Are 501c3 Exempt From Sales Tax in Pennsylvania?

Obtaining federal 501(c)(3) tax-exempt status from the Internal Revenue Service (IRS) does not automatically grant an exemption from sales tax in Pennsylvania. The state has its own distinct requirements and a separate application process. While the IRS 501(c)(3) determination is a necessary component of the state application, Pennsylvania law requires an organization to prove it meets a specific standard of charitable work before it can be granted an exemption from the state’s sales and use tax.

Qualifying for Pennsylvania Sales Tax Exemption

To qualify for a sales tax exemption, a nonprofit organization must be recognized by the Commonwealth of Pennsylvania as an “Institution of a Purely Public Charity.” This status involves meeting five specific criteria. The first criterion is that the organization must advance a charitable purpose, which involves activities that benefit the public, such as through education, health services, or support for the underprivileged. Second, the institution must operate entirely free from a private profit motive, meaning no individual or shareholder can benefit from the organization’s net earnings.

Third, the organization must donate or render gratuitously a substantial portion of its services. Fourth, the entity must benefit a substantial and indefinite class of persons who are legitimate subjects of charity. Finally, the institution must relieve the government of some of its burden by providing services that the government would otherwise have to offer.

Required Documentation for the Exemption Application

The primary method for submission is the online application via the Pennsylvania Department of Revenue’s myPATH portal. Several key attachments must be uploaded with the online application. A copy of the IRS determination letter confirming 501(c)(3) status is required, along with the organization’s governing documents, such as its articles of incorporation and bylaws. These documents must contain a specific clause that prohibits any surplus funds from being used for private benefit if the organization dissolves.

Comprehensive financial information is also necessary. Applicants must provide their most current financial statements, detailing all sources of income and categories of expenses. If the organization files a Form 990 with the IRS, a copy of the most recent return should be attached. For new organizations without a financial history, a proposed budget is an acceptable substitute.

The Application and Approval Process

Once an organization has gathered all the necessary documentation, the application and all required attachments should be submitted electronically through the myPATH portal. The online system allows for the direct uploading of documents and enables the organization to track the status of its application.

After the application is submitted, the Department of Revenue will begin its review. Upon successful review and approval, the Department of Revenue will issue a determination letter granting the organization status as an Institution of a Purely Public Charity. This letter will include the organization’s sales tax exemption number.

Using the Sales Tax Exemption

Once an organization receives its exemption number, it can begin making purchases free from sales tax. To do so, the nonprofit must present a properly completed Pennsylvania Exemption Certificate (Form REV-1220) to the vendor at the time of purchase. This form certifies that the purchase is being made by a qualifying exempt organization.

The exemption is not all-encompassing; it applies only to the purchase of tangible personal property or services that are directly used to fulfill the organization’s charitable purpose. Purchases made for administrative convenience or for activities unrelated to the nonprofit’s mission may not qualify. It is the organization’s responsibility to use the exemption appropriately and maintain records of its tax-exempt purchases.

A distinction for nonprofits to understand is that being exempt from paying sales tax does not mean they are exempt from collecting it. If a 501(c)(3) organization sells items, particularly as part of fundraising efforts, it is required to register for a sales tax license and collect sales tax from its customers. The obligation to collect tax is separate from the privilege of not paying it on qualifying purchases.