By Monika Briggs, CPA

This series is designed to serve as a foundational guide for CPAs who are new to the nonprofit space. It aims to help them navigate this sector while demystifying the complex and overwhelming nonprofit regulatory landscape. This series will empower CPAs with the knowledge necessary to thoughtfully manage nonprofit finances and adeptly handle the myriad regulatory and compliance challenges they will encounter.

The series launched in April with "What Every CPA Needs to Know about Nonprofit Status," and continued in part two with "What Every CPA Needs to Know about Federal Filing Requirements." In this post, we will look at the nuanced world of state-specific filing requirements.

While tax-exempt status is governed by federal law, the nuts and bolts of forming, structuring, and operating a nonprofit are dictated at the state level. Nonprofit organizations must navigate a number of state-specific filing requirements, which are crucial for ensuring that nonprofits operate transparently and are accountable to the public and state regulators. Adhering to these filing requirements is essential – not only for legal compliance but also for demonstrating an organization's commitment to ethical operation. This article explores the typical annual reporting and filing obligations that nonprofits must fulfill across various states, reviews sales tax compliance, outlines the basics of charitable solicitation registration, and discusses the impact of the Charleston Principles on nonprofits that engage in online fundraising. Each of these aspects plays a vital role in maintaining a nonprofit's good standing at the state level.

State Annual Financial Reporting Requirements

Entity formation and governance are governed at the state level, and each state has its own set of requirements for formation, registration, and annual financial reporting. These requirements can vary widely, so it is important for organizations to understand local requirements to maintain good standing and ensure compliance with state regulations.

Pennsylvania’s Annual Report Requirement – The enactment of Act 122 in November 2022 made significant changes to Title 15 of the Pennsylvania Consolidated Statutes. Title 15 governs corporations and unincorporated associations in the state, including both nonprofit and for-profit organizations. Among many notable changes, Act 122 instituted an annual report requirement for all entities registered in Pennsylvania. Prior to this legislation, Pennsylvania required a decennial (every 10 years) report to be filed by each entity to evidence its continued existence.

Starting in 2025, entities will have to submit annual reports to the Pennsylvania Department of State. The submission deadlines are staggered based on entity type: June 30 for corporations (both for-profit and nonprofit), Oct. 1 for limited liability companies, and Dec. 31 for all other entity types. While a $7.00 filing fee accompanies each report, nonprofit entities are exempt from payment. The annual reports will contain essential details, such as the name of at least one governor, information about the principal officers, and the principal office of the entity. Failure to file the annual report will result in administrative dissolution or cancellation, as well as loss of the protection of its name.

Income Tax Exemption at the State Level

While tax-exempt status is a matter of federal law, once approved as tax-exempt by the IRS an organization is not typically subject to state income taxes, with the exception of state tax regulations applied to unrelated business taxable income. Therefore, states do not require a separate state-level equivalent of IRS Form 990 for nonprofit organizations. Instead, they typically rely on the information provided on the federal Form 990 to assess the activities and compliance of nonprofits within their jurisdiction. However, since regulations vary from state to state, it's always a good idea to consult with a local attorney or CPA or check directly with the state's charity bureau or similar regulatory body for the most accurate guidance.

Sales and Use Taxes

Navigating state-level sales tax compliance for nonprofits can be quite complex. Generally, nonprofit organizations, especially those recognized as a 501(c)(3), are exempt from paying sales tax on purchases if the items are used for their exempt purposes. However, these organizations typically need to apply for sales tax exemption through a formal application process in their respective states, which often requires providing proof of their tax-exempt status and demonstrating that purchases are directly related to their exempt activities. Once approved, nonprofits must provide vendors with evidence of their sales tax exemption, which could range from a valid exemption number to a copy of the exemption letter. In Pennsylvania, nonprofits are generally exempt from state sales and use taxes on most goods and services, significantly reducing operational costs.

It’s important to note that most states, including Pennsylvania, require nonprofits to collect and remit sales tax on items and services they sell, much like any other commercial business. Exceptions to this rule usually apply to specific fundraising activities, but conditions vary significantly from state to state. For example, some states offer temporary or event-specific exemptions if the sales occur over a limited number of days per year and the proceeds are used directly for the nonprofit's exempt purposes.

State Charitable Registration

Fundraising is a crucial activity for nonprofit organizations, which rely heavily on these efforts for operational funding. Most states regulate these fundraising activities through a state charitable registration process.

State charitable solicitation registration is a key aspect of state compliance for nonprofit organizations engaged in fundraising. Charitable solicitation registration is mandated by most states to ensure transparency and protect the public from fraudulent activities. This registration allows states to keep a record of organizations that are soliciting funds from their residents, ensuring these organizations are legitimate and operate in compliance with the law. When a nonprofit begins soliciting contributions, grants, or membership fees in a state, it may become subject to registration and filing requirements related to solicitations.

State charitable registration regulations are based on whether an organization is located or has nexus in a state. It’s important to remember that an organization does not need to be physically present within a state to have nexus. If the organization is raising funds within a state, it is deemed to have nexus. Generally, any nonprofit that solicits donations from residents of a state, regardless of where the nonprofit is based, must register in that state. This includes fundraising through mail, phone, email, and, increasingly, online platforms.

Currently, 40 states and the District of Columbia require registration; only 11 are without any, or have very limited, registration requirements for nonprofits wishing to solicit funds in their states. Failing to register can result in penalties, fines, and sometimes the prohibition of fundraising activities within the state until compliance is achieved. Penalties not only affect an organization financially, but they can also damage its reputation.

