Nonprofit entities may request exemption from income tax from the Internal Revenue Service (IRS). See the IRS brochure Applying for Tax-Exempt Status.
Iowa does not make this determination. An entity is automatically exempt from Iowa income tax if exempt status is granted by the IRS.
Iowa corporation income tax forms
An exempt entity does not have to file an Iowa corporation income tax return unless it has unrelated business income. Unrelated business income is taxable at the regular Iowa corporation income tax rates to the same extent it is taxable at the federal level. The exempt entity may also be subject to the Iowa alternative minimum tax.
To report unrelated business income, file Iowa form 1120. Complete form IA 4626 if subject to the alternative minimum tax. Iowa estimated tax payments must be made if an income tax liability of $1,000 or more is anticipated.
Nonprofit entities are not automatically exempt from paying sales tax on goods and taxable services, even if they are exempt from state and federal income taxes. Sales tax must be paid unless some other general sales tax exemption applies. Local option sales tax must also be paid on purchases made in jurisdictions that impose the tax.
In other words, a nonprofit entity is treated the same as any other person for sales and use tax purposes.
Purchases for resale
Purchases made for resale are exempt from sales and local option taxes. Purchases for resale are exempt even if the entity does not have a sales tax permit.
Tax paid to another state
When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.
Example 1 - Church
A church purchases hymn books to be used by the congregation. The church pays sales and local option tax, if any, to the seller.
A church purchases canned goods and meat to feed the homeless. The sales tax and local option tax, if any, do not apply because grocery items are exempt for everyone.
A church purchases Bibles from a book publisher to resell to its members. Since the purchase is for resale, the church does not pay sales tax to the publisher.
Example 2 - Nonprofit Corporation
A nonprofit corporation purchases heating oil and electricity for its office building from a local utility. The corporation will pay sales tax and local option tax, if any, to the utility company.
A nonprofit corporation pays to have its monthly newsletter printed. The corporation will pay sales tax and local option tax, if any, to the printer.
Example 3- Nonprofit Animal Shelter
A nonprofit animal shelter sells T-shirts and sweatshirts as a fundraiser. The shelter does not pay sales tax or local option tax, if any, on the T-shirts and sweatshirts because they will be resold. Items that are not for resale, such as dog or cat food used by the shelter, are taxable.
Taxable Services
Certain services are subject to sales tax. Nonprofits generally must pay tax on taxable services.
A local business collects garbage from a church. Garbage collection and disposal for nonresidential commercial customers is taxable. The church will pay sales tax and local option tax, if any, to the seller.
Example 2 - Exterminator
An organization has its building sprayed for bugs and insects. Pest eradication is taxable. The organization will pay sales tax and local option tax, if any, to the seller.
Example 3 - Auto repair
A church van breaks down and has to be repaired. Automobile repair is a taxable service. The church will pay sales tax and local option tax, if any, to the seller.
Iowa private nonprofit schools do not pay sales tax on the purchase of goods and taxable services used for educational purposes.
Note: Schools must pay the 5% state hotel and motel tax and any applicable local hotel and motel tax on sleeping room rental.
Educational Institution
An institution which primarily functions as:
A school, college, or university with students, faculty associated with the institution, and an established curriculum with basic courses offered every year
A library
Purchases for resale
Purchases made for resale are exempt from sales and local option taxes. Purchases for resale are exempt even if the entity does not have a sales tax permit.
Tax paid to another state
When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.
Purchases by a school and a church
When goods and taxable services are shared by a school and a church, the primary use determines if the purchase is taxable.
School Organization
Organizations such as a PTA or school booster club are not automatically exempt from paying or collecting sales tax.
Example 1 - Textbooks
A private nonprofit school purchases textbooks to be used by its students. The school does not pay sales tax or local option tax, if any, to the seller because the textbooks are used for an educational purpose.
Example 2 - Purchase for rental property
A private nonprofit school purchases an air conditioner for a rental property owned by the school. The school will pay sales tax and local option tax, if any, to the seller since the purchase is not for educational purposes.
