Direct mail contracts: sales tax implications for not-for-profit organizations

Background

The South Dakota v. Wayfair Inc. (2018) decision allows states to implement economic nexus standards for determining sales and use tax nexus. This decision most heavily impacts remote sellers who do not have a physical presence in states (the standard applied pre-Wayfair). While there may be a significant impact on organizations who sell taxable goods and services remotely, the change may also impact organizations from a purchasing standpoint.

Direct mail contracts

Many not-for-profit organizations contract third-party vendors to provide direct mail services. Under new economic nexus laws, the third-party vendor may be required to charge and collect sales tax in states where direct materials are delivered, even if neither the not-for-profit organization nor the vendor have physical presence. In most states, the not-for-profit organization may be required to issue a properly executed exemption certificate to the direct mailer to be relieved of the sales tax charge.

If the vendor does not charge the applicable sales tax based on mailings delivered in a state, the not-for-profit organization may still be obligated to remit use tax if the not-for-profit organization has physical presence or exceeds the state’s economic nexus threshold. This is also dependent on the state taxing direct mailing services or printed material.

The sales and use tax exemptions available to not-for-profit organizations and required documentation will vary by state as some states only provide an exemption for enumerated organizations.

Action steps

If you are a tax-exempt organization who contracts with a third-party vendor for direct mail services, you may have already received a notice from your vendors outlining the “new” tax impact. Review the notice and request a list of states where the vendor will be charging, collecting, and remitting sales tax. Compile a list of states where your organization holds a valid and current sales and use tax exemption certificate and compare that to the list provided by your vendor. Focus should be placed on states where direct mail is being delivered but where no exemption certificate is currently held.

Determine if a sales and use tax exemption certificate is required to utilize a states’ not-for-profit exemption. Most states require organizations to apply for the required permit. Organizations will likely need to attach a copy of the governing documents and annual tax or financial statement filings with a state application. Once a registration is obtained, organizations may need to file annual returns or file periodic renewals.

Consider whether the organization can move the direct mail activity internally. Organizations who send direct mail materials from their headquarters or offices may not be subject to sales or use tax in the states where they send mailers. The organization need only consider use tax on their mailing materials in states they have physical presence or have sales that exceed an economic nexus threshold. If neither exist, there may be opportunities to continue treating mailings without tax based on various state laws and statutes.

If you have a concern regarding your direct mail contracts, please contact your Baker Tilly tax advisor for more information.