In Multiple Jurisdictions – For nonprofits that solicit donations from multiple states, compliance can become particularly complex. Each state has its own set of rules and forms, and keeping track of all the requirements and deadlines can be a significant administrative burden. Fortunately, of the 40 states and the District of Columbia that require registration, 37 accept the Unified Registration Statement (URS). The URS, developed by the National Association of State Charities Officials and the National Association of Attorney Generals, standardizes the process, allowing nonprofits to use one form instead of multiple state-specific forms.

The URS is a three-page form that covers basic organizational information through more in-depth reporting. It’s important to note, however, that many states require additional state-specific forms to be completed and filed with the URS. Also, while each state’s requirement for attachment of Form 990 and financial statements may vary, it is an almost universal requirement that an organization include the articles of incorporation or other formation documents, bylaws, and IRS determination letter with the registration.

In Pennsylvania – Most organizations that solicit charitable contributions from Pennsylvania residents must register with the Department of State's Bureau of Corporations and Charitable Organizations, which administers the charitable solicitation laws and maintains a database of charities, professional solicitors, and fundraising counsels. Organizations that solicit contributions from Pennsylvania residents and receive more than $25,000 of gross national contributions must register with the state by filing a Charitable Organization Registration Statement (Form BCO-10), unless the organization is specifically excluded or exempt. The BCO-10 is due on the 15th day of the fifth month after the close of the fiscal year. Organizations must also pay an annual registration fee ranging from $15 to $250, depending on the organization's gross annual contributions.

Information disclosed on the BCO-10 includes details about fundraising activities, leadership and compensation, and data regarding professional fundraisers used. Further, nonprofits are required to attach supplementary documents that substantiate the reported information, including financial statements and a copy of IRS Form 990 and its schedules. Initial filings must also include the IRS determination letter, articles of incorporation or charter, and bylaws. Organizations not filing a standard Form 990 (such those that file a 990N, 990EZ, or 990PF) must also complete the Public Disclosure Statement (Form BCO-23).

Financial statement requirements in Pennsylvania vary based on the organization’s gross national contributions:

• Under $100,000: Internally prepared, compiled, reviewed, or audited.
• $100,000 to under $250,000: Compiled, reviewed, or audited.
• $250,000 to under $750,000: Reviewed or audited.
• $750,000 and above: Audited.

Nonprofits must monitor their fundraising closely. As the level of contributions to a nonprofit organization increases, proactive planning becomes essential to ensure that the organization and its accounting firm are prepared to meet the evolving financial reporting requirements.

Finally, several types of organizations are statutorily exempt from filing an annual registration statement in Pennsylvania, including religious institutions, educations institutions, hospitals, libraries, and others. Further, any charitable organization that receives gross national contributions of $25,000 or less annually and does not compensate any person who conducts solicitations is also exempt from filing. In lieu of the BCO-23, exempt organizations must file a Request for Approval of Exemption/Exclusion (Form BCO-9) with the required supporting information.

The Charleston Principles and Online Fundraising

The growth of online and digital fundraising has introduced new opportunities for nonprofits, but it has also added regulatory challenges. The Charleston Principles were established as guidelines during a 2001 conference in Charleston, S.C., and later adopted by the National Association of State Charity Officials (NASCO). These principles are designed to clarify state regulatory requirements for nonprofits soliciting donations online across different states.

The Charleston Principles address the issue of physical presence traditionally required for state regulatory oversight. They offer a clear framework for nonprofits so they understand when they need to register for soliciting donations from residents of various states, without necessitating physical presence.

Under the Charleston Principles, nonprofits are advised to register in states where:

• Their noninternet activities alone would require solicitation in the state (such as direct mail or telephone solicitation of the state’s residents).
• The entity solicits contributions through an interactive, active site, and either …
  – Actively targets residents through direct solicitation methods like targeted emails or advertising.
  – Receives contributions from the state on a repeated, ongoing, or substantial basis.
• Solicitations are conducted through a noninteractive, passive site that specifically intends to solicit donations from that state's residents on an ongoing basis.

These principles do not carry legal weight, but they are widely respected as a regulatory framework, helping nonprofits ensure compliance and avoid legal pitfalls in interstate online fundraising.

Conclusion

In this blog, we examined the key annual reporting and filing obligations that nonprofits need to fulfill across various states, explored sales tax compliance, outlined the basics of charitable solicitation registration, and discussed the impact of the Charleston Principles on nonprofits that engage in online fundraising. This review emphasizes the importance of understanding and adhering to state-specific regulations to ensure transparency, legal compliance, and the maintenance of public trust within the nonprofit sector.

In the next installment, I will explore the critical topic of governance and board oversight for nonprofits. Boards of directors are pivotal in ensuring ethical governance and strategic direction, and I’ll delve into the best practices for establishing and maintaining a strong board and complying with relevant governance regulations. Stay tuned to learn how good governance can fundamentally strengthen your organization and enhance its impact within the community.

The Essential Nonprofit Compliance Series

May 6 | What Every CPA Needs to Know about Nonprofit Status
June 3 | What Every CPA Needs to Know about Federal Filing Requirements

Monika Briggs, CPA, has a particular passion for nonprofit finance and compliance, actively enhancing her expertise while helping organizations navigate complex regulatory environments. She can be reached at monika.briggs@gmail.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}