Can a Nonprofit Sell Products, and When Is the Profit Taxed?

Yes. A nonprofit can sell products, and nothing in the tax code stops it. Selling raises two separate questions, and confusing them is where most of the trouble starts. The first is federal income tax: the profit is taxable only if the sales are a trade or business, regularly carried on, and not substantially related to the organization’s exempt purpose. The second is state sales tax, which has nothing to do with the first, and which many charities have to collect even when the profit is untaxed.

Very few charities sell much. Across 256,539 charities filing a full Form 990, 26,404 (10.3%) report any sales of inventory at all, and the median seller took $33,954 of gross sales and kept $9,871 of it. 13.5% of sellers lost money on the sales. The figures below are from the IRS annual extract of those returns, and the analysis script is published with the method.

The three questions that decide whether the profit is taxed

Unrelated business income tax, usually called UBIT, applies only when all three of these are true. If any one fails, the profit is not taxed, however commercial the activity looks.

• Is it a trade or business? An activity carried on for the production of income from selling goods or services. A one off donation of surplus equipment is not. A shop is.
• Is it regularly carried on? Judged against how a commercial business in the same trade would operate. A store open all year is regular. An annual bake sale, or a stall at one weekend fair, is not, which is why most one day sales are outside the tax entirely.
• Is it substantially related to the exempt purpose? The sale itself has to advance the mission, not just fund it. This is the test people get wrong. Raising money for the mission is never what makes a sale related, because that is true of every fundraiser.

The third question is the one that decides most real cases. A museum shop selling reproductions of works in its own collection is related, because the merchandise itself teaches what the museum exists to teach. The same shop selling umbrellas and souvenir mugs is not. A sheltered workshop selling goods made by the disabled people it trains is related, because the making is the program. A charity selling branded t-shirts to supporters is, on the face of it, unrelated: the shirt does not deliver the mission, it advertises it.

Being unrelated is not a problem in itself. It means the profit on that activity is taxed at the 21% corporate rate, like any other company’s, after a $1,000 specific deduction. It only becomes an existential problem if unrelated business grows large enough to look like the organization’s real purpose, and there is no percentage in the law that marks the line. The usual practical answer, if a commercial line grows that far, is to move it into a taxable subsidiary the charity owns, which pays its own tax and can pass profits up as dividends.

The exceptions that rescue most small sales

Section 513 carves activities out of unrelated trade or business even when all three questions above point the wrong way. Three of them do most of the work for small charities:

• Volunteer labour. If substantially all the work of the selling activity is done by unpaid volunteers, it is not an unrelated trade or business. This is the exception that covers the volunteer run gift shop and most bake sales.
• Donated merchandise. If substantially all the goods sold were received as gifts or contributions, the sales are excluded. This is the thrift store exception, and it is why a charity shop full of donated clothing is not running a taxable retail business.
• Convenience of members. A cafeteria, bookstore or laundry carried on primarily for the convenience of an organization’s students, patients, officers or employees is excluded. It covers a hospital cafeteria and a college bookstore serving students, not the same shop selling to tourists.

A fourth exception covers the low cost articles a charity sends out unasked with an appeal, such as address labels or a keyring, where the recipient is not obliged to pay. The threshold is a dollar figure the IRS indexes each year, so check the current one before relying on it. None of these exceptions need an application. They are conditions the organization has to be able to show it met, which means keeping a record of who did the work and where the goods came from.

What charities that sell things actually report

Form 990 puts sales of inventory on their own line, Part VIII line 10a, with the cost of goods sold on line 10b, whether the selling is related or unrelated. That makes the population measurable.

The rate rises with size, from 9.0% to 14.2%, but it never gets high. Nine out of ten charities sell nothing at all, and the ones that do sell keep a median 47.4% of what they take. That margin is stable across every size band until the top, where it falls to 40.0%, because the largest sellers are mostly hospitals reselling drugs and supplies rather than merchandising a brand.

Two numbers are worth holding on to before starting a store. The median small charity that sells things clears $4,466 a year from it. And 3,557 sellers, 13.5% of them, reported a cost of goods higher than their sales, so the activity lost money before anyone counted the staff time. Among sellers that report a cost at all, the median margin is 39.5% and the bottom tenth are at minus 23.7%.

The other 17.2% of sellers report sales with no cost of goods at all, which is what donated inventory looks like on a return: a charity that is given goods records their value as a non-cash contribution on line 1g and the proceeds on line 10a, and whether any cost then appears on line 10b is an accounting choice. So the 100% margins at the top of the distribution are best read as “no cost reported” rather than proof of a thrift operation. The extract cannot tell those apart.

Does selling more make tax more likely

The intuitive answer is yes, and the returns say no. Grouping sellers by how much of their revenue the sales actually contribute, and then asking how many of each group reported $1,000 or more of unrelated business income, gives the opposite of the expected gradient.

