Crowdfunding—as many not-for-profits are already keenly aware—is the practice of funding a project or other venture by raising contributions via the Internet. This practice is gaining popularity among a wide audience, from individuals to for-profit entities seeking capital and not-for-profits raising money for their projects or social causes. And while various platforms make the process fairly straightforward, the Washington State tax landscape for not-for-profits can make it a bit more complex.
Let’s take a closer look at how crowdfunding works and what organizations exempt from federal income tax need to know about its tax implications—namely state sales, use, and B&O taxes. Note that while not-for-profit entities are generally exempt from federal income tax, there is no general exemption from Washington sales and business and occupation (B&O) taxes.
Generally speaking, crowdfunding platforms allow organizations to elevate their causes and reach more people efficiently. Each leverages the Internet along with its own, specific benefits. Some focus on arts and technology projects while others cater more to individuals. Still others aim to support not-for-profits and social issues. Each platform provides different levels of support; however, as a whole they’re still merely platforms and are otherwise similar at a fundamental level. They won’t replace your organization’s capital campaigns or other planned giving vehicles.
Before we get into the details, it’s helpful to begin with a few definitions:
- Host. This is the platform itself, such as GoFundMe, Kickstarter, etc.
- Project creator. This is the individual or entity creating the project for funding.
- Backer. This is a business or individual that offers money to fund the project.
There are various ways to raise money using crowdfunding platforms. Some project creators ask for donations to reach a certain goal without offering a quid pro quo component. Others post projects advertising certain gifts at specific donation levels. For instance, an organization may state that a donation of up to $50 gets the backer a thank you note, a donation of $100 gets the backer a thank you plus a book, and a donation of $250 gets the backer a thank you and a hosted dinner.
Washington State Taxability
Crowdfunding by not-for-profits raises several questions regarding taxability under Washington State law, according to official state material as of December 17, 2014. What income from crowdfunding is taxable under the B&O tax? Should sales tax be charged? How are taxes calculated? When should taxes be paid? Additionally, each of the three parties to a crowdfunding transaction—the host, the project creator, and the backer—has a different tax consequence. In this article, we’ll focus on the tax issues facing project creators.
When discussing the tax consequence to the project creator, the B&O tax classification is based on the rewards provided to backers. The general B&O tax classification rules are:
- Amounts received in exchange for items with no significant value (such as thank you notes or the posting of a name) aren’t generally subject to B&O tax. It’s important to note that use tax may be imposed on the thank you cards that are distributed to Washington donors, generally measured by the cost of the cards. This is based on their use as promotional materials.
- Amounts received as solely donations (in other words, no goods or services are provided in exchange for the donations) aren’t generally subject to B&O tax nor do they create a sales tax collection and remittance obligation to the project creator.
- Amounts received in exchange for tangible personal property, digital products, or services are subject to B&O tax and may also create a sales tax collection and remittance obligation to the project creator.
Returning to the example we gave above—where the donation level determined whether a backer received a thank you note, thank you and book, or thank you and hosted dinner—the minimum donation amount at each level is considered to be the value of the item given in exchange. Amounts above the minimum donation are considered to be donations and are therefore not subject to tax. In the example above:
- The $50 tier would not be subject to sales or B&O tax.
- The $100 tier would be subject to B&O tax because it constitutes the sale of tangible personal property (the book). For gifts over $100 (but less than $250), the excess value would be considered a donation and therefore not subject to tax. Sales tax would also apply based on the location of the backer.
- The $250 tier would be subject to retailing B&O tax and retail sales tax unless the value of the dinner was less than 10 percent of the whole award’s value (in this case, $25). For gifts over $250, the excess value would be a donation not subject to tax.
Note that the project creator needs to report donations in the reporting period when the project is fully funded. Also note that the examples above are merely hypothetical tax outcomes; the amounts discussed don’t represent any threshold or bright-line test in tax law.
Regardless of the amount of the reward, the imposition of sales tax is controlled by the nature of the item exchanged for the donation. Sales tax is required on donations if a retail service or a retail product normally subject to tax is provided as a reward. Such taxable rewards include retail services, digital products, or tangible personal property.
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Keep in mind that gift acknowledgement rules for not-for-profits apply to donations raised via crowdfunding platforms. For gifts over $250, a written, contemporaneous gift acknowledgment letter should be provided to donors. If gifts or services are being provided, the letter should also indicate what was provided and make a good-faith estimate of the value.
If you have questions about how your organization’s crowdfunding or other fund-raising efforts may be taxed in Washington State, or for insight on related tax laws in other states, contact your Moss Adams professional.