The Fair Tax Act of 2005, Part XVI
Continuing with the FCA, particularly some extraneous details about family size:
`(c) Children Living Away From Home-
`(1) STUDENTS LIVING AWAY FROM HOME- Any person who was a registered student during not fewer than 5 months in a calendar year while living away from the common residence of a qualified family but who receives over 50 percent of such person’s support during a calendar year from members of the qualified family shall be included as part of the family unit whose members provided said support for purposes of this chapter.
`(2) CHILDREN OF DIVORCED OR SEPARATED PARENTS- If a child’s parents are divorced or legally separated, a child for purposes of this chapter shall be treated as part of the qualified family of the custodial parent. In cases of joint custody, the custodial parent for purposes of this chapter shall be the parent that has custody of the child for more than one-half of the time during a given calendar year. A parent entitled to be treated as the custodial parent pursuant to this paragraph may release this claim to the other parent if said release is in writing.
These statements reinforce today’s notions of dependents under current tax law. Not too much changes in terms of who has tax benefit when using these rules.
`(d) Annual Registration- In order to receive the family consumption allowance provided by section 301, a qualified family must register with the sales tax administering authority in a form prescribed by the Secretary. The annual registration form shall provide–
`(1) the name of each family member who shared the qualified family’s residence on the family determination date,
`(2) the Social Security number of each family member on the family determination date who shared the qualified family’s residence on the family determination date,
`(3) the family member or family members to whom the family consumption allowance should be paid,
`(4) a certification that all listed family members are lawful residents of the United States,
`(5) a certification that all family members sharing the common residence are listed,
`(6) a certification that no family members were incarcerated on the family determination date (within the meaning of subsection (l)), and
`(7) the address of the qualified family.
Said registration shall be signed by all members of the qualified family that have attained the age of 21 years as of the date of filing.
You register each year for the FCA, in order to reflect household changes. You determine who gets the check (or checks, you can split it up if you wish), and all adults in the house must sign the form.
`(e) Registration not Mandatory- Registration is not mandatory for any qualified family.
`(f) Effect of Failure to Provide Annual Registration- Any qualified family that fails to register in accordance with this section within 30 days of the family determination date, shall cease receiving the monthly family consumption allowance in the month beginning 90 days after the family determination date.
`(g) Effect of Curing Failure to Provide Annual Registration- Any qualified family that failed to timely make its annual registration in accordance with this section but subsequently cures its failure to register, shall be entitled to up to 6 months of lapsed sales tax rebate payments. No interest on lapsed payment amount shall be paid.
You don’t have to get FCA if you do not wish to (some folks feel the SSN is the Mark of the Beast and refuse to participate).
Also, the bill provides rules for how FCA gets stopped (failure to register) and getting things fixed if you were late in registering. More details next time!
Quadrupole alluded to these issues in response to the previous section, but I’d like to be sure I understand the prebate family implications. Specifically:
Example #1. Ten college students age 18 and over live in the same house, same address. All full scholarship students- no support from families. Does each one get the full single family monthly allowance? And if they are not yet age 21, do they have to sign the three certificates required during prebate registration?
Example #2. 100 orphans living in an orphanage. Who gets the family consumption allowance and how much is it?
Example #3. A married gay or lesbian couple living together in a state that allows such marriages–Do they qualify for two single allowances or one head of family and one dependant? If not “married, do they each get the full single family allowance?
You all can probably come up with a ton of similar questions, but I agree with Quadrupole- social behaviors will very likely be impacted by the Fairtax
Answers to your questions: The ten college students could apply for themselves as independents if their parents provided no support at all for them.
The orphanage would be a business providing a service to the orphans. The children’s expenses are tax-free while under the care of the business. The orphanage owners and their families get FCA for their own immediate families.
If they are legally married in their state, they can get FCA like regular married couples, so far as I know. The state tax authorities are in charge of regulating the applications for FCA, not the Feds directly, except in states that did not agree to administer the tax.