The 1,575 charities that get more than half their revenue from selling goods are the least likely of any group to report unrelated business income: 5.7%, against 15.3% among the charities where sales are a rounding error. They also keep the best margin, 60.8%.

The mechanism is the third test, not scale. An organization whose sales are most of its money is usually an organization whose selling is the program: the thrift store that employs the people it serves, the training bakery, the press that publishes in the field it exists to advance. Those sales are related, or the goods were donated, so no tax arises no matter how large they get. The charities that do report unrelated income are more often the ones running a small commercial sideline next to an unrelated mission. Size does not make a sale taxable. Distance from the mission does.

One limit on that comparison, and it cuts both ways: Part V line 3a asks whether the organization had $1,000 or more of gross unrelated business income from any source, not specifically from selling goods. Some of the 13.1% of sellers who answer Yes are reporting rent, advertising or parking rather than the shop. The pattern across the reliance bands is still the finding, because that noise does not have a reason to run downhill with reliance on sales.

Against the sector as a whole, sellers are three times as likely to report unrelated business income as non-sellers: 13.1% against 3.9%. Both are small. Of all 256,539 charities, 12,496 (4.87%) reported unrelated business income and 12,196 (4.75%) filed the return that goes with it.

Rent works the other way round. Section 512(b)(3) excludes rent from real property to begin with, so the question is not whether it is related but whether something broke the exclusion: debt on the property, equipment in the lease, or services supplied with the space. 28,985 charities (11.3%) report rent, and 20.1% of them report unrelated business income against 2.9% of everyone else. Whether a nonprofit can rent out space covers it.

The filing, if the profit is taxable

An organization with $1,000 or more of gross income from an unrelated business files Form 990-T, on the same deadline as its Form 990, the 15th day of the fifth month after year end. The threshold is on gross income, not profit, so a shop that turns over $40,000 and loses money still files. Four practical points:

• Each business is computed separately. Since 2018, losses from one unrelated activity cannot be used against the profit of another. A loss making gift shop no longer shelters profitable advertising income.
• Expenses have to be directly connected to the unrelated activity, and shared costs allocated on a reasonable basis that the organization can explain. Allocating most of the executive director’s salary to a t-shirt line is the sort of thing that does not survive a question.
• Estimated tax applies once the expected liability reaches $500, in quarterly instalments, the same as a company.
• It is public. A 501(c)(3)’s Form 990-T is open to public inspection, so the commercial line is visible to anyone who looks, which is worth knowing before naming it.

Where the sales land on Form 990 matters too, and it is a common bookkeeping error. Goods sold at a fundraising event belong on line 8 with the event, not on line 10a, and raffle or bingo takings belong on line 9, covered in the nonprofit raffle rules. Hospitals, colleges and universities are allowed to report inventory sales as program service revenue instead. Keep the sales, the cost of goods and the inventory in their own accounts from the start, as the chart of accounts template sets out, and the return and any 990-T both fall out of the books. The Form 990 guide covers which parts apply, and the tax filing guide the deadlines.

Sales tax is a different question with a different answer

Federal income tax exemption is not an exemption from state sales tax, and the two are decided by different governments on different principles. A charity can owe nothing on the profit and still be legally required to collect tax on every sale. Whether it does depends entirely on the state, and the two largest illustrate how far apart the defaults sit.

In California, there is no general exemption from sales tax for sales by nonprofit organizations. An organization making sales of goods generally needs a seller’s permit and charges tax like any other retailer, and even the thrift store exemptions are narrow: they turn on running a recognised rehabilitation program, or on raising funds for services for people who are chronically ill. In New York, the default runs the other way. An organization exempt under section 1116(a)(4) of the state tax law does not collect tax on its sales unless they are made by a shop, store or restaurant it operates, and if it does run a shop, similar items it sells by other means, including remotely, count as sold from that shop.

Three things follow for any charity that sells anything:

• The exemption certificate in the drawer is for buying, not selling. Most states’ nonprofit exemptions cover the organization’s own purchases. Sales to the public are a separate registration.
• Online selling reaches other states. A store on a platform can create obligations in states where the charity has never been, once sales there pass that state’s threshold. Those thresholds are high enough that most small charity stores never reach them, and on marketplaces such as Etsy or Amazon the platform itself collects and remits the tax.
• Occasional sale relief varies and is usually narrow. Some states exempt a small number of fundraising sale days a year, some cap the amount, and some exempt nothing. It is a question for the state revenue department, not for a national article.

What selling goods is worth, sector wide

All 26,404 sellers together took $23.4 billion of gross sales and reported $14.6 billion of cost, keeping 37.7%. That aggregate is 10 points below the median margin of 47.4%, and both figures are correct: the median describes a charity with a shop, the aggregate is dominated by a few very large operations at thinner margins. The top 1% of sellers, 263 organizations, account for 66.5% of all gross sales, and the top 10% for 91.2%.