Example 3 - Convent
A convent purchases 10 beds. The convent is used by the religious order that teaches in a parochial school, but the convent is not part of the school. The convent will pay sales tax and local option tax, if any, to the seller since the purchase is not for educational purposes.
Example 4 - Purchase for school and church
A parochial school and a church purchase an organ together, which is used by the school's music teacher for student lessons and during Sunday services. If the organ is used by the school more often than it is used by the church, it is not taxable.
Sales made by entities or organizations engaged in educational, religious, or charitable activities are exempt on proceeds expended for qualifying educational, religious, or charitable purposes. See below for explanations of educational, religious, or charitable.
Net proceeds must be used by or donated to one of the following to be exempt:
Entity exempt from federal income tax under Internal Revenue Code section 501(c)(3)
Government entity (including public schools)
Private nonprofit educational institution
A local Jaycees chapter raises $10,000 from a haunted house fundraiser. The chapter gives $9,000 to the United Way and retains the other $1,000 for a pizza party for the chapter members and for others who helped with the event. Sales tax is not due on $9,000. The Jaycees must remit sales tax on the remaining $1,000. However, if the Jaycees collected sales tax from its customers on the entire amount, it must remit all the tax collected.
Is Gambling Taxable?
All receipts from gambling activities sponsored by nonprofit entities are subject to sales tax, regardless of the ultimate use of the proceeds.
What is “Educational Purpose”?
“Educational purpose” includes the following:
Acquisition of knowledge to develop and train a person
Activity that has as its primary purpose to educate by teaching
Activity that has as its primary objective to give educational instruction
Activity for which the educational process is not merely incidental
Activity where the purpose is systematic instruction
School recreational activities and intramural sports
Any activity designed to offer culture to the public
Tests given to students or prospective students to measure intelligence, ability, or aptitude
Municipal or civic science centers
Art centers
Libraries
IRC 501(c)(3) nonprofit youth athletic groups
The South River Little League is a baseball organization. This organization purchases baseballs, baseball gloves, uniforms, and equipment for the teams in the league. The organization must pay sales tax and local option tax, if any, on these purchases.
The organization also has a concession stand on its property and sells candy, beverages, and other snacks and refreshments. The food and beverage items purchased by the organization for the concession stand are exempt because they are purchased for resale. All of the net proceeds from the sales by the concession stand are used by the organization to pay operational costs and make the previously-mentioned purchases.
If the Little League is an IRC 501(c)(3) organization, it does not collect tax, since it qualifies as a nonprofit youth athletic group. If the Little League is not an IRC 501(c)(3) organization, it must collect sales tax and local option tax, if any, on sales from the concession stand because the organization is not a qualifying nonprofit youth athletic group, is not affiliated with a school, and its activities are not intramural sports.
What is “Religious Purpose”?
“Religious purpose” is any activity that promotes religious worship. In the broadest of terms, religious worship includes all forms of belief in the existence of superior being(s) capable of exercising power over the human race. As commonly accepted, it means the final recognition of a deity. It encompasses forms of worship, reference to one's views about the deity, or the relationship to one's creator. It also includes the use of property by a religious society or by a body of persons as a place for public worship.
For profits to be exempt for religious purposes, they must be used:
By or donated to an IRC 501(c)(3) organization, and
For a religious activity
Connie's Consignment Shop is selling church cookbooks for a local church. The net proceeds from the sales will be used by the church to sponsor ministry work in the United States. Net proceeds from the sale by Connie of the church cookbooks are exempt from sales tax because the proceeds will be used for religious activity.
What is “Charitable Purpose”?
“Charitable purpose” is applied to almost anything that promotes the well-doing and well-being of people. It includes:
Performance of services for public good or public welfare
Activities for the benefit of a family, an individual, or the public at large
Giving of gifts by persons kindly disposed toward others
Relief of poverty
Advancement of education or religion
Promotion of health
Provision of a governmental or municipal service
Maintenance of public parks
Other similar activities
However, there must be no profit to the one performing the service or in any way benefit any private shareholder or individual involved in the activity.
