The Illinois Department of Revenue recently clarified requirements related to tax-exempt purchases by nonprofit organizations. Effective June 3, 2021, the new regulation (86 Ill. Admin. Code 130.2081) consolidates statutory exemption language for various types of nonprofits. Section 130.2081 also explains how nonprofit organizations and their employees can make purchases exempt from Retailers' Occupation Tax as well as the documentation retailers must collect in order to deduct such sales from their gross receipts.
Sales to nonprofit organizations
Illinois allows an exemption from the Retailers' Occupation Tax for sales of tangible personal property to certain nonprofit entities, including:
- Governmental bodies;
- Certain organizations operated exclusively for charitable, religious, or education purposes; and
- Organizations with no paid officers or employees operating primarily for recreation of people over 55.
Statutory exemptions also apply to certain transactions involving sales to third parties for the benefit of exempt nonprofit organizations. Specifically, Illinois exempts sales of:
- Computers and communications equipment used for any hospital purpose to a lessor who leases for at least one year to an exempt hospital;
- Equipment used in the diagnosis, analysis, or treatment of hospital patients to a lessor who leases the equipment for at least one year to an exempt hospital;
- Personal property sold to a lessor who leases the property for at least one year to an exempt governmental body; and
- Materials sold to construction contractors for incorporation into real estate owned by any of the types of nonprofit entities outlined above.
The new regulation does not offer any explanation or further guidance on the exemptions themselves. Rather, section 130.2081 simply restates the statutory exemption language and clarifies documentation requirements for both exempt purchasers and retailers making sales to such entities.
Purchases by exempt entities
Exemption identification numbers
Exempt entities must have an active exemption identification number (E-number) issued by the Illinois Department of Revenue in order to make tax-free purchases. E-numbers must be renewed every five years. If the entity has applied for but not yet received an E-number, or if its E-number is expired and pending renewal, the entity may not make tax-free purchases.
E-numbers must be used solely for purchases that further the exempt entity's organizational purpose. Nonprofits will be held liable for taxes and penalties for the use of an E-number for a purchase not related to the organizational purpose, unless an officer or employee acted without the organization's consent and/or knowledge.
Purchases by employees or representatives of exempt entities
To be considered a tax-exempt purchase, the payment method used must indicate its ownership by the exempt entity. However, section 130.2081 adds a limited exception to this requirement. Under the new regulation, an organization’s employees or representatives may make purchases using their own funds on behalf of an exempt entity with an active E-number, so long as the purchases are in furtherance of the entity's organizational purpose and the following requirements are met:
- The employee or representative must provide retailers with an annual certification including: the name and address of the employee or representative, the retailer, and exempt entity; the entity's E-number; and a statement under penalty of perjury that the property will be used in furtherance of the entity's organizational purpose.
- The retailer must retain a copy of the E-number letter issued to the entity by the Department.
- No single transaction can exceed $400.
- The employee or representative must present the retailer with the certification outlined above at the time of sale, and the retailer must confirm the employee or representative's identity.
Retailers' documentation requirements
If a retailer does not collect proper documentation of a sale to an exempt entity, the retailer cannot claim an exemption. Retailers must collect and retain the exempt entity's E-number letter for initial purchases and must verify the E-number expiration date has not passed. For subsequent purchases made by or on behalf of the same exempt entity, retailers must document the active E-number at the time of sale and include that documentation in their books and records. Retailers must also verify and document that the form of payment is owned by the exempt entity, unless the requirements for purchases made by employees or representatives on behalf of exempt entities are met.
Properly documenting tax-free sales to exempt entities or their employees or representatives allows retailers to support the exemption when filing returns or when under audit. However, if a retailer fails to comply with documentation and payment requirements, the exemption will be disallowed.
Takeaways
While much of the text in section 130.2081 is merely a consolidation of existing statutory exemption language, the clarification of documentation requirements for purchases by or on behalf of exempt entities are important for both nonprofits and retailers making sales to such entities. Further, the ability of employees and representatives to make limited tax-free purchases on behalf of exempt entities is a new exception to the traditional documentation requirements. Illinois nonprofits, retailers and remote sellers with questions about these rules should contact their state and local tax advisor.