If not married, each individual comprises their own family unit, it seems according to the definitions.
James,
I don’t think you are quite correct with regard to the orphans. First, the orphanage is *not* a business unless it is engaged in a profit making activity. So unless someone is *paying* the orphanage to care for those orphans as a service, it’s not a business. If it is a non-profit orphanage, it has to pay the FairTax (non-profits, since they are end consumers and pay the FairTax). If it is a private orphanage being paid by the state, it doesn’t pay the FairTax on it’s costs, but it does charge the state FairTax on what it bills the state.
The interesting question re the orphanage in my mind is this: who is the legal guardian of those 100 kids? How is prebate handled for those who are wards of the state (as presumably most orphans would be). My guess would be that the prebate is paid to the state for those orphans as dependents, but I don’t think the text of the bill is quite clear on that.
Orphanages are typically non-profit orgs or state-run agencies. Non-profit organizations are essentially treated like businesses, and are not taxed for their purchases, although they may remit tax on taxable services or goods. From the Fair Tax Plain English Summary:
The not-for-profit organization is responsible for collecting the tax and filing tax reports to the
state sales tax administering authority. Taxable property and services purchased by a qualified
not-for-profit organization “for business purposes†are not taxable. So, in other words, purchases
for business purposes are not taxable and sales to consumers are taxable. However, the
organization must present its qualification certificate to the seller when making a purchase in
order for the sale to be tax exempt.
Now if the non-profit becomes a guardian organization, I don’t believe it can qualify for FCA (no SSN for an organization). If the state runs the operation I think the question is moot.
James,
Non-profits are only treated like businesses for ‘business activities’. So if a non-profit runs a pancake breakfast fundraiser where they sell pancake breakfasts to raise funds, they do not have to pay FairTax on the inputs for that breakfast, but they do have to charge FairTax on what they are charging people for the breakfast.
If that same non-profit decides to serve a pancake breakfast for free to the homeless, it *will* have to pay the FairTax for the inputs for that breakfast because providing a free breakfast to the homeless is not a ‘business activity’.
Or to put it differently, a business activity is something which someone is eventually paying you for. So if a non-profit is providing an orphanage for children out of it’s donations, that is *not* a business activity. If someone is paying the non-profit to run the orphanage, then they don’t have to pay FairTax on their inputs, but the *payments* to the non-profit for that purpose are then FairTaxed.
Or to put it differently, you can’t dodge the FairTax by virtue of being a non-profit. If it’s consumed, it’s FairTaxed, we don’t care who you are.
I understand that if an orphanage charged anyone, those charges would be taxed, but an orphanage doesn’t charge the orphans anything, nor anyone else. It’s a straight charity, basically.
The bill even grants special ‘qualification certificates’ to such organizations to allow them to operate in these ways. Short of allowing tax-free donations, why give them these certificates of there is no distinction?
If you look closely at the bill non-profits have two benefits (which is why they have to register).
1) Donations or dues paid to a non-profit are not subject to the FairTax (except when they are made in exchange for services or products, like our pancake breakfast example).
2) Non-profits are not taxable employers. Normally, when you employ someone for a purpose that is not a ‘business purpose’ you are a taxable employer.
What this means is that even though the non-profit is the final ‘consumer’ of it’s employees efforts, which means that they are not contributing to a FairTaxable product, they still do not have to pay FairTax on that consumption.
Please note non-profits still have to pay FairTax on any purchases they make that are not for a business purpose. So orphanage would not have to pay taxes on the cost of it’s employees, but it would have to pay FairTax on any goods or services it bought from outside vendors (electricians, groceries, etc).
FYI… see section 706 and ‘section 2 definitions’ of HR 25 to see the relavent portions of the bill.
Hrm. Well I will get further clarification from the folks at fairtax.org and re-visit this once we get down to the special rules for non profits as I blog along here. I’ll also ask them about the FCA-orphanage scenario for clarification as well.
