PAYMENT OF VIRGINIA TAXES AND AVAILABLE EXCEPTIONS
By William J. Olson
William J. Olson, P.C.
8180 Greensboro Drive, Suite 1070
McLean, Virginia 22102-3823
Virginia nonprofits are required to pay many of the same taxes and fees as for-profits. However, there are numerous exceptions to this rule, discussed below.
A. INCOME TAX
Under state law, corporations not conducted for profit, which are exempt from federal income tax, are exempt from filing a Virginia corporation income tax return, unless they have income subject to federal tax (i.e., unrelated business income). The statutory exemption for nonprofit corporations applies to "corporations not organized or conducted for pecuniary profit which by reason of their purposes or activities are exempt from income tax under the laws of the United States." Code of Virginia, § 58.1-401(5).
B. EMPLOYEE INCOME TAX WITHHOLDINGS
Nonprofit employers are obligated to withhold Virginia Income Tax from employee wages. Code of Virginia, § 58.1-461. Employers must establish a Virginia Employer's Withholding Tax Account by filing Form R-1 with the Virginia Department of Taxation. There are three levels of withholding:
C. UNEMPLOYMENT COMPENSATION
A nonprofit is subject to Virginia unemployment tax if one of the following conditions is met:
Tax is assessed on employers -- new employers must pay 2.5 percent of the first $8,000 of each employee's salary for three years. After three years, the rate is based upon claims made against the employer, and the status of the compensation fund. The tax is paid, and returns are filed, quarterly.
A 501(c)(3) can elect to cover unemployment claims against it instead of paying unemployment taxes. Code of Virginia, § 60.2-501.
Certain churches and other religious organizations, rehabilitation facilities, work-relief programs, and custodial institutions are excepted from this tax. Code of Virginia, § 60.2-213.
D. SALES AND USE TAX
Nonprofits which engage in retail sales (that are not "occasional sales", see Code of Virginia, § 58.1-602) must collect the state sales tax (3.5 percent) and, where applicable, local sales tax (1.0 percent) and remit them to the Virginia Department of Taxation on a monthly basis, using Form ST-9. Nonprofits collecting sales tax must register with the Virginia Department of Taxation, using Form R-1.
Sales tax collected must be separately stated to the customer, then added to the sales price or charge. Failure to file or pay the full amount of tax collected by the due date results in the imposition of penalty. The minimum penalty is $10.00, and may be imposed even if no tax is owed, if the required form is not filed. The penalty starts at 6 percent of the tax owed, and interest is added at the federal underpayment rate plus 2 percent. The maximum penalty is 30 percent of the tax owed.
Nonprofits are also liable to pay sales tax (and use tax) on purchases which they make, unless they obtain a sales tax exemption. The use tax applies to tangible personal property which is used, consumed, or stored in Virginia, which was purchased outside the state, but would have been subject to sales tax had it been purchased within the state, or should have had sales tax collected. Nonprofits paying use tax must register with the Virginia Department of Taxation, using Form R-1.
Eligibility for an exemption from paying sales and use tax can either be statutory (Code of Virginia §§ 58.1-609.1-10) or by action of the General Assembly. Nonprofits can seek exemptions under Code of Virginia, §§ 58.1-609.4 (educational organizations), § 609.7 (medical-related organizations), § 609.8 (community service organizations), § 609.9 (cultural organizations), or § 609.10 (miscellaneous exemptions).
Exemptions granted by the General Assembly are actually codified. There are 133 paragraphs of § 609.8 identifying nonprofits which are exempt from sales tax; 124 of these exemptions are currently scheduled to expire on June 30, 1999. For the latter process, a form, "Request For Sales and Use Tax Exemption," must be filed with the Virginia Department of Taxation by a member of the General Assembly. For the petition to be considered during the next regular session of the General Assembly, the form must be filed by November 1 of the prior year. The latter process is often turned to because statutory exemptions are interpreted narrowly.
E. REAL PROPERTY TAX
Many nonprofits are exempt from paying real estate taxes on property which is used for exempt purposes. Churches, hospitals, museums, and other nonprofits enjoy exemptions from real estate taxes. Virginia Constitution, art. X, §§ 6(a)(1)-(4), (6); Code of Virginia, §§ 58.1-3606, 3607, 3610-21.
However, Virginia allows local governments to impose a "service charge" on certain nonprofits which are exempt from real estate taxes. Code of Virginia, § 58.1-3400, et seq. This charge may not exceed 20 percent of the real estate tax rate of the local government (except with regard to faculty and staff housing). § 58.1-3401(C). However, the charge may not be imposed on certain real estate owned by educational or religious nonprofits. § 58.1-3402.
Virginia requires local governments to maintain an inventory and assessment of all tax-exempt properties within their jurisdiction. Code of Virginia, § 58.1-3604.
F. RECORDATION AND OTHER TAXES
1. Recordation Tax
Virginia imposes a state tax on both grantors and grantees upon the admission to record of deeds, deeds of trust and mortgages. Code of Virginia, §§ 58.1-801, et seq. Certain nonprofits, including churches, nonprofit colleges and schools, and hospitals, are exempt from paying the state tax on the admission to record of deeds (for real estate conveyed to them), deeds of trust, and mortgages. § 58.1-811. Churches and nonprofit colleges and schools are also exempt from paying state tax on conveyances of real estate conveyed by them. Id.
2. Business, Professional and Occupational Licenses
Under the uniform BPOL tax law enacted in 1996, receipts of most nonprofit organizations, except for unrelated business income taxable under the Internal Revenue Code which exceeds $10,000, are excluded from BPOL taxation. See Code of Virginia, § 58.1-3703.C.18.
3. Business Tangible Personal Property Tax
Local governments may impose business personal property tax on furniture, fixtures, computer equipment, machinery, and other equipment. Churches, hospitals, museums, and other nonprofits enjoy exemptions from personal property taxes. Code of Virginia, §§ 58.1-3610-21.
4. Business Vehicle Personal Property Tax
Local governments may impose business personal property tax on vehicles. Vehicles must also carry vehicle license decals. Religious nonprofits are exempt from paying taxes on motor vehicles. Code of Virginia, § 58.1-3617.
5. Business Vehicle Sales Tax
Local governments may impose a tax on the sale or use of certain motor vehicles in Virginia. However, no tax may be imposed on a motor vehicle which is transferred by gift or sale to a 501(c)(3), where the nonprofit does not title and tag the motor vehicle for use. Nor may a tax be imposed where the vehicle is to be used by certain nonprofit health care or charitable distribution organizations. Code of Virginia, §§ 58.1-2402, 2403.