Wednesday, October 19, 2016

Talk About Tax

A great discussion took place at the New Public Library Director Boot Camp, which I had the pleasure of coordinating, at the end of September in Wausau. With so few public libraries reporting that they collect sales tax, it seemed like a great topic for a Q&A-style blog post.
Image of Tax appearing as an American Flag
I don’t charge sales tax; should I? While sales to public libraries are exempt from sales tax, sales by public libraries are generally not exempt.  Most public library sales, including sales of photocopies and computer printout charges, are subject to the Wisconsin sales tax and any county and stadium sales taxes. Other library sales, such as sales of coffee or food items, withdrawn books, used equipment, and used furniture also are subject to sales tax.  Public libraries must also charge sales tax for rentals of bestselling books and videos. Wisconsin Administrative Code section Tax 11.05 details the sales tax rules for state and local government agencies. Public libraries fall under the same general rules that apply to other state and local government agencies.

Library fines, including charges for unreturned materials and duplicate library cards, are specifically exempt from sales tax. Photocopy and records search charges that result from an official public records request are also exempt.

This sounds complicated. It doesn’t have to be. To simplify the collection of sales tax at your library, you do not need to add the tax on top of your sales—you can consider sales tax as part of the price you charge. However, if you do this, you must notify customers by a sign and/or on receipts provided to the customer that “prices include sales tax.” If your prices include sales tax, the tax due is simply calculated by dividing your total receipts by your tax rate. 

Let’s compare the two methods. Consider this: your library users made 10,000 black/white printouts and photocopies at 10 cents apiece during the month of September, and your sales tax rate is 5 percent…
  • If you choose to add sales tax on top of this, you would have to increase your page price to $0.105 (or a half-cent sales tax on each page). You would then collect a total of $1,050, and pay $50 in sales tax. That works fine when working with totals, but it is not so great when an individual makes one copy. 
  • If you choose to include sales tax in your charges, you would take the $1,000 you collected and then divide that by your tax rate: $1,000/1.05= $952.38 in copies, and $47.62 collected in sales tax. This means that your actual charge per copy is 9.52 cents, but it is a lot easier to charge by the copy this way.

Do I need a seller’s permit? Whom do I pay? Any organization that collects sales tax must have a seller’s permit from the Wisconsin Department of Revenue; this includes local government agencies. However, the municipality must handle the necessary filing and tax submission under its seller’s permit, if it or any of its subunits (including the library) makes taxable sales.
If a library contracts with a private vendor who owns and has control over the photocopy machines in the library, then the vendor, not the library, is responsible for collecting sales tax. The same would be true for pay phones owned and controlled by a private vendor—if anyone still has them.

Then what about the Friends Book Sale?  These sales may be exempt from sales tax if they meet certain tests.  Sales by nonprofit organizations on fewer than 20 days per year, or with total taxable receipts of less than $25,000 per year, are exempt “occasional sales” if the sales event does not involve an admission charge or paid entertainment. A municipality also may qualify for the “occasional sales” exemption if it meets the same tests. 

I thought I got around this when I called the payments donations… Some organizations believe that if they call payments “donations” they can avoid the obligation to collect sales tax. To qualify as a donation, a payment must be completely voluntary, with no restrictions placed on people who do not make a payment. For example, if a library requests a $.10 donation per computer printout, the library cannot place any restriction on computer printouts made by people who do not make the donation. This means that you cannot provide a suggested donation amount, as that implies an expectation of pay. The Department of Revenue looks at the facts surrounding requests for donations to determine whether they are truly voluntary donations, or if they are sales subject to the sales tax.

Speaking of tax, how do I know if my library is tax exempt? Are we a 501(c)(3)? While many organizations want to apply to be a 501(c)(3) organization to get nonprofit tax-exempt status, local governments, including public libraries, are already considered nonprofit tax-exempt organizations under IRS regulations. Therefore, the IRS will not grant 501(c)(3) status to your library. 

Donations to your library meet the IRS definition of a “charitable contribution” to a “qualified organization,” and they are tax-deductible. Better yet, no application is needed to get this status, per the IRS Publication 526 on Charitable Contributions. The publication defines one type of “qualifying organization” as any state or any of its subdivisions that perform substantial government functions. If your public library is established and operated according to Wisconsin Statutes Chapter 43, then your library clearly meets that definition.

If you have questions about sales tax, or any other public library administration topic, please contact Shannon Schultz of the DPI Public Library Development Team.

Written by Shannon Schultz