OK, I called the Fair Tax folks on their 1-800 number and spoke to someone about the section of the bill in question. He told me that the bill does indeed relieve a non-profit from taxation on any business purchases, not merely inputs to consumable activity. I specifically mentioned our orphanage scenario in our conversation.
He also pointed me to this link: http://www.fairtax.org/PDF/FairTaxTreatmentOfChurchesAndNonprofitOrgs.pdf
This document doesn’t really help our discussion, as it furthers quadrupole’s notion of trade activity (churches selling bibles in this case).
However, ‘business purposes’ seems to be a broad definition, including the line ‘in furtherance of other bona fide business purposes’ beyond simple resale and providing of taxable services. Perhaps the bill needs clarification here to avoid confusion, but it seems that an orphanage could claim that providing room & board to orphans qualifies as ‘business purposes.’
I sent an email to the Fair Tax expert FAQ guy as well, so hopefully I’ll get a response I can post here.
OK… could you ask them where that is exactly in the bill? Because the FairTax bill is structured in a way that
a) Imposes the tax on goods and services
b) Points out where that doesn’t apply (business use, education,etc)
And nowhere in the bill do I find a word mentioning non-profits being
exempt from paying that tax on goods they purchase in general.
I have emailed a Karen Walby for a more ‘official’ written response than I can normally get from fairtax.org all by my lonesome, but have as yet not gotten a response (holidays and all that, or perhaps I simply don’t warrant enough attention).
For my part, I arrived at this conclusion by reading section 706 on non-profit organizations. In subsection (e) it states:
`(e) Exemptions- Taxable property and services purchased by a qualified not-for-profit organization shall be eligible for the exemptions provided in section 102.
Now this refers back to section 102 where all the basic exemption for business and investment is. Section 102, subection b states:
`(b) Business Purposes- For purposes of this section, the term `purchased for a business purpose in a trade or business’ means purchased by a person engaged in a trade or business and used in that trade or business–
`(1) for resale,
`(2) to produce, provide, render, or sell taxable property or services, or
`(3) in furtherance of other bona fide business purposes.
Now this is where you and I interpret differently. You state that a charity would ultimately be a consumer because it does neither item one or two in most cases. That is to say, it probably doesn’t engage in resale (some might for fundraising, but that is explicitly taxed in section 706) and it doesn’t engage in providing a taxable service (except again, for fundraising and that is also explicitly taxed in section 706). However, I think that a charity actually providing for its stated charitable pursuit qualifies as a bona fide business purpose under number 3.
I will call again and see if I can get an explicit answer from FairTax.org (preferably in writing) for repost here.
Just spoke to the folks at FairTax.org and they re-confirmed my interpretation of the legalese. In addition the paper he linked to makes the point that a church, for example, should be able to purchase bibles (for use in the church) tax-free, but if it chose to re-sell the bibles to an end-consumer, they would be responsible for including the tax and remitting it. The intent to re-sell the bible is not a requirement for the tax-free purchase.
The qualification certificate is also used for purchasing things tax-free from retailers, similarly to a business registration certificate.
The fairtax.org folks also mentioned that this mirrors the tax-free status that most non-profits enjoy today. Non-profit organizations are exempt from state sales taxes in Texas, for example, and pay no Federal income taxes either.
Again, where in the bill are non-profits exempted from paying the Fairtax on their non-business related purchases?
Let me explain part of why I am so adamant on this point. The purpose of the FairTax is to tax all consumption exactly *once* at the retail level (except education). There are no distinguished consumers under the FairTax. Government isn’t a distinguished consumer, and I see no language in the bill to make charities distinguished consumers either. Please note that even businesses are not distinguished consumers; they are simply not consumers at all. The playing field is even.
If charities are able to consume tax free, then they become distinguished consumers, and there is then insentive to launder one’s consumption through a charity. That distortion is undesirable in the extreme.
I tell you what. I’ll try to find a legalese guy you might trust (still trying Karen Walby) to interpret this for us, but I think at least I have been pretty clear.