Profit-making organizations may engage in charitable activities, even though they are not charitable organizations.
A local nonprofit animal shelter provides shelter, medical care, socialization, and adoption services for homeless animals. As a fundraiser, it sells T-shirts and sweatshirts depicting rescued animals. All the profits from the sales will go to and be used by the animal shelter to defray its costs. Sales of the T-shirts and sweatshirts are exempt from tax since the net proceeds will be spent on a charitable purpose.
An organization will sometimes conduct fundraising activities where the net proceeds are used to further the organization's purpose. In these cases, the net proceeds are exempt if the organization itself is considered educational, religious, or charitable and is exempt from income tax pursuant to IRC 501(c)(3).
Example 1 - Exempt
A community playhouse exempt from income tax as a 501(c)(3) presents theatrical productions, play readings, children's classes, workshops and demonstrations, children's productions, and lectures in the field of theater. Memberships are sold which entitle the purchasers to attend plays presented during the year. Individual and student tickets are also sold. The playhouse pays its operational expenses from these sales and other sources. The sales are exempt because the playhouse is a 501(c)(3) engaged in educational activities.
Example 2 - Taxable
A local model railroad club sells T-shirts depicting old steam and diesel engines as a fundraiser. All proceeds from the T-shirt sales will be used by the club to pay operational expenses of the club's building that houses the club's model railroad layout and where the meetings are held. The activities of this club are not educational, charitable, or religious, and it is not a 501(c)(3). Consequently, proceeds from the sale are subject to sales tax.
“Net proceeds” are those remaining after direct expenses have been deducted from the gross receipts of the activity or event. The expenses must be necessary and have an immediate bearing or relationship to the fulfillment of the activity.
For example, the cost of food for a fundraising meal is a direct expense; however, the cost of a victory celebration because the fundraising dinner was a success is not a direct expense.
Net proceeds expended for a qualifying religious, educational, or charitable activity are exempt.
Example 1 - Charitable activity but proceeds partially taxable
A local organization (not a 501(c)(3)) has a fundraiser and collects $10,000 in net proceeds. The organization gives $9,000 to a local nonprofit homeless shelter and uses $1,000 to pay guest speakers at its meetings. The organization does not pay sales tax on the $9,000 given for a charitable activity, but must pay sales tax on the $1,000 it retained for its own use.
Example 2 - Religious purpose and purchase for resale
A church exempt from income tax as a 501(c)(3) holds a craft sale and uses the proceeds to purchase new pews for the church. The crafts can be purchased by the church exempt from sales tax as a purchase for resale. The church does not have to collect sales tax when the crafts are sold since the proceeds from the craft sale will be used for religious purposes (the purchase of new pews).
Example 3 - Gambling proceeds
A nonprofit church holds a bingo night once a week. The proceeds are used to purchase new carpeting for the church. Sales tax applies to the gross bingo receipts since gambling activities are always taxable.
Example 4 - Charitable activity and purchase for resale
A local nonprofit homeless shelter has a fundraising dinner. The shelter contracts and pays a local caterer to supply the meal and beverages. The shelter hires a printer to print tickets to be sold for the event and programs about the evening's entertainment. The net proceeds from the fundraiser will be used by the shelter to assist homeless families with shelter, food, and medical care. The shelter does not pay sales tax on the food purchased from the caterer because the food is being purchased for resale. The shelter must pay sales tax on the printing costs for the tickets and the programs. The net proceeds from the dinner are not subject to sales tax because they are being used for a charitable activity.
Example 5 - Religious purpose and purchase for resale
A nonprofit church headquarters purchases Bibles from an Iowa vendor and sells them to its member churches. The profits from the Bible sales will be placed in a missionary recruitment fund. The Bibles can be purchased by the headquarter church exempt from sales tax as a purchase for resale. The church does not have to charge sales tax when it sells the Bibles since the proceeds will be used for religious purposes.
