June 1,
2007, states:
Beginning June 1, 2007, an additional sales, use, and casual excise tax equal to one
percent is imposed on amounts taxable pursuant to this chapter, except that this additional
one percent tax does not apply to amounts taxed pursuant to Section 12-36-920(A), the
tax on accommodations for transients, nor does this additional tax apply to items subject
to a maximum sales and use tax pursuant to Section 12-36-2110 nor to the sale of
unprepared food which may be lawfully purchased with United States Department of
Agriculture food coupons. (Emphasis added.)

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(vi)manufacturers or importers excise taxes imposed by the
United States; or
(vii) any other expenses.
Code Section 12-36-2120(41) exempts from the sales and use tax sales made by certain
nonprofit organizations. The statute exempts:
items sold by organizations exempt under Section 12-37-220 A(3) and (4) and
B(5), (6), (7), (8), (12), (16), (19), (22), and (24) if the net proceeds are used
exclusively for exempt purposes and no benefit inures to any individual. An
organization whose sales are exempted by this item is also exempt from the retail
license tax provided in Article 5 of this chapter;
Nonprofit organizations coming within the exemption are:
(1)

public libraries and churches;

(2)

charitable trusts and foundations used exclusively for charitable and public
purposes;

(3)

The American Legion, the Veterans of Foreign Wars, the Spanish American
War Veterans, the Disabled American Veterans, and Fleet Reserve Association
or any similar Veterans Organization chartered by the Congress of the United
States;

(4)

The Young Women's Christian Association, Young Men's Christian Association
and the Salvation Army;

(5)

The Boy's and Girl's Scouts of America;

(6)

The Palmetto Junior Homemakers Association, the New Homemakers of South
Carolina, the South Carolina Association of Future Farmers of America and the
New Farmers of South Carolina;

(7)

Any religious, charitable, eleemosynary, educational, or literary society,
corporation, or other association;

(8)

Volunteer Fire Departments and Rescue Squads;

(9)

All community owned recreation facilities opened to the general public and
operated on a nonprofit basis; and,

(10) nonprofit or eleemosynary community theater companies, symphony orchestras,
county and community arts councils and commissions and other such
companies, which is used exclusively for the promotion of the arts.

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Based on the above, sales of tangible personal property by nonprofit organizations listed
in Code Section 12-36-2120(41) are exempt from the sales tax, provided
(1) “the net proceeds [from the sales] are used exclusively for exempt purposes”
and
(2) “no benefit inures to any individual.”
Therefore, in considering the three scenarios set forth in the “Questions” section of this
advisory opinion, a nonprofit organization of a type that qualifies for the exemption from
the sales tax under Code Section 12-36-2120(41) for its sales of tangible personal
property will lose that exemption and owe the sales tax with respect to:
(1) sales of artwork by the nonprofit organization in which the artist will receive a
percentage of the sales price received by the nonprofit organization;
(2) sales of tangible personal property at a gift shop where a nonprofit
organization hires a person to manage and operate the gift shop in return for a
percentage of the sale proceeds; and
(3) sales of tangible personal property at a special event for which the nonprofit
organization hired a promoter to organize and conduct and for which the promoter
will be paid a percentage of the gross proceeds the nonprofit organization receives
from the sales of tangible personal property at the special event.
For more detailed information concerning the three scenarios, see the “Conclusion”
section of this advisory opinion.

Note: For additional information on this exemption (including examples of auctioneers
selling tangible personal property for a nonprofit organization), see SC Revenue Ruling

04-8. The exemption discussed in this advisory opinion, as well as SC Revenue Ruling

04-8, only applies to purchases by nonprofit organizations for resale and sales by

nonprofit organizations. Purchases of property used by such nonprofit organizations (i.e.,
computers, furniture, supplies, etc.) do not come within the exemption in Code Section
12-36-2120(41).
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director
June 16
, 2009
Columbia, South Carolina

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