Under section 706 subsection (e) it explicitly states that ‘Taxable property and services purchased by a qualified not-for-profit organization shall be eligible for the exemptions provided in section 102.’ Now the exemptions in section 102 are very broad, and basically state that for resale or trade, providing services for profit, or some other bona fide business purpose, all purchases are tax free.
If non-profits have to pay tax on their expenses, I see no use for this line in the bill at all. They don’t qualify as taxable employers, and would only remit consumers’ taxes on the items they resold, so this line could be completely omitted. Elsewhere in the bill, entities that are treated significantly different from businesses are NOT forwarded to section 102 for exemptions.
I understand your worry about economic distortion. I really do. But non-profits are distinguished today as tax-exempt. The FairTax literature makes a lot of noise about not wanting to diminish or harm charitable giving, so I suppose this is why the exemption is given.
If they had to be taxed, this would be a pretty big change for non-profit oirganizations. If non-profits suddenly became taxed under the FairTax, then they would essentially lose their tax-advantaged status today, something which most non-profits really cannot afford, and with no relief. A non-profit organization cannot collect FCA, and would be subject to the full FairTax at retail in every state without exception.
OK, one more fairtax.org white paper supporting my opinion:
http://www.fairtax.org/PDF/TheImpactOfTheFairTaxOnCharitableGiving.pdf
At the end of page 3:
‘Charitable operations, of course, continue to be tax exempt, operating under a sales tax
exemption certificate as they do today with most states. No purchase made by an exempt
charity is taxed.’
Continuing to page 4:
‘When charities provide products or services to individuals for compensation, essentially
a retail transaction, that transaction is taxed. This is comparable to the current system
not allowing the deduction of that portion of a gift for which the donor received some
return compensation’
Again, where in the bill…
I’m sorry to be so insistive, but I’m a primary source kind of guy… it’s nice and all that the FairTax page says something, but unless someone can point me to it in the bill (and I’ve looked for it there) I just don’t believe it. FairTax.org saying it doesn’t make it so, the bill saying it makes it so. Otherwise we are just like everyone else who paints their own pretty pictures of the FairTax to argue for or against.
OK, look. I am TRYING to get a legalese guy to post me something, but it may take a bit.
In the meantime, I will run this by you again.
In the bill, under section 706, subsection e:
`(e) Exemptions- Taxable property and services purchased by a qualified not-for-profit organization shall be eligible for the exemptions provided in section 102.
This would seem to state that if a charitable organization purchases goods and services, they are eligible for the exemptions under section 102: Intermediate and Export Sales.
That section says that for ‘business purposes’ (a term you and I have differing definitions for), ‘No tax shall be imposed under section 101 on any taxable property or service purchased for– (A) a business purpose in a trade or business.
Now here is where you and I seem to differ. ‘Business purposes’ is explicitly defined in the next section. It states:
(b) Business Purposes- For purposes of this section, the term `purchased for a business purpose in a trade or business’ means purchased by a person engaged in a trade or business and used in that trade or business–
`(1) for resale,
`(2) to produce, provide, render, or sell taxable property or services, or
`(3) in furtherance of other bona fide business purposes.
Your opinion seems to be that this excludes charity outright, since it is not a profitable activity (except fundraising). So your interpretation seems to be that if you aren’t pursuing resale activities, or producing a taxable property or service, you can’t be eligible for tax exemption.
Your interpretation seems to be that charities can only use tax exemption for things they intend to profit upon (items for resale or services provided at cost).
However, I believe you are ignoring item 3: ‘ in furtherance of other bona fide business purposes.’ Bona fide simply means authentic, or in good faith. In other words, you should be able to get tax exemption for any purchase of goods or services towards an authentic business purpose. That’s pretty broad, and does not explicitly state it has to be profitable. I believe that this line is what grants a non-profit full tax exemption, as well as granting tax exemption for expenses like internal paperwork, office supplies, etc for a regular business, that don’t relate to profit directly.
