Situation

Marathon Bible College (MBC) is a qualified public charity under Internal Revenue Code section 501(c)(3). MBC operates a bookstore on its campus that sells books, t-shirts and other clothing items imprinted with the university’s name, computer hardware and software, music, and educational supplies, such as notebooks and pens. The bookstore also sells food, appliances, toiletry items, other clothing apparel, and other convenience items. The sale of all of these items by the university to its students, faculty and staff does not result in unrelated business income because all items are either related to the university’s educational purposes or are for the convenience of the students, faculty and staff of the university. To the extent these items are sold to the general public, the income arising from the sale of food, appliances, toiletry items, other clothing apparel and convenience items could result in taxable unrelated business income to MBC.

Rules

From Treasury Regulation 1.513-1(e)(2):

Any trade or business carried on by an organization described in section 501(c)(3) or by a governmental college or university described in section 511(a)(2)(B), primarily for the convenience of its members, students, patients, officers, or employees; or, any trade or business carried on by a local association of employees described in section 501(c)(4) organized before May 27, 1969, which consists of the selling by the organization of items of work related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment[.]

Occasional sales to the general public could be deemed not “regularly carried on”, provided such sales are not “systematically and consistently promoted” [Reg. 1.513-1(c)(2)(ii)]. This would mean that it is important that you do not formally advertise your bookstore to the general public nor offer “coupons” in commercial newspapers. There is an advisory (FSA 200012051) that disregarded this provision by holding that sales to the general public were taxable even though the activity involved satisfied the convenience test.

From the 2014 Report of the Advisory Committee for Tax Exempt and Governmental Entities (Exempt Organizations subcommittee report, Appendix A):

Situation 16

X is a state university. X operates a bookstore on its campus that sells books, t-shirts and other clothing items imprinted with the university’s name, computer hardware and software, music, and educational supplies, such as notebooks and pens. The bookstore also sells food, appliances, toiletry items, other clothing apparel, and other convenience items. The sale of all of these items by the university to its students, faculty and staff does not result in unrelated business income because all items are either related to the university’s educational purposes or are for the convenience of the students, faculty and staff of the university. To the extent these items are sold to the public, the income arising from the sale of food, appliances, toiletry items, other clothing apparel and convenience items results in taxable unrelated business income to X.

Dave’s commentary:

It is a “best practice” for college/seminary/university bookstores to periodically monitor their sales activity to the general public in order to gauge what exposure, if any, they may have to UBIT in this area.  One method might be to offer a discount to students, faculty, and staff who present a valid ID and track the customers who do not take advantage of the discount.  If monitored for a few consecutive days, two or three times a year, this can provide valuable data that will allow management to discern what level of UBIT reporting they might be required to make.

Bottom Line

Certainly “bookstores” on your campuses that provide not only textbooks and supplies for students but other products that are “for the convenience” of your students is an integral part of what you do. However, the IRS may deem that you have unrelated business income if sales to the general public are large, frequent, and/or as the result of aggressive “public advertising”. You should take great care in making sure that your bookstore operations are within the rules.

Specific questions? Email Dave Moja

 The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.