Example 6 - Religious purpose and retailers
A nonprofit church holds a fair to raise money for new choir robes. An admission is charged. The church rents space to several local retail businesses to set up booths to sell craft items. The retailers will keep any gross receipts that are generated from the sales. The choir also has a booth at the fair and it sells books. The proceeds will also go toward the purchase of new robes. In this example, the local retail merchants are required to collect and remit sales tax on their sales, assuming the proceeds are not expended for a qualifying activity. The admission charge and the book sales are exempt from tax since the proceeds are being used for religious purposes (the purchase of the choir robes).
The gross receipts from the sales of food and beverages for human consumption by an entity or organization primarily engaged in the promotion of food or beverage products that are grown, produced, or raised in Iowa are exempt from tax.
A nonprofit association that is also exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code promotes the sale of Iowa-raised turkey. The organization sells turkey sandwiches, chips, and beverages. The association does not charge sales tax on its food sales.
Sales made and services performed by a state fair organized under Iowa Code chapter 173 or by a county, district, or fair society organized under Iowa Code chapter 174 are exempt from Iowa sales and use tax.
Designated exempt entities awarding construction contracts may issue special exemption certificates to contractors and subcontractors, allowing them to purchase or withdraw from inventory materials for the contract free from sales tax. This special exemption certificate also allows a manufacturer of building materials to consume materials in the performance of a construction contract with a designated exempt entity, without owing tax on the fabricated cost of those materials. Iowa Code section 423.4 lists the entities that may be considered a “designated exempt entity.”
"Designated Exempt Entity" Includes Only the Following:
Private nonprofit educational institution in Iowa
Nonprofit private museum in Iowa
Tax-certifying or tax-levying body or governmental subdivision of Iowa, including the state board of regents, state department of human services, state department of transportation, and recreational lake and water quality districts.
Municipally-owned solid waste facility which sells all or part of its processed waste as fuel to a municipally-owned public utility
All divisions, boards, commissions, agencies, or instrumentalities of state, tribal, federal, county, or municipal government which do not have earnings going to the benefit of an equity investor or stockholder
A nonprofit Iowa affiliate of a nonprofit international organization whose primary activity is the promotion of the construction, remodeling, or rehabilitation of one-family or two-family dwellings for low-income families, such as Habitat for Humanity
Rural water districts organized under Iowa Code Chapter 357A
An entity that is an instrumentality of a county or municipal government, including an agent of the entity, if the instrumentality or agent was created for the purpose of owning real property located within a reinvestment district established under Iowa Code Chapter 15J. Such entities are entitled to a sales tax exemption on building materials, supplies, or equipment that are completely consumed in the performance of a construction contract to construct a project, which project has been approved by the economic development authority board in accordance with Chapter 15J.
Nonprofit hospitals are NOT designated exempt entities for this purpose.
The Iowa use tax complements the Iowa sales tax. It is imposed on goods purchased out-of-state for use in Iowa and on taxable services when the first use occurs, or potentially could occur, in Iowa or where the product or result of the service is used in Iowa.
The Iowa use tax rate is the same as the state sales tax rate: 6%
Tax paid to another state
When state sales or use tax has been paid to another state, Iowa allows a credit. If the other state’s sales tax rate is higher than or equal to Iowa’s 6% rate, no Iowa tax is due. If the sales tax rate in the other state is less than 6%, the purchaser owes the difference to Iowa. A credit is not allowed for local taxes paid in another state.
Example 1
An Iowa church purchases two pews in Chicago and takes delivery of the pews in Chicago. An Illinois 6.25% state sales tax is collected by the vendor. No Iowa use tax is due since the payment of the 6.25% Illinois state sales tax is more than the 6% Iowa use tax.
Example 2
An Iowa church purchases two pews in South Dakota and takes delivery of the pews in South Dakota. A South Dakota 4% state sales tax is collected by the vendor. An Iowa use tax of 2% is due on the purchase of the pews since the South Dakota state tax rate is lower than the 6% Iowa tax rate.