Non-profits also have to pass some tests to apply for non-profit status, assuring the state and fed that their ogranization is performing or intends to perform legitimate charity or whatever their stated purpose is, as well as demonstrating their funds do NOT go to any individual as profit. Such status is easy to lose if abused. The FairTax bill also creates a stricter version of what is considered non-profit. The example claimed frequently is that the NFL is currently a non-profit but would not be any longer under the FairTax.
Beyond simple language in the bill, however, FairTax.org is a fairly primary source for the intent of the legislation, short of getting Congressman Linder to say so. If the bill is vague on this point, I think their clarification is useful and generally trustworthy. However, I will try to find some other sources to back me up on this. If this is a matter of legal interpretation or vague language confusing one or both of us, then perhaps I can find someone else who has looked at this and settle the issue.
But not to beat a dead horse, why do you believe my interpretation if the bill’s language is off? Please post here as to why in detail. I am having to guess as to your literal interpretation of the language (although you have expressly indicated your feelings about what charities do and do not pay).
So it sounds like the crux of our disagreement comes down to whether a non-profit is making purposes for a business purpose under the definition in section 102 b. I would argue that section 102 b defines (as it states in the text) `purchased for a business purpose in a trade or business’.
I would further argue that non-profits are not engaged in a trade or business, based upon the fact that they are called out as distinct in Title A, Section 2, Paragraph 12 b:
‘(B) EXCEPTIONS- The term `taxable employer’ does not include any employer which is–
`(i) engaged in a trade or business,
`(ii) a not-for-profit organization (as defined in section 706), or
`(iii) a government enterprise (as defined in section 704).’
This would seem to clearly indicate that a non-profit as defined in section 706 is distinct from an entity ‘engaged in a trade or business’. This should not come as a surprise, as an ‘entity engaged in trade or business’ appear to me to be intended to cover an entity that is eventually going to produce a taxable good or service. The ‘furtherence of bona-fide business purposes’ clause is intended to prevent someone from claiming that paying my accountant for the books for my restaurant is not directly related to my sale of food, and thus not exempt under the section.
OK, well at least we are clear on the disagreement. I will continue to try to get a definitive answer, maybe I can get Congressman Linder with a little luck.
I think your concern about abuse of nonprofits is valid (happens a lot today) but I am concerned that nonprofits essentially lose big money if your interpretation is the correct one (charities would essentially lose tax freedoms they have today). The advocacy literature seems to back me up, but I’ll try to get a more 1st-party source or at least a more critical source as soon as I can.
Also, the intent of the bill is quite clearly laid out in the in SubTitle A Section 1 ‘Principles of Interpretation’, and if you look at item (2) you see:
‘`(2) To tax all consumption of goods and services in the United States once, without exception, but only once.’
Exempting charities explicitely violates this principal of interpretation. Now this is not to say that when the bill clearly and specifically exempts a class of consumption (as it does with education) that this principle should be considered overriding, it shouldn’t. But in the absence of such specific exemption (which I do not believe to be present as indicated in my argument for why a non-profit is not engaged in a trade or business) one falls back on the principle.
When a business purchases a good or service, that good or service is passed on into a future product, the sale of which is FairTaxed.
When a non-profit purchases a good or service that will not contribute to a future FairTaxable sale then either we have a violation of the principle laid out in Section 1, or we have to tax that non-profits purchases.
That is why my default presumption, absent language to the contrary in the bill, is that non-profits have to pay the FairTax on their purchases the same as anyone else.
And this makes sense. Why exactly should a non-profit be able to purchase a sandwich and give it to you tax free, while if *I* purchase a sandwich for you it is FairTaxed?
I understand your argument. I believe they HAVE made an exemption here, (perhaps for political purposes) but as I said before I will continue to press for a definitive answer.
On a more personal, non-proceedural note, I don’t like my governement picking winners and losers.
What exactly is the difference between:
Habitat for Humanity building a house for my brother, or me building a house for my brother?
Meals on Wheels bringing my grandmother a warm meal, and me bringing my grandmother a warm meal?