Resolving the largest by EIN through the ProPublica Nonprofit Explorer shows what that tail is. The biggest is JobsOhio Beverage System, the nonprofit that holds Ohio’s liquor franchise, at $1.76 billion of sales against $1.05 billion of cost. Almost all the rest are hospital systems: Fairview Health Services, NewYork-Presbyterian Queens, Rush University Medical Center, Henry Ford Health System, Ascension Health. Nonprofit retail at scale is pharmacy and wholesale, not merchandise, and none of it tells a small charity anything about what a branded t-shirt will earn.

For that, the median is the honest number: $9,871 kept on $33,954 of sales, and under $250,000 of spending, $4,466. Selling products is a way to raise a few thousand dollars and put the logo in circulation. It is rarely a way to fix a budget: 41.0% of charities run a deficit in a given year, and the rate barely moves between sellers (39.8%) and non-sellers (41.2%). Where the money actually comes from is set out in how nonprofits make money, and a realistic line for merchandise in next year’s budget is a small one, net of the cost of the stock.

Before you start selling

A short sequence keeps a small store out of trouble:

• Write down why the sale is related, or accept that it is not. One paragraph in the minutes, naming the exempt purpose the merchandise itself advances, or recording that this is an unrelated line and will be taxed as one.
• Check whether an exception already covers it. Volunteer run, donated goods, or a single event a year: each of those ends the income tax question before it starts.
• Register for sales tax if the state requires it, before the first sale rather than after.
• Price for a real margin. Half of sellers keep under 47.4% of gross, and one in seven keeps nothing, so a print on demand item at a dollar of margin needs volume nobody has.
• Account for it separately so the return, the 990-T and any state filing are a query rather than a reconstruction.

Method and limits

The data is the IRS SOI annual extract for processing year 2024, restricted to 501(c)(3) organizations with at least $25,000 of total expenses, which gives 256,539 returns. Sales of inventory are Part VIII line 10a, cost of goods sold line 10b, and net line 10c. Unrelated business income and the Form 990-T question are Part V lines 3a and 3b. Sizes are total functional expenses, Part IX line 25.

Five limits. Organizations filing Form 990-EZ or 990-N are absent, so the smallest band is not “small charities” in general. The share that sells is a floor, because goods sold at fundraising events are reported on line 8 instead, and hospitals, colleges and universities may report inventory sales as program service revenue. Reliance on sales is measured on the net kept rather than gross sales, because total revenue on line 12 already counts inventory at net: gross sales over total revenue runs past 100% for large retail operations and is not a share of anything. The unrelated business income question is asked at the level of the organization, not the activity, so it cannot be tied to the shop specifically. And nothing here is tax advice: whether a particular sale is related, and what a particular state requires, both need an adviser who can see the facts.

Questions people ask

Can a nonprofit sell products?

Yes. A 501(c)(3) can sell goods, and the profit is taxed only if the selling is a trade or business, regularly carried on, and not substantially related to its exempt purpose. Even then it is tax on that activity's profit, not a threat to the exemption, unless the commercial side grows into the organization's real purpose.

Does a nonprofit pay sales tax on what it sells?

That depends on the state, and it is a separate question from income tax. California has no general exemption for sales by nonprofits, so a seller's permit and tax collection are the norm. New York exempts an exempt organization's sales unless it operates a shop, store or restaurant.

How much do nonprofits make from selling merchandise?

Less than most people expect. Of 256,539 charities filing a full Form 990, 10.3% report any sales of inventory. The median seller took $33,954 of gross sales and kept $9,871, and under $250,000 of spending the median kept is $4,466.

When does selling merchandise become unrelated business income?

When the sale itself does not advance the exempt purpose, the activity is a trade or business, and it is regularly carried on. Raising money for the mission does not make a sale related. Selling branded merchandise to supporters is usually unrelated, and museum reproductions of its own collection usually are not.

Is a nonprofit thrift store taxable?

Usually not, for federal income tax. Section 513 excludes sales of merchandise where substantially all of it was received as gifts, and separately excludes activities where substantially all the work is done by volunteers. State sales tax is decided separately and thrift exemptions there are narrow.

Does a nonprofit have to file Form 990-T?

Only if it has $1,000 or more of gross income from an unrelated business in the year. The test is on gross income, so a shop that turns over $40,000 and loses money still files. 12,196 charities (4.75%) filed one.

Can a nonprofit sell on Etsy or Amazon?

Yes, and the platform generally collects and remits state sales tax on those sales. The income tax question is unchanged: it depends on whether the goods advance the mission, whether volunteers do the work, and whether the goods were donated.

Where do these figures come from?

The IRS Statistics of Income annual extract of Form 990 returns, processing year 2024, covering 256,539 charities with at least $25,000 of spending. It is a free public download, and the analysis script is published alongside the method.

This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.