Exercise Caution When Relying on Sales Tax Exemptions

Many states provide sales tax exemptions to non-profit organizations.  Exemptions are usually one of two types: a purchaser exemption or a seller exemption.  A purchaser exemption exempts the organization from paying sales tax on purchases of goods for the organization’s use, whereas a seller exemption exempts the organization from charging sales tax to those who purchase goods that the organization sells.  Seller exemptions are usually narrower than purchaser exemptions and may apply to specific products.  A non-profit organization desiring to use either type of exemption should carefully evaluate the exemption to determine if it falls within its parameters.  Understanding how exemptions apply may require information that does not appear in the express language of the statute.  Thus, it is advisable for a non-profit organization to seek legal advice from counsel experienced in sales tax exemptions before relying upon an exemption.

As an example, Illinois exempts from the Retailers’ Occupation Tax sales by a non-profit organization to its patients pursuant to the following statutory provision:

A person whose activities are organized and conducted primarily as a not‑for‑profit service enterprise, and who engages in selling tangible personal property at retail (whether to the public or merely to members and their guests) is engaged in the business of selling tangible personal property at retail with respect to such transactions, excepting only a person organized and operated exclusively for charitable, religious or educational purposes either (1), to the extent of sales by such person to its members, students, patients or inmates of tangible personal property to be used primarily for the purposes of such person…

We are aware of a case in which a non-profit medical clinic interpreted this provision to mean that its sales of medical devices to its patients were exempt from sales tax.  Relying on the exemption, the clinic did not collect tax on sales of medical devices to its patients for a period of several years.  The clinic was audited by the Department of Revenue, which concluded that the exemption did not apply and that all of the clinic’s sales were subject to sales tax.  The clinic appealed the decision to an administrative board.  The appeal was a partial success because even though the board found that the sales tax exemption did not apply, the board applied the medical rate to the clinic’s sales.  The clinic further appealed the decision to an administrative law judge.  The judge found that the exemption applied and that none of the clinic’s sales were subject to sales tax, but the judge’s decision was overruled by the Department of Revenue.  The clinic considered filing a lawsuit to challenge the Department’s decision, but the clinic settled the case with the Department.  In light of the expenses and uncertainties of litigation, the clinic made a wise decision to settle the case, but it is feasible that the clinic could have prevailed.          

The audit cost the organization thousands of dollars in back taxes that would have otherwise been paid by its purchasers.  The clinic could have avoided this expense by charging its purchasers sales tax.  If the clinic had obtained legal advice on this matter prior to beginning its sales, the clinic would have learned that qualifying for the exemption was not as straightforward as the statute indicated.  The Department’s interpretation of the exemption is so narrow that it would rarely, if ever, include sales by outpatient clinics.  The Department seems to interpret the “primarily for the purposes of” provision to require the goods sold to be used on the site of the selling organization in conjunction with rendering service to the patient, such as food or medicine sold by hospitals to inpatients.  If the goods are unavailable for sale through any other means, sales of the goods may also satisfy the “primarily for the purposes of” requirement.  These interpretations of the “primarily for the purposes of” provision are not obvious from the text of the statute or its applicable regulations.  Given thee vagaries, it would be wise for a non-profit organization to seek legal advice prior to relying upon this exemption or any other exemption. 

The foregoing article was provided for general information.  Seek specific legal advice for your situation.  The attorneys of David L. Bea & Associates are experienced in representing organizations in sales tax matters.  If you have any questions, please do not hesitate to contact us.

© 2012 David L. Bea & Associates