Applying for State Tax Exemptions

Not for profit organizations typically ensure that they have completed the basics when it comes to formation. They check the box on the most significant steps: incorporating under state law, adopting internal governance policies, applying to the Internal Revenue Service for a federal income tax exemption, and registering with the Charities Bureau of the New York State Attorney General’s Office. However, there are two further important, and often overlooked, steps that every New York State (“NYS”) not for profit corporation should take as well.

State Income Tax Exemption

In addition to applying for an exemption for federal income tax purposes, a NYS not for profit must file for an exemption for state purposes by filing Form CT-247 along with copies of its articles of incorporation, its federal determination letter, and its bylaws. Generally, in order to be tax exempt for NYS income tax purposes, a not for profit must be organized and operated as a not for profit organization, must not have stock, shares, or certificates for stock or for shares, must have no part of its net earnings inure to the benefit of any officer, director, or member of the organization, and must be exempt from federal income taxation under Internal Revenue Code (“IRC”) section 501. If the organization meets these requirements, it will be presumed to be exempt from NYS income tax.

Failure to complete Form CT-247 leaves a not for profit organization liable for NYS franchise tax as a business corporation. It also can create problems down the line if an organization wishes to engage in a transaction that requires Attorney General approval, such as a merger or a dissolution. If, after an organization receives Attorney General approval to dissolve, it is discovered by the NYS Department of Taxation and Finance that no CT-247 was ever filed, the form must be prepared and filed before the transaction can proceed. Complications can also arise if an organization has its federal tax exemption revoked, but later restored by the IRS. The NYS not for profit corporation must file a new application with NYS, which is often forgotten, via Form CT-247. We have dealt with both of these situations, and the resulting (and often frustrating) delays, many times.

State Sales Tax Exemption

In NYS, a not for profit religious, charitable, educational or other IRC Section 501(c)(3) organization should also apply for an Exempt Organization Certificate, so that the purchases it makes are exempt from NYS sales tax. In order to apply, the organization must complete Form ST-119.2, Application for an Exempt Organization Certificate and submit it to NYS along with a copy of its federal determination letter from the IRS, and other required documentation, including its Certificate of Incorporation. If NYS determines that the organization is entitled to sales tax exempt status, the State will issue Form ST-119, Exempt Organization Certificate. Form ST-119 will contain a six-digit NYS sales tax exemption number unique to that organization. NYS will also issue Form ST-119.1, Exempt Purchase Certificate. Once issued, the organization may use its Exempt Purchase Certificate to make sales tax exempt purchases on behalf of the organization.

Separately, if an exempt organization will be making sales in NYS, it may be required to collect sales tax from purchasers. If it is required to collect and remit sales tax to NYS, the organization must register for sales tax purposes with the NYS Department of Taxation and Finance and obtain a Certificate of Authority. NYS’s sales tax rules are incredibly nuanced. In general, sales of tangible property are subject to sales tax. Certain enumerated services, including furnishing information by printed matter and maintaining or repairing real property or land, are also subject to sales tax. The rules regarding the taxability of services can be especially confusing and should be carefully considered if an organization plans to provide services that are similar to those that are specifically enumerated as taxable under NYS law.