Tax Exempt Status and Letters of Determination

PTAs in California generally are not required to pay taxes on income earned. California State PTA has secured from the Internal Revenue Service a group (blanket) tax exemption letter under Section 501(c)(3) of the Internal Revenue Code.

PTAs also have received an exemption letter from the California Franchise Tax Board confirming PTA's exemption from state franchise or income tax under Section 23701d of the Revenue and Taxation Code.

Both the federal and state exemption letters cover unit, council and district PTAs. Copies of the letters of determination may be obtained by contacting the California State PTA office. The PTA that needs the exemption letters must contact the State PTA office.

To retain the tax-exempt status, PTAs must be careful that fundraising does not become a primary focus. An individual unit can have an effect on the entire organization. Unit, council and district PTAs do not pay tax on income from activities that are substantially related to the purpose for which the PTA was given exempt status.

Sales Tax

When PTAs sell items but use profits exclusively to support the purpose of the organization, they are considered consumers and not the retailers of certain items that they sell (California State Board of Equalization).

Sales tax is paid at the time of purchase by units. Consequently, resale use permits are not required by units to conduct sales of those items. Note carefully that the condition for this exemption requires that the profits from sales must be used exclusively to further the organization's purposes. Vendors do not always charge sales tax to the units for items purchased for sale at fundraisers. At times, vendors have stated that the units are never charged sales tax, or they have argued that units need a seller's permit, because they are selling merchandise to the consumer.

According to the Tax Tips for Nonprofit Organizations, units are excluded from collecting and remitting sales taxes for items sold, and have been determined to be the consumers of the items purchased. The proceeds from items sold however, must be used exclusively to further the organization's exempt purpose. This means the units must pay sales tax to vendors for such items intended for sale when they purchase the items from the vendors. The units are not considered to be sellers of items as a result of this special exclusion and, therefore, do not have to obtain sellers permits or file sales returns.

The units may have to inform the vendors of their exclusion status and insist on paying sales tax to the vendors The units may need to adjust the vendor invoices to include sales tax and pay the adjusted amount. The units may have to consider using different vendors, if they are unable to obtain cooperation or agreement regarding the payment of sales tax to the vendors.

If the vendor absolutely refuses to collect sales tax and no other vendor is available to satisfy the unit's requirement, sales tax for items purchased can and should be remitted by the unit to the Board of Equalization via written letter; this is not the usual action, but it is available if other actions as previously described are unsuccessful. Boards of Equalization local office locations are available from the Board of Equalization website at www.boe.ca.gov.

Council and district PTAs do not meet the same criteria as units and, therefore, are required to have resale use permits, obtained from the California State Board of Equalization, if they are engaged in fundraising that involves the sale of tangible items.

Because of the great diversity of fundraising activities by council and district PTAs, consult Tax Tips Pamphlet No. 18, "Sales and Use Tax Guide for Volunteer and Nonprofit Fundraising Organizations," to determine what may and may not be taxable.

If an out-of-state vendor does not have a resale certificate permitting him/her to do business in the state of California, then the unit must secure a one-time-only Resale Use Permit and the forms and instructions necessary to maintain records, file returns and pay use tax on gross sales from the State Board of Equalization office; contact via website at www.boe.ca.gov.

Federal Taxes

Although PTA is an organization that operates in the public trust, it must comply with all tax requirements as prescribed for its nonprofit status. As a result, PTAs may be required to file federal tax returns depending on their gross receipts (see below).

Unit, council and district PTAs with annual gross receipts normally more than $25,000 and not in excess of $100,000 must file Form 990EZ and Schedule A.

Unit, council and district PTAs with annual gross receipts in excess of $100,000 and assets over $250,000 must file Form 990 and Schedule A.

Unit, council and district PTAs with annual gross receipts normally less than $25,000 are not required to file Forms 990/990EZ or Schedule A. However, if a PTA is not required to file but receives a Form 990 package from the IRS, it must be signed by an elected officer and returned indicating that the filer is not required to file. Attach the label to the name and address space on the return; check the box in the heading of the return to indicate that the organization's gross receipts are normally not more than $25,000; sign the return; send it to the address listed on the package.

The forms dated the year the PTA fiscal year begins are the correct forms to use. For example, if the current fiscal year begins July 1, 2004 and ends June 30, 2005, forms for the year 2004 should be used.

State Taxes and Government Forms

PTAs must adhere to state filing requirements. Regardless of their asset or revenue levels, council and district PTAs are required to file the Registration Renewal Fee Report (RRF-1) annually with the California Attorney General's Registry of Charitable Trusts. Units are exempt from filing, unless they are incorporated.

The state charity registration number (CT#) is assigned after an organization is registered. The organization must submit the CT-1 (registration application) and the other documents/supporting materials listed on the CT-1. After the organization is registered, the CT# is assigned by the Attorney General's office. The RRF-1 cannot be processed until an organization is registered and the CT# has been assigned.

