There Is No Such Thing As A (Tax) Free Lunch!

August 4, 2016

By Israel Tannenbaum and Mitch Lewis

As most people know, New York, New Jersey and Connecticut (along with the predominance of states) allow 501(c)(3) organizations to obtain a sales tax exemption on their purchases.

Organizations should be taking advantage of this, as sales tax can add up quickly, diverting much needed funds that could potentially be used for charitable purposes. Generally organizations are prudent in using this exemption for large purchases; however there are many instances where organizations fail to take advantage of it.

Like most individuals who have worked in this sector will readily tell you, nonprofit organizations are similar to businesses. That’s right, while the ultimate mission of the organization is distinctly different from for-profit entities (furtherance of its exempt charitable purpose vs. making an actual profit), in order to succeed, not-for-profit organizations need to attract and retain top talent, pay attention to both their bottom line and sustainability, fend off competition (i.e., such as similar organizations vying for the same donor dollars), and meet the needs of their customers (i.e., charitable base which they support).

Meetings are an integral component of conducting business. While many of these are held in offices, it has become a social norm to have meetings with meals. As well all know, many negotiations begin with “Let’s do lunch,” and in some countries, such as Russia and Japan, business is done almost exclusively while dining and drinking.

In fact, in a study published in the Harvard Business Review, it was determined those individuals who negotiated in restaurants generated 12% greater profits than those who did not. In short, it seems there are many good reasons to “do lunch.”

While it’s clearly a good idea to “break bread” when conducting business, organizations should be mindful to use available tax savings. One such benefit that is often overlooked, but over time can lead to significant savings, is the use of an organizations sales tax exemption while conducting business over meals.

It is important to note, however, that in order for this to be a valid sales tax exempt transaction, it must be paid directly by the organization, such as with the use of the organization’s credit card, and cannot be paid for by the individual and then reimbursed.

Additionally, since it may be impractical to carry around the sales tax exemption certificate, and certainly no one wants to sort this out with a prospective donor at the table, it would be a good idea to pick one or two places to frequent and arrange the sales tax exemption matter in advance.

Another opportunity that many organizations can benefit from would be avoiding the sales tax on fuel. Many organizations as part of operations are required to purchase fuel, either for their own vans and buses which are used to provide program services, or for employees who may travel from client to client using a company vehicle.

As a word of caution, sales tax is a state level tax, and each state’s regulations have their own specifics and intricacies.

For example, under New York law when making purchases of motor fuel and diesel motor fuel, most exempt organizations must pay sales tax at the time of purchase, then file for a refund of the tax paid. As such, it’s extremely important to make sure this strategy is in compliance with the specific rules of the state the organization is making the purchase in.

Just some food for thought!


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