Entities engaged in educational, religious, or charitable activities are not exempt from paying the 5% fee for new registration on the purchase or lease of vehicles subject to registration. All cars, trucks, truck tractors, road tractors, trailers, and semi-trailers are subject to this fee instead of the state sales tax.
All organizations must pay the fee unless it is exempt under a specific provision of the Iowa Code.
Gambling receipts are subject to sales tax, regardless of the ultimate use of the proceeds. Nonprofit organizations and churches that conduct games of skill, games of chance, raffles, bingo, and other games are required to obtain a gambling license and sales tax permit.
To obtain a gambling license, see Social & Charitable Gambling on the Iowa Department of Inspections & Appeals Website.
To obtain a sales tax permit, complete the Business Tax Registration form on the Iowa Department of Revenue Website.
Exempt:
Gambling activities conducted by county and city governments. (Exempt under Iowa Code section 423.3(32)).
Gambling activities held by the Iowa State Fair, Iowa state fair authority, or Iowa state fair foundation (organized under Iowa Code chapter 173), including gambling activities that occur outside of the annual scheduled fair event. (Exempt under Iowa Code section 423.3(35)).
Gambling activities held by a fair (as defined in Iowa Code section 174.1(2)), including gambling activities that occur outside of scheduled fair events. (Exempt under Iowa Code section 423.3(23)).
Raffles held by a licensed qualified organization at a fair as defined under Iowa Code section 99B.1 and pursuant to the requirements specified in Iowa Code section 99B.24. (Exempt under Iowa Code section 423.3(62)).
Raffles—whether or not they are conducted at a fair event—where the proceeds are used to provide educational scholarships by a qualifying organization representing veterans as defined in Iowa Code section 99B.27(1)(b). (Exempt under Iowa Code section 423.3(97)).
Receipts
Gambling receipts include charges paid to participate, admissions, and ticket sales. Sales tax is computed on the entire gross receipts without any deductions.
Certain cities and counties in Iowa have imposed a local hotel and motel tax.
The local hotel and motel tax is in addition to the 5% state hotel and motel tax. Lodging is not subject to local option sales tax, whether or not a local hotel and motel tax is imposed. Nonprofit organizations and corporations, churches, schools, and religious organizations are not exempt from state or local hotel and motel taxes.
Gasoline, gasohol, liquefied petroleum gas dispensed into a vehicle, and undyed diesel fuel are subject to Iowa fuel tax at the time of purchase. If a fuel tax is imposed, no state sales tax is imposed.
If certain requirements are met, a corporation can be considered a governmental unit for purposes of receiving a sales or use tax exemption on its purchases. A determination of whether a corporation is a government instrumentality is made on a case-by-case basis by the Iowa Department of Revenue.
Sales are exempt when the following occur:
Net proceeds are expended for educational, religious, or charitable purposes, AND
The organization selling or receiving the profits is exempt from income tax pursuant to IRC 501(c)(3)
Examples of Exempt Sales:
Sales for fund raising by individuals and organizations at bazaars, sporting events, fairs, and carnivals when proceeds go to qualifying organizations
Student sales
Sales by the Boy Scouts, Girl Scouts, YMCA, 4H, PTA, etc., and their satellite organizations
Sales of tickets or admissions to amusements, fairs, or athletic events conducted by elementary and secondary educational institutions (Sales tax is due, however, on receipts from gambling activities conducted by these institutions.)
Sales from church-related functions, such as the ladies auxiliary, except for gambling activities
Activities or events to the extent that net proceeds are donated to support governmental or municipal services (Examples are proceeds from the activities of the Junior Chamber of Commerce, Lions Clubs, or Kiwanis which are expended on a civic project.)