Form RRF-1 can be submitted with the CT-1 (registration application) or after the organization receives the letter confirming registration which will include the CT#. If Form RRF-1 is sent with the application, the Attorney General's office will place the CT# on the form after the registration is processed and proceed with processing the RRF-1.

Council and district PTAs with assets and revenues less than $100,000 for the previous year will not be required to pay the $25 filing fee. The deadline for tax filing is the 15th day of the fifth month after the end of the association's fiscal year. If the fiscal year is July 1st through June 30th, tax returns must be postmarked no later than November 15th. There is no extension available for the RRF-1.

The CT-1 and RRF-1 forms and instructions are available on the Attorney General's website http://ag.ca.gov/charities/

District PTAs with annual gross receipts normally more than $25,000 are required to file Form 199 with the Franchise Tax Board. The California State PTA submits a group filing of Form 199 on behalf of unit and council PTAs that are not incorporated.

Unit, council and district PTAs having unrelated business income of $1,000 or more are required to file Form 109 with the Franchise Tax Board. Unit, council and district PTAs that are incorporated must file a Statement by Domestic Nonprofit Corporation with the California Secretary of State. A filing fee is required.

Gross Receipts

Gross receipts are the total amount of income received from all sources during the annual accounting period before subtracting any costs or expenses, not including funds not belonging to the unit (Funds not Belonging to a Unit 5.2.1a, 219). The receipts of three immediate preceding years (including the year for which the return would be filed) are averaged to determine if tax filing is required.

An organization's gross receipts normally will not be more than $25,000, if it has existed for:

• One year or less, and has received (or donors have pledged to give) gross receipts of $37,500 or less during the first reporting year (for this purpose, there is no requirement to annualize the gross receipts, even if the first year is less than 12 months);
• More than one year, but less than three, and the average gross receipts received in the first two reporting years are $30,000 or less; or
• At least three years, and the average gross receipts in the immediately preceding three years (including the year the

Unrelated Business Income Tax

PTAs may be required to pay tax on other types of income, referred to as unrelated business income. Unit, council and district PTAs with annual gross receipts associated with unrelated business income of $1,000 or more must file IRS Form 990-T, Franchise Tax Board Form 109, and report the income when filing IRS Form 990/990EZ.

Meet any of these conditions to avoid Unrelated Business Income Taxation (UBIT):

1. Sell donated merchandise

2. Use substantially all donated help

3. Make sure the activity is not a "regularly carried on trade or business"

4. Make sure it furthers the PTA's exempt purpose

Filing Deadlines

The California State PTA provides general information about tax filing requirements, including due dates, but will not provide information or guidelines to unit, council and district PTAs concerning the completion of tax returns. Council and district PTAs shall not provide information, training or guidelines to constituent PTAs concerning the completion of tax returns. For PTAs that require assistance, it is recommended that an accountant or tax professional specializing in nonprofit 501(c)(3) organizations be consulted regarding all tax filings. This is a legitimate PTA expense.

The deadline for tax filing is the 15th day of the fifth month after the end of the association's fiscal year. If the fiscal year is July 1st through June 30th, tax returns must be postmarked no later than November 15th. If an extension is required, instructions regarding extensions of time to file are included in the filing instructions for each form.

Officer Responsibilities for Filing

Although the responsibility of filing lies with the treasurer whether or not a tax form is received, it is the executive board's responsibility to ensure that all forms are filed by the deadline due date. The auditor shall verify on the Audit Report Form that all tax forms have been filed, if required.

Be sure the treasurer is not overwhelmed and understands the complexities of completing the required forms. A good bookkeeper is not necessarily comfortable with completing tax forms.

Consider hiring an outside professional, well-versed in nonprofit tax requirements, to complete the PTA tax forms. Tax filings are complex even for many professionals. No volunteer should feel stressed doing them or embarrassed not to do them. The objective is to have them done properly and on time.

Always keep a copy of the signed tax forms for the unit's records and note the date that the forms were mailed.

If a PTA that is required to file Form 990/990EZ is disbanded, IRS regulations require that a final Form 990/990EZ and an explanatory statement be filed by the 15th day of the fifth month after the change in status. The district PTA is responsible for filing.

Do not forget to sign and date the tax return. Tax forms may be signed by any elected officer.

Resources

Federal tax forms can be obtained from local libraries and post offices; by calling 800.TAX.FORM; or by downloading the forms directly from www.irs.ustreas.gov.

State tax forms can be obtained by calling the Franchise Tax Board at 800.338.0505; writing to the Tax Forms Request Unit, P.O. Box 307, Rancho Cordova, CA 95741-0307; or downloading the forms directly from www.ftb.ca.gov

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