Non-Profit Guidelines

Protecting your tax exemption A 501(c)(3) organization must:

• satisfy annual filing requirements,
• continue to be operated for its exempt purposes, ensuring that its earnings do not inure to the benefit of any private shareholder or individual,
• not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests,
• not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory,
• not provide commercial-type insurance as a substantial part of its activities,
• not have purposes or activities that are illegal or violate fundamental public policy,
• absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office,
• restrict its lobbying activities to an insubstantial part of its total activities.

Do we have to pay sales tax, since we are a nonprofit and exempt from income taxes?

• Absolutely! The 501(c)(3) status applies only to Federal and State income tax
• California Sales Tax is governed by the State Board of Equalization (BOE); See BOE Publication 18 Nonprofit Organizations

Raffles & Auctions:

• Selling tickets for raffles is considered “gaming” and California has a 90/10 rule … only 10% of the expected raffle revenue may be used to purchase raffle prizes …(90% of the proceeds must be used to pursue your organization’s objectives. NOTE: donated prizes eliminates the 10% restriction to purchase prizes.)
• 50/50 Raffle is illegal in the state of California. (see 90/10 rule above)
• Wine: May NOT be offered as a raffle prize…may be auctioned but see note below regarding alcohol “sales”.
• Silent and live auctions are not considered gaming but the proceeds generated are subject to sales tax as are white elephant sales, plant table sales, etc.

Alcoholic beverages as prizes in raffles, auctions or other fundraisers: (Summarized from Alcoholic Beverage Commission, ABC, documents) ABC regulations state that any time money is being paid for an alcoholic beverage it constitutes a sale of alcohol and requires the seller to hold a liquor license. Nonprofits often conduct a variety of activities which directly or indirectly are still considered sales, such as:

• Sales of food, meals, beverages, and similar items under a number of different circumstances;
• Sales of tickets that buyers will exchange for food, beverages, or physical products;
• Sales of tickets for fundraising events when the ticket price includes amounts for food or beverages;
• Sales of items at rummage sales, bazaars, carnival booths, community events, and other fundraisers;
• Sales of merchandise in Internet, live, or silent auctions.

For nonprofits which conduct such sales irregularly, ABC regulations would require the nonprofit to obtain a temporary permit to conduct the sale. For CGCI members:

• • The CGCI Liability Insurance policy has a clause regarding coverage for liquor liability. Insurance coverage is EXCLUDED if the nonprofit is in the business of manufacturing, distributing, SELLING, SERVING or FURNISHING alcoholic beverages.
  • Conclusion from the above regulations: if a nonprofit obtains a permit to sell alcohol either directly or indirectly via raffle baskets, auctions, etc., then the activity will be excluded from coverage under the CGCI liability insurance policy.
  • Simplest solution to the above situation: Select garden-related items for all gift baskets/prizes used in raffles, auctions, etc.

Do we have to pay sales tax, since we are a nonprofit and exempt from income taxes?

• Absolutely! The 501(c)(3) status applies only to Federal and State income tax
• California Sales Tax is governed by the State Board of Equalization (BOE); See BOE Publication 18 Nonprofit Organizations