My basic point is: there isn’t any real difference, and our tax law shouldn’t pretend there is.
Please also note, that exactly the argument you are making can be made for why government purchases should be tax exempt. It’s all about the same old game of allowing distinguished player preferential tax treatment, and that’s part of what I was hoping the FairTax was doing away with.
The reason non-profits generally get tax exemption is that they are reckognized as providing a public benefit with money willfully donated to them, in lieu of government doing the same thing with money taken from the public. By not taxing such entities, the government essentially subsidizes such organizations.
The current system provides pretty much complete tax freedom for such organizations (with the exception of unrelated income). The FairTax (in my interpretation anyway) maintains this, but restricts who can be a non-profit, essentially subsidizing fewer groups (reckognizing that some non-profits today are only so due to a very broad definition of non-profits in todays Internal Revenue Code). It also makes it easier to donate with tax-free dollars, because you don’t have to itemize to use the exemption.
The difference between Habitat for Humanity building a house for your brother and you doing it is that Habitat for Humanity cannot own the house after they build it. No individual in Habitat for Humanity can benefit from the funds for the house. So they have to give it away, or they get taxed for conversion to personal use. The government is essentially subsidizing the work of Habitat for Humanity so long as they retain this behavior, because HfH is reducing the work that HUD would otherwise be doing (and probably doing it better).
Meals on Wheels is a similar situation. Meals on Wheels cannot retain its funds without using them for their stated purpose of providing meals for people. No member of Meals on Wheels is entitled to keep any of the money raised by MoW save for the salaries of its employees. MoW is essentially subsidized by government because they are reducing the work done by government welfare agencies.
Charitable giving is popular (in part) because people know they can give money to a charity tax-free and that the money goes directly to the benefit of the charity rather than any portion of it going to the Federal government.
James,
‘The difference between Habitat for Humanity building a house for your brother and you doing it is that Habitat for Humanity cannot own the house after they build it.’
I somehow missed the part where non-profits could no longer hold real property. It so *happens* that when Habitat for Humanity finishes building a house they give it to my brother. It need not be so, the house could be retained and used (under your interpretation) for any bone-fida business purpose. Just by virtue of *being* Habitat for Humanity and building a house they are exempt. I still don’t see any difference between me building a house and giving it to my brother and Habitat for Humanity building a house and giving it to my brother other than who is doing the giving. The *act* itself is identical. All we have done is give Habitat for Humanity a magical special pass to commit an act more cheaply than me or you.
By creating distinguished consumers (charities) you encourage all kinds of strange behavior. For example, it becomes a lot cheaper for me to donate to meals on wheels to feed my grandmother than to do it myself. It also opens a *huge* loophole on government consumption. The Federal government already provides grants to various non-profits to provide various social services. Under your interpretation of the FairTax, the Feds can now dodge the application of the FairTax to government consumption by simply expanding that operational model. Instead of spending money as the government and being FairTaxed on it, just funnel it through a ‘social welfare’ non-profit front group.
Non-profits can hold property, but no individual in the organization can benefit directly from it. That’s true. I cede that.
Now I agree with your assessment about creating distinguished consumers under the proposal, but I am not making this up on my own. I arrived at this conclusion after checking with three different sites, including fairtax.org. I know you disagree, and we’ve hashed out why.
Until one of us can produce another argument beyond what is presented here, it seems pretty clear we will continue to disagree.
I simply want a definitive answer on this issue, one way or the other. If I am in the wrong on this, that’s fine with me. it wouldn’t bother me too much if non-profits were taxed on consumption (though I imagine non-profits might). I will continue to press Dr. Walby, the leadership at fairtaxgroups.com and others for a solid answer on legal terms using the bill’s language and will repost my findings here as I dig them up. Somebody out there has to know the answer, and if I am wrong, fairtax.org is seriously misrepresenting the bill with respect to non-profit orgs.
I’ve been trying to follow this thread with great interest. It looks to me as though there may be a loophole in HR25 which allows any not for profit organization to purchase goods and services tax free, and if they give the goods or services away, then no tax would ever be collected. Makes me wonder about the claim that everything gets taxed once and once only under the Fairtax.
