Our nonprofit's exemption renewal was denied because we submitted a financial review instead of a financial audit -- do we have to get the audit, or can the Department accept the review we already have?

Subject

Nonprofit Exemption; Renewal Requirements

Plain-English summary

A Virginia nonprofit organization tried to renew its sales and use tax nonprofit exemption and submitted a financial review to accompany its renewal application. The Department's Nonprofit Exemption Unit denied the exemption because the Taxpayer's gross annual revenue had exceeded $1 million in the previous year -- a threshold at which the Department may require an independent certified public accountant's financial audit rather than accept a lesser financial review. The Taxpayer asked the Department to accept the financial review it had already provided, arguing it had not been aware of the audit requirement before it applied for renewal.

The Tax Commissioner ruled against the Taxpayer. Under Va. Code § 58.1-609.11 (4), once an entity's gross annual revenue reaches at least $750,000 it must provide an independent financial review, but once gross annual revenue reaches at least $1 million, the Department may specifically require a full independent financial audit instead -- and if the Department makes that specific requirement, the entity must provide the audit "in lieu of" the review to qualify for the exemption. Because the Nonprofit Exemption Unit had told the Taxpayer an audit was required, and the statute gave the Department that authority, the Commissioner found no basis to overrule the requirement. The ruling directed the Taxpayer to provide the requested financial audit so the Department could reconsider the renewal application.

What this means for you

Nonprofits nearing or above the $1 million revenue threshold

If your organization's gross annual revenue reaches $750,000, plan on providing an independent financial review with your exemption renewal. If it reaches $1 million, be prepared for the Department to instead require a full financial audit performed by an independent certified public accountant -- a more rigorous (and more expensive) process than a review. Not knowing about this requirement in advance is not a basis for the Department to accept a lesser review in its place.

What "audit" versus "review" means for renewal timing

Because an audit takes longer and costs more to obtain than a review, nonprofits approaching the $1 million revenue mark should budget time and expense in advance of a renewal deadline, rather than waiting for a denial letter to learn which document the Department will require.

If your renewal is denied for lacking an audit

The remedy here was straightforward: obtain and submit the independent financial audit the Nonprofit Exemption Unit requested. The Commissioner treated the Department's authority to demand the audit (once revenue exceeds $1 million) as clear-cut under the statute, so arguing unfamiliarity with the requirement did not change the outcome.

Common questions

Q: Did the nonprofit get its exemption renewed based on the financial review it already submitted?
A: No. The Tax Commissioner denied that request and upheld the Department's requirement that the Taxpayer submit an independent financial audit instead, since its gross annual revenue exceeded $1 million in the previous year.

Q: What's the difference between the financial review and financial audit requirements?
A: Under Va. Code § 58.1-609.11 (4), an entity with gross annual revenue of at least $750,000 in the previous year must provide a financial review performed by an independent certified public accountant. For an entity with gross annual revenue of at least $1 million in the previous year, the Department may instead require a financial audit performed by an independent certified public accountant, and if it does, that audit must be provided in lieu of the review to qualify for the exemption.

Q: Does the Department have to warn a nonprofit about the audit requirement before it applies for renewal?
A: The ruling doesn't say the Department must give advance notice. Here, the Taxpayer argued it wasn't told to expect an audit before applying, but the Commissioner still found no basis to overrule the Nonprofit Exemption Unit's requirement once the Taxpayer's revenue crossed the $1 million threshold.

Q: What did the Taxpayer need to do to move its renewal forward?
A: Provide the requested financial audit performed by an independent certified public accountant so the Department could review it and reconsider the renewal application.

Q: Is the $1 million audit requirement automatic, or does the Department have discretion?
A: The statute frames it as something the Department "may require" once gross annual revenue reaches at least $1 million -- and once the Department specifically requires the audit, the entity must provide it to qualify for the exemption.

Citations and references

Statutes:

• Va. Code § 58.1-609.11 (nonprofit exemption; financial review and financial audit requirements)
• Va. Code § 58.1-609.11 (4) (financial audit required for entities with gross annual revenue of at least $1 million in the previous year, in lieu of a financial review)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-10

Original ruling text

February 9, 2021

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), requesting a ruling regarding the Department’s denial of the nonprofit exemption. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is a nonprofit in Virginia. Upon attempting to renew its nonprofit application, the Taxpayer submitted a financial review to accompany the application package. The Department’s Nonprofit Exemption Unit did not grant the exemption because the Taxpayer’s gross annual revenue exceeded $1 million in the previous year. In the Department’s letter to the Taxpayer, it was explained that organizations whose gross annual revenue exceeds $1 million are required to submit a financial audit conducted by an independent certified public accountant pursuant to Virginia Code § 58.1-609.11. The Taxpayer requests the Department accept the financial review presented as the Taxpayer was not aware of the requirement for an independent financial audit.

RULING

Virginia Code § 58.1-609.11 (4) states:

“If the entity's gross annual revenue was at least $750,000 in the previous year, then the entity must provide a financial review performed by an independent certified public accountant. However, for any entity with gross annual revenue of at least $1 million in the previous year, the Department may require that the entity provide a financial audit performed by an independent certified public accountant. If the Department specifically requires an entity with gross annual revenue of at least $1 million in the previous year to provide a financial audit performed by an independent certified public accountant, then the entity shall provide such audit in order to qualify for the exemption under this section, which audit shall be in lieu of the financial review…”

The Taxpayer argues that the Department did not request a financial audit before the Taxpayer applied for the renewal, and that it had already performed a financial review. Thus, the Taxpayer contends that the Department should accept the financial review in lieu of the independent financial audit.

Pursuant to Virginia Code § 58.1-609.11, the Department is authorized to require a financial audit performed by an independent certified public accountant for organizations with gross revenues exceeding $1 million. The Nonprofit Exemption Unit, in its letter, indicated the Taxpayer is required to submit a financial audit performed by an independent certified public accountant in order for the Department to reconsider the renewal application. In accordance with Virginia Code § 58.1-609.11, there is no basis to overrule the requirement. Therefore, the Taxpayer should provide the requested financial audit for review in order to renew its nonprofit exemption.

The Code of Virginia section cited, along with other reference documents, is available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3410L