DFA Opinion Takes Narrow Reading of Arkansas Sales Tax Charitable Exemption

One of the tax pitfalls for nonprofits is assuming that federal 501(c)(3) status means that the nonprofit is also eligible for other charitable tax exemptions. The DFA's first published opinion, No. 20140807 (Dec. 18, 2015), takes such a narrow reading of the Arkansas sales tax charitable exemption, denying the taxpayer the benefit of the exemption and exposing it to potential liability for failing to collect and pay sales tax.

The taxpayer was an Arkansas nonprofit corporation that provided educational programming, and it sold DVDs of its programs. The taxpayer requested an opinion that it was entitled to the exemption of Arkansas Code Annotated section 26-52-401(2), which provides an exemption for "the sale of tangible personal property or service by charitable organizations, except when the organizations may be engaged in business for profit...." A "charitable organization" is not defined by statute, but the Department applied a definition from Rule GR-37(E)(6), which defined a "charitable organization" as “an organization whose purpose is benevolent, philanthropic, patriotic or eleemosynary and whose function if performed, and not performed by a private party, would have to be performed at public expense.” The opinion advised that selling educational DVDs was not substituting for a public expense, and therefore the taxpayer was not a "charitable organization" eligible for exemption. (While Rule GR-37 relates to a different exemption for hospitals and sanitariums, the definition of "charitable organization" of Rule GR-37(E)(6) is adopted by reference in Rule GR-39(D)(1) applicable to the exemption at issue in the opinion.)

The opinion went on to advise that even if the taxpayer were a "charitable organization," it could not get the exemption because of Arkansas Code Annotated section 26-52-430, which denies the exemption for sales that compete with for-profit businesses. Among the requirements to be considered a noncompeting exempt sale is that "[t]he sales transaction is not a continuing one and is held not more than three (3) times a year...." Ongoing sales on the taxpayer's website appeared to exceed that limitation, such that section 26-52-430 would make the DVD sale gross receipts taxable in any event.

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