Could I set up a not for profit corporation, purchase groceries tax free, and give the stuff to my extended family with no taxes ever collected? And perhaps other family members could incorporate and purchase other stuff in the same manner. Or perhaps return the favor in terms of barter goods or services. Not at all sure what concerns me, but something about this whole lash up seems to have a distinct odor?
I look forward to some clarification!
You can do that today, until you get caught, anyway.
Today a non-profit organization pays no federal income taxes (except for its employees), usually no state income taxes, and in most states, no state sales taxes (exempted at the register with a certificate or card).
Bogus non-profits come and go all the time, so your concern is certainly warranted, but only so far as abuse goes. Personally I think the FairTax would restrict non-profits more than today, even if they operated tax-free.
So in my opinion, this ain’t news. The news would be if we threw that out and taxed them as quadrupole supposes, while professing to maintain their tax-free status as the fairtax.org folks note in their literature and have told me on the phone. Now that would be misrepresentation, and that would make some folks angry (rightfully so).
I invite any other readers out there to help clarify this if they have good primary source information.
I asked the folks at fairtaxgroups.com this question and this was their response:
You can view my question and their reply here: http://fairtaxgroups.com/index.php?topic=1738.0
‘The following is gleaned from FairTax treatment of churches and nonprofit organizations. The provisions from HR25 are very clear, in my estimation, and the white paper helps one understand the treatment of not-for-profits.
Not-for-profit organizations must qualify as not-for-profit. The qualifications from HR25, section 706, are given below.
Once an organization qualifies as a not-for-profit organization, and issued certification as evidence of their qualification, they are treated just like any other qualified business enterprise.
That is to say, taxable property or services purchased by qualified not-for-profit organizations for business purposes are not taxable. Just as any other business, the organization must present its certificate to the seller when making purchases in order for the sale to be tax exempt.
If the not-for-profit organization provides taxable goods and/or services in connection with contributions, dues or other payments to the organization, the FairTax would apply to that provision of taxable goods and/or services.
For example, the church provides a soup kitchen. Supplies purchased for that soup kitchen are not subject to the FairTax. The church gives the soup to people and that is not taxed. No contribution was rendered for that soup by the recipient so there was nothing to base the tax on.
Were the church to give the soup to people as a result of a “contribution” of some amount for the soup, the “contribution” would be taxed because it would be a form of payment for the soup whether that contribution was required or not. That property was provided in connection with a contribution and the church is responsible for remiting the tax to the state sales tax authority.
`SEC. 706. NOT-FOR-PROFIT ORGANIZATIONS.
`(a) Not-For-Profit Organizations- Dues, contributions, and similar payments to qualified not-for-profit organizations shall not be considered gross payments for taxable property or services for purposes of this subtitle.
`(b) Definition- For purposes of this section, the term `qualified not-for-profit organization’ means a not-for-profit organization organized and operated exclusively–
`(1) for religious, charitable, scientific, testing for public safety, literary, or educational purposes;
`(2) as civic leagues or social welfare organizations;
`(3) as labor, agricultural, or horticultural organizations;
`(4) as chambers of commerce, business leagues, or trade associations; or
`(5) as fraternal beneficiary societies, orders, or associations;
no part of the net earnings of which inures to the benefit of any private shareholder or individual.
`(c) Qualification Certificates- Upon application in a form prescribed by the Secretary, the sales tax administering authority shall provide qualification certificates to qualified not-for-profit organizations.
`(d) Taxable Transactions- If a qualified not-for-profit organization provides taxable property or services in connection with contributions, dues, or similar payments to the organization, then it shall be required to treat the provision of said taxable property or services as a purchase taxable pursuant to this subtitle at the fair market value of said taxable property or services.
`(e) Exemptions- Taxable property and services purchased by a qualified not-for-profit organization shall be eligible for the exemptions provided in section 102.’