State And Local Taxes.
Don't make the mistake of believing that your federal income tax exemption prevents state and local jurisdictions from imposing their filing requirements and their taxes on your nonprofit organization. Many organizations learn about state filing requirements the hard way.
The first part of this two-part article appeared in the Feb. 1 issue. In Part I, the imposition of state income taxes and sales and use taxes on nonprofit organizations was discussed.
This article focuses on other taxes and filing requirements for nonprofit organizations. Specifically, personal property taxes, employee withholding taxes, state franchise fees, and the escheat rules can become big problems for your organization. If you want to avoid costly back taxes, interest and penalties, you should address the issues before a state auditor does it for you.
Personal property tax
Many jurisdictions impose a tax on the value of an organization's personal property. Your computers, furniture, and supplies constitute taxable personal property in many states. This tax is payable unless your organization has a specific exemption from this tax.
Normally, you must file an annual property tax return and report the cost of your tangible personal property. Most jurisdictions allow you to reduce the cost of property by depreciation. However, the allowance for depreciation is set by the taxing jurisdiction and may or may not follow the depreciation schedule you use for book purposes. Therefore, it is common to maintain a separate depreciation schedule for personal property tax purposes.
Nonprofit organizations may have multi-state exposure because of employees who work from their homes or from shared office space in other states or jurisdictions. This opens the door to the imposition of local property taxes if you furnish these employees with computers and other office equipment. Since your organization owns this equipment, you are subject to the obligation to pay another jurisdiction's personal property tax.
Jurisdictions differ on whether an exemption is available to organizations other than those exempt from income tax under Section 501(c)(3). Some only grant the exemption on personal property used in the direct accomplishment of certain specified tax-exempt purposes, (e.g., education or health care).
In almost all cases, your organization will face this tax unless you apply for this specific exemption by following the specified procedures.
Withholding tax on wages
Organizations that have employees usually must withhold state income taxes from wages paid to those employees. Many nonprofit organizations have employees working throughout the United States. Some work from their homes while others may work in shared office locations in multiple states.
While there are exceptions, the duty to withhold state income taxes is controlled by where the employee is working. Therefore, a nonprofit organization located in Washington, D.C. that has an employee working from home in California, is required to withhold California income tax from the employee. Another special complication exists when the city in which the employee works imposes an income or earnings tax; in these increasingly common situations, organizations are required to withhold and remit these taxes, too.
These local wage tax liabilities are independent of state personal income tax and are frequently at a higher rate than that tax. Thus, you can easily see how inadvertent local wage tax omissions can result in significant liabilities.
Your failure to withhold and remit the required state or local employee taxes can be particularly harsh because these taxes, together with penalties and interest, can be imposed directly on those individual employees and officers who failed to withhold and remit the taxes. Sometimes, directors and officers can be held jointly and severally liable for these taxes. Ignorance does not usually matter and in this case, experience could be a very tough teacher.
Currently, every state requires holders of escheatable/unclaimed property to file reports and remit unclaimed property to the state's unclaimed property division. The state holds the property as trustee for the true owner. Upon receipt of the property by the state, you are discharged of any liability to the owner.
This particular state filing requirement has traditionally had relatively low rates of compliance. However, because of the amount of unclaimed property, together with interest and penalties that can be imposed for noncompliance, this area is becoming one of the fastest growing audit areas for state governments.
Many organizations are unaware that if they are holders of unclaimed property, they may have to remit funds to the unclaimed property divisions of state governments. Most states have annual reporting requirements for unclaimed property, and, if you fail to file and remit unclaimed property, you may face penalties.
Unclaimed property generally includes uncashed checks, unidentified remittances, credit balances in accounts receivable, and unpaid liabilities that you have restored to cash or taken into income. Unclaimed employee benefit plan distributions may also constitute unclaimed property. State reporting requirements vary, and a review of specific state rules is necessary to determine whether or not you have a reporting requirement for unclaimed property.
States have become more aggressive in pursuing unclaimed property, and audits now routinely include nonprofit organizations. States are either conducting the audits themselves or hiring contract auditors. Contract auditors usually work under contingency arrangements and tend to take aggressive positions.
Since many states have no statute of limitations for unclaimed property if you never filed a report, there are few limits on how far back states can go to demand the remittance of unclaimed property.
Now is a good time to examine your policy and practices regarding unclaimed property. Several states offer programs for organizations that have failed to report and remit unclaimed property in prior years if you come forward before the state contacts you. These programs generally limit the look-back period and may provide relief from penalties and interest.
Many nonprofit organizations assume that filing a registration application with the state revenue department (and even receiving an identification number) satisfies their duty to obtain a certificate of authority and file annual corporate reports.
Most states impose a separate filing requirement on nonprofit corporate organizations that are "doing business" in a state other than their state of incorporation. These organizations are foreign corporations with respect to these states. As such, they must register to do business as a foreign corporation and pay initial registration fees.
To remain in good standing, foreign corporations must file annual reports and pay state franchise fees. In general, while state revenue departments administer corporate income taxes, sales and use taxes and employee withholding taxes, certificates of corporate authority and annual franchise reports are filed with and administered by the state's Secretary of State.
Some of the information contained in these filings is available to the public, such as the corporation's business location, the list of officers, and the corporation's registered agent.
Failure to comply with these rules can result in serious problems. For example, your organization may lose the authority to transact business as a corporation within that state, the Secretary of State may impose fines and penalties and, in extreme cases, members, officers and directors may become personally liable for the corporation's obligations.
No discussion of state filing requirements for nonprofits is complete without mentioning state charitable registrations. These rules apply to you if you solicit contributions.
Approximately 40 states regulate charitable solicitations, and their statutes are written broadly to cover virtually any type of solicitation to any person or entity. Physical presence within a state is irrelevant. The registration requirement is based on whether you solicit contributions there. Therefore, soliciting donations by direct mail, telemarketing, newspaper, television, or radio ads directed to individuals, businesses, or even foundations located within a particular state normally triggers the requirement to register under these rules.
Once registered, annual reports are required to remain in good standing, and many states impose filing fees and require audits of your financial statements.
If you discover that you have a problem with a particular jurisdiction, you should consider all issues with that jurisdiction before registering. If you want to avoid costly back taxes, interest and penalties, you should address the issues before a state auditor does it for you.
Don't wait for a nexus questionnaire or a letter of inquiry. If you get one, it's often too late for you to make the first move. Many states have voluntary disclosure programs, and, if possible, you should work through a experienced state and local tax specialist who is familiar with the special issues of nonprofit Organizations to make an agreement before revealing your identity. Successful representation and negotiation may result in a settlement agreement that limits the look-back period for tax assessments and interest and reduces or eliminates penalties.
D. Greg Goller, CPA is a tax partner in Grant Thornton, LLP's Washington, D.C. office where he specializes in tax issues for nonprofit organizations. Jeffrey M Rhines, CPA, MT is a senior tax manager and Marc Grossman, JD, LLM is a tax manager; both are located in Grant Thornton's Philadelphia office and specialize in state and local tax issues.
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|Author:||Goller, D. Greg|
|Publication:||The Non-profit Times|
|Date:||Apr 1, 2001|
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