Can I sell things for a profit and be tax-exempt?

Summary:

Selling items does not risk an organization's tax-exempt status if the revenue generated is used to promote the organization's exempt function and the applicable taxes are paid on any unrelated business income.

Answer:

In July 2000, someone wrote to nonprofit (see http://www.rain.org/mailman/listinfo/nonprofit):

I am looking for an answer, we are a nonprofit organization supporting a
skating team. We would like to sell a few items to profit the fundraising
efforts by buying from a wholesaler and selling at a competitve retail price.
Can we do this? All profits will go back to the organization and they will be
sold at a fundraising table by volunteers

Tony Poderis (http://www.raise-funds.com) replied with these thoughts:
Yes, you certainly can sell commercial products to help support
your non-profit organization. There are many good collaborative opportunities
available with reputable vendors. When considering selling those products,
first ask yourself:

1. If we sell a product to help support our organization, will the time, effort,
   and expense we put into it be justified relative to the net profit?
   
   
2. Will we be certain that the selling program does not restrict nor replace the
   far more effective and proven philanthropic process we are --- or should be ---
   carrying out?
   
   
3. What plans (advance mailings, flyers, signage, etc.) can we develop which
   will maximize our chances for real profit, recognizing the limits of what we can
   do with a table display of products, and our expectations that passersby ---
   especially those not knowing us --- will stop and make purchases? When we
   attempt to sell to the general public which does not know our organization, do we
   really believe we will make a meaningful amount of money strictly due to the sale
   of a commercial product otherwise competitively available in the marketplace ---
   sold to persons having no relationship at all to our organization?
   
   
4. If we sell to our regular donors, will we run the risk of annoying them and
   perhaps losing or diminishing their regular charitable support with yet another
   type of solicitation? Will they consider the two transactions as truly separate
   issues? We must accept the fact that, contrary to what the vendors selling
   commercial products to us declare, our regular donors making product purchases
   will generally regard their expenditures as primarily charitable support of our
   organization --- regardless of their receipt of tangible goods.

When you do choose to sell a vendor’s products to make money for your
organization, I suggest that between you and the vendor, the following questions
should be answered:

1. What will our total expenses be --- the gross cost (and description) of
   everything we will be obliged to pay?
   
   
2. What can we expect to earn as clear net profit after we sell what we agree to
   sell?
   
   
3. Will we be required to buy the products outright? If so, can we return
   unsold merchandise and receive full reimbursement? Will there be a time limit
   for such returns?
   
   
4. If we operate on consignment of the product, will there be any penalties or
   restrictions for unsold returns?
   
   
5. What will our agreement be regarding either party’s responsibility to pay
   shipping and handling charges?

The big questions to ask of your organization remain:

• What are our chances to make enough money to make enough of an impact in
  support of our organization by working to sell people products in our
  “marketplace” which are commonly available to them elsewhere?
  
• What true meaning
  and value are such transactions going to have for our supporters?

Someone wrote to soc.org.nonprofit (in the mid-'90s) about their plan incorporate as a non-profit and sell Native American
artifacts, contributing to public education by promoting these crafts. Responding to this post, another reader said:
The problem is if the answer to "What is the exempt purpose?" is "It
might be public education, I think." The IRS will be profoundly
suspicious.

The first issue for an organization is to determine if it HAS an exempt
purpose. If the answer is in the affirmative, then it is merely a
technical issue to determine how to satisfy the exempt
organization/non-profit rules. But if the approach is: let's get tax
exempt by coming up with an exempt purpose, that is an invitation to
disaster.

Selling Native American artifacts is not, per se, an exempt function,
nor does it necessarily have a "public education" component sufficient
for exemption. IF public education were the primary purpose
(or if the purpose of the organization were to provide social services,
education, etc. to the native americans), then the sale of the goods as a
way of generating revenues for THAT purpose would not prevent it from being organized as a nonprofit corporation.

Further, though, the proposed nonprofit corporation will be required to pay federal UBIT (Unrelated Business Income Tax) on revenues received by a business operated to support its exempt activity but not, itself, directly related to the organization's exempt purpose. There may be state and local tax and business-franchise rules that apply as well.

Why not simply be a for-profit business, make money and donate to the
non-profit of your choice, to benefit programs for Native Americans?

You could be the next Paul Newman.

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Reposted 7/26/01 -- PB