CHAPTER 6
State Tax-Exempt Status
Don't assume state exemption is automatic! While some states grant it based on your federal 501(c)(3) letter, others (like California or Texas) require you to file a separate state-level application for sales and franchise tax exemption.
⚠️ Common Misconception
Many new nonprofits assume that getting federal 501(c)(3) status automatically exempts them from all state taxes. This is not always true.
Types of State Tax Exemptions
Sales Tax Exemption
Allows your nonprofit to purchase goods and services without paying sales tax. Requirements vary by state—some grant this automatically, others require an application.
Example: Office supplies, equipment, promotional materials
Income Tax Exemption
Most states don't tax nonprofit income if you have federal 501(c)(3) status, but you may still need to file annual information returns.
Example: Donations, grants, program revenue
Property Tax Exemption
If you own property, you may be exempt from property taxes, but this usually requires a separate application to your county assessor's office.
Example: Office buildings, land, facilities
State-Specific Examples
California
Must file Form 3500 (Exemption Application) with the California Franchise Tax Board within 90 days of receiving federal determination letter.
Annual filing required: Form 199
Texas
File Form AP-204 (Application for Exemption) with the Texas Comptroller's office to claim sales tax exemption on purchases.
No state income tax, but franchise tax may apply
✅ Action Item
Contact your state's tax department or visit their website to determine which exemptions you qualify for and what forms you need to file.