We are considering holding a competition to create posters, bookmarks, and greeting cards based on the importance of literacy. We want to use the competition as a way to gain greater public recognition, and then sell the products as a fundraiser. Would we be in conflict with our nonprofit status? Would we need to charge sales tax? -Kathy Kilrain del Rio, Executive Director, Literacy Volunteers of Greater Saco-Biddeford, Me.
Your idea to hold a competition to create items that support the theme of your organization, then sell the items as a fundraiser, sounds good. Selling items, especially ones that support your mission, is not a conflict with your nonprofit status. A nonprofit organization can actually earn a profit and not pay income tax, because what we commonly call "nonprofit" status is actually "tax-exempt" status granted under Section 501(c)(3) of the Internal Revenue Code. There are some limits on the ways you can generate tax-exempt profits, and I am not an expert in the tax code, so please consult a Certified Public Accountant in your state for a formal opinion before proceeding. The CPA can also answer your questions about sales tax on the items you sell.
In addition to considering the tax implications, you should think carefully about the time and effort your organization will have to invest in this fundraising effort. You probably will not earn a large profit on the bookmarks and greeting cards that you sell because these are typically low value items. Prepare the best estimate you can of your expected total revenues, costs, and net profit before you decide what to do. It might make sense to just hold the competition as a way to increase public recognition of your organization and mission. You may decide to skip the manufacture and sale of the items if your revenue-cost-profit estimate shows that you would be better off doing some other activity as a fundraiser.
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