Nonprofit and Qualifying Healthcare
State and County Treatment of Nonprofits
While many states afford broad tax exemptions to nonprofit organizations, Arizona does not. The State of Arizona does not provide an overall exemption from transaction privilege tax (TPT) for nonprofit organizations. Rather, the Arizona Revised Statutes (A.R.S.) define certain narrow exemptions for nonprofits from Arizona TPT under various business classifications when acting as either a customer or as a business conducting taxable business activities.
The variation lies in the definition of the Arizona TPT, which differs from the sales tax imposed by most states. It is a tax on the privilege of conducting business in the State of Arizona. Differing from a true sales tax, the TPT is levied on income derived by the business, who is legally allowed to pass the economic expense of the tax on to the customer. However, the business is ultimately liable to Arizona for the tax.
Taxable activities conducted by a nonprofit organization (i.e., as a business) are generally taxable unless there is a statutory exclusion for a nonprofit organization performing the type of activity. For example, under the retail classification there is a general exemption for nonprofits that are retailers. This means they are not responsible for collecting TPT on any sales, regardless of who the customer is.
When the nonprofit acts as a customer, the vendor may pass the economic expense of the tax on to the customer (i.e., the nonprofit) even though the business is the taxable party, unless there is a specific statutory exemption.
So, in general, exemptions are available for sales by the nonprofit organizations, not for sales to the nonprofit organizations. More to the point, sales to a nonprofit organization are typically subject to Arizona TPT unless the nonprofit organization is a qualified hospital or health care organization or another deduction applies.
Examples of certain transactions where the nonprofit organization is acting as the customer that are likely subject to Arizona TPT are:
- hotel stays,
- rentals of venues/banquet rooms,
- rentals of tangible personal property (e.g., A/V equipment),
- retail purchases (i.e., for use by that nonprofit organization),
- restaurants (e.g., meals, catering, etc.), and
- other like-transactions.
Any deduction or exemption from TPT must be specifically provided for in statute and be applicable to the particular type of nonprofit organization participating in the transaction. Some organizations must apply for an exemption letter from the Arizona Department of Revenue (ADOR) in order to take advantage of the exemptions while others do not.
City Treatment of Nonprofits
The cities on the other hand do provide an overall exemption from city privilege tax for nonprofit organizations conducting taxable business activities (see MCTC § - 270), with the following exceptions:
- Transactions involving proprietary clubs and I.R.C. § 501(c)(7), (8), and (9) organizations, where the gross revenue of the activity received from persons other than members and bona fide guests of members is in excess of fifteen percent (15%) of total gross revenue. In the event this fifteen percent (15%) limit is exceeded, the entire gross income of such an entity will be subject to the applicable tax.
- Gross income generated from unrelated business income.
The above exceptions are deemed regularly conducted business activity and are subject to the applicable city privilege tax.
Nonprofit Acting as a Customer
As stated above, there are certain, narrow exemptions provided in the statutes for nonprofits from Arizona TPT and city privilege tax under various business classifications when acting as a customer. However, some organizations must apply for an exemption letter from ADOR in order to take advantage of the exemptions while others do not.
- Qualifying hospitals
- Qualifying health care organizations
- Qualifying community health care centers
- Rehabilitation programs for mentally or physically disabled persons
- Nonprofit charitable I.R.C. § 501(c)(3) organizations that regularly serve meals to the needy or indigent on a continuing basis at no cost.
- Nonprofit charitable I.R.C. § 501(c)(3) organizations that provide residential apartment housing for low-income persons over 62 years of age in a facility that qualifies for a federal housing subsidy.
- Nonprofit charitable I.R.C. § 501(c)(3) organization that solely provides graduate and postgraduate education in the health sciences.
NOTE: Nonprofit charitable I.R.C. § 501(c)(3) organizations other than the ones listed above are taxable when acting as a customer, unless a specific statutory deduction is provided.
Nonprofit Acting as a Business
The exemptions available to nonprofits acting as a business are different for state and city. Since the cities, subject to certain exceptions, provide an overall exemption from city privilege tax for nonprofit organizations conducting taxable business activities (see MCTC § - 270), in some cases, the activity may be taxable for state purposes but exempt for city purposes.
Please review transaction privilege tax procedure TPP 00-4 for an overview of the exemptions from Arizona TPT available to tax exempt organizations engaged in business under certain business classifications. No exemption letter is required from ADOR in order to claim exemptions when the nonprofit is acting in the capacity as a business.