There is a common misconception fraternities, sororities, clubs, associations and other non-profit groups are not required to pay taxes given their nonprofit status. Unfortunately, this assumption is incorrect. In fact, they are required to pay sales tax on their purchases in several different states, and the definition of what qualifies has expanded to include software.
Non-profit taxes - generally
Fraternities, sororities, clubs, associations and other non-profit groups are typically exempt from paying federal income tax if they maintain their tax-exempt status and they file their IRS Form 990 each year. These organizations receive this federal tax exemption as a result of their 501(c)(7) status with the IRS.
Unfortunately, that 501(c)(7) status only applies to federal income tax exemptions. Each state sets their own tax laws.
It is positive that most states also provide an exemption to 501(c)(7) organizations so they do not have to pay state income taxes. However, some states (not all) expect 501(c)(7) organizations, to pay state sales tax on items they purchase.
Non-profits and taxes – sales and use tax
When a consumer makes a purchase, the consumer often pays for the cost of the product or service being purchased plus an additional sales tax, calculated as a percentage of the purchase price. The specific percentage charged varies by state, and in some cases, county or city.
For example, within the State of Georgia, there is a 4.0% sales tax that is paid to the state, but each county and jurisdiction can charge an additional sales tax. As a result, most people making a purchase in Georgia pay sales tax between 6.0% to 8.9% depending on where you make the purchase. You will pay more or less in taxes depending on where you make a particular purchase.
In many states, fraternities, sororities, clubs, associations, etc. are required to follow the rules and pay sales tax just like any other consumer or business making a purchase. Again, the State of Georgia provides some limited sales tax exemptions for very specialized charitable organizations, but fraternities, sororities, clubs, etc. are not one of them.
The State of Connecticut specifically calls out fraternal organizations as not being exempt from sales tax. California also specifically mentions fraternal organizations, and explains sales tax must be paid for most purchases.
Each state has different rules which makes this whole situation especially complicated.
If a chapter, club, group, or association is exempt from paying sales tax, it should have a tax-exempt certificate from the state and possibly the city or county where the organization maintains its mailing address. If the organization does not have an exemption certificate, it likely is required to pay sales tax on purchases it makes.
Sales Tax on Services & Software
To make matters even more complicated, states, counties and cities only collect sales tax on certain purchases. Most of the time they collect sales tax on tangible purchases like clothing or a car. In addition, historically, states could only collect sales tax on businesses or sellers of goods that maintained a physical presence in the particular state.
In 2018, the United States Supreme Court issued an opinion in a case titled South Dakota vs. Wayfair, Inc. The Court’s decision significantly changed the rules about sales tax. Among other things, the decision allowed states to tax remote sales where the seller of the goods resided in a different state.
This opened a whole new opportunity for states to generate additional sales tax revenue. Based on this decision and the flurry of news laws states created after the court case, if someone lives in South Carolina and buys something from an Amazon seller located in Arizona, South Carolina can charge sales tax on that purchase.
In addition, the laws and definitions of products and services changed. In many cases, states expanded their definitions to include software subscription purchases. Texas classifies this as data processing services. The State of Washington refers to it as information technology products and services. Both intend to collect sales tax on anyone purchasing data processing services from a third party.
As a result, even though Netflix’s corporate headquarters is in California and they sell a digital subscription to access content on your TV, consumers in Oregon and every state outside of California may now be paying sales tax on their Netflix subscription based on the rules of their particular city, county and state.
Based on the 2018 Supreme Court decision and various new laws put into effect, software companies around the world are now navigating a complex web of city, county and state laws to determine when sales tax is supposed to be collected.
Sales Tax and OmegaFi’s Software
“Like Netflix and every software company, OmegaFi is also responsible for complying with this law,” explained OmegaFi CEO Fred Maglione. “More importantly, we want to take care of our customers and make sure our customers do not violate their legal obligation to pay taxes on the purchases they make with us.”
As a result of these new laws, requirements and obligations, OmegaFi will begin collecting sales tax on behalf of its customers where required by law.
OmegaFi customers with a mailing address in Arizona, Massachusetts, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Washington State and Washington DC will likely be charged sales tax to comply with the taxing authorities in those states. As laws change, additional states may be added or removed.
“I sincerely wish we did not have to take this action,” commented Maglione, “but we will do everything we can to comply with these new laws and help our customers comply as well.”
The specific tax amount customers will pay will vary based upon the requirements of their city, county and state and the product they purchase from OmegaFi. In most cases, OmegaFi estimates the sales tax to be between 0.0% and 9.0%. (Remember, sales tax is not required in every state). Customers will see the sales tax amount on their monthly invoice and within the various OmegaFi apps they use.
Organizations can look up the sales tax rate in their location by visiting https://www.avalara.com/taxrates/en/calculator.html.
Organizations with a valid tax exempt certificate in their jurisdiction, should provide a copy of it to their primary OmegaFi contact to avoid paying the tax.
Sales Tax & Revenue to the Sorority or Fraternity
Note, this article and new procedure is focused on the sales tax obligations associated with the software provided by OmegaFi to an individual customer.
Customers should consult with their headquarters, governing bodies, and/or legal and tax advisors to determine if they have any obligation to collect sales tax from the members and guests who purchase services, merchandise, food, housing, etc. from them directly.
The changing landscape in state tax laws spurred by a landmark 2018 Supreme Court case has led to a shift in tax obligations. Like so many other businesses and consumers across the country, fraternities and sororities in many (but not all) locations may now be required to pay sales tax on software purchases from technology companies, including OmegaFi. OmegaFi intends to work with customers to make this process as simple as possible.