Sales to organization members such as sales of uniforms, insignias, and equipment by Scout organizations to their members; sales of Bibles by a church to its members; sales of choir robes by a church to its members
A nonprofit summer camp or ranch operated to help underprivileged children and educate the child in some manner
Admissions and sales at centennial events held by a government entity
Sales by civic and municipal art and science centers
Activities to raise funds to send members of nonprofit educational, religious, or charitable organizations to conventions or other similar events directly related to the purposes of the organization
Sales by nonprofit youth athletic groups
Examples of Taxable Sales:
Admissions to athletic events of post-secondary educational institutions
Admissions to professional golf tournaments or any similar event where spectators view professional athletics
Admissions to plays and concerts, except where there is evidence that the organization producing the event has as its primary objective the education of its members through these productions (each situation evaluated separately)
Renting sleeping rooms to be used by another person or group for educational, religious, or charitable purposes if the rooms are in any place where sleeping accommodations are furnished to transient guests
A summer camp or ranch operated for profit is a form of commercial recreation; the gross receipts from admissions are subject to sales tax.
Renting sleeping rooms at a summer camp or ranch if it is operated for profit and rented to another person or group for educational, religious, or charitable purposes if the rooms are in any place where sleeping accommodations are furnished to transient guests for rent
Examples of Nonprofit Entities Always Exempt from Sales/Use Tax
Some nonprofit entities are specifically exempted from sales and use tax under Iowa law. The following is a non-exclusive list of those entities:
American Red Cross
Navy Relief Society
U.S.O. (United Service Organizations)
Community health centers (as defined in 42 U.S.C.A. subsection 254c)
Migrant health centers (as defined in 42 U.S.C.A. subsection 254b)
Residential care facilities and intermediate care facilities for the intellectually disabled and residential care facilities for the mentally ill (licensed by the Department of Inspections and Appeals under Iowa Code chapter 135C)
Residential facilities for intellectually disabled children (licensed by the Department of Human Services under Iowa Code chapter 237)
Residential facilities for child foster care [licensed by the Department of Human Services under Iowa Code chapter 237, except those maintained by “individuals” as defined in Iowa Code subsection 237.1(7)]
Rehabilitation facilities which provide accredited rehabilitation services to persons with disabilities and which are accredited by the Commission on Accreditation of Rehabilitation Facilities or the Accreditation Council for Services for intellectually disabled and other developmentally disabled persons and adult day care services approved for reimbursement by the Iowa Department of Human Services
Community mental health centers (accredited by the Department of Human Services under Iowa Code chapter 225C)
Home and community-based services providers certified to offer Medicaid waiver services by the Department of Human Services that are any of the following:
Health and disability waiver service providers, described in 441 IAC 77.30.
Hospice providers, described in 441 IAC 77.32.
Elderly waiver service providers, described in 441 IAC 77.33.
AIDS/HIV waiver service providers, described in 441 IAC 77.34.
Federally qualified health centers, described in 441 IAC 77.35.
Intellectual disabilities waiver service providers, described in 441 IAC 77.37.
Brain injury waiver service providers, described in 441 IAC 77.39.
Sales of tangible personal property and services made to nonprofit hospitals and nonprofit hospices (licensed under Iowa Code chapter 135B)
Statewide nonprofit organ procurement organizations
Nonprofit legal aid organizations
Nonprofit organizations organized solely for the purpose of lending property to the general public for nonprofit purposes
Nonprofit private museums*
Governmental units, subdivisions, or instrumentalities of a tribal government, the federal government or of the state of Iowa (This includes state, county, and local subdivisions of the government of the State of Iowa and those of any other state which provide a similar sales tax exemption to Iowa and its political subdivisions.) *
Recreational lake and water quality districts*
Federal corporations created by the federal government which are exempt under federal law*
Private nonprofit educational institutions located in Iowa*
Private nonprofit art centers located in Iowa
Habitat for Humanity in Iowa when purchasing building materials*
Toys for Tots when purchasing toys
Community action agencies as defined in Iowa Code section 216A.93
Substance abuse treatment or prevention facilities that receive block grant funding from the Iowa Department of Public Health
Nonprofit food banks as defined in Iowa Code section 423.3(107)
Exemption only applies to tangible personal property and enumerated services
Purchases of specified digital products are taxable to nonprofit food banks
*These entities can also possibly be entitled to construction contract sales/use tax refunds.
