San Francisco State University (SF State) is income tax-exempt as an instrumentality of the State of California, per Internal Revenue Code Section 115(1). The revenue code and related federal regulations provide that the public state colleges and universities are classified similar to 501(c)(3) organizations for exempt function purposes. Therefore, the University may engage in activities, which include charitable, scientific, literary, testing for public safety, literary, educational, or other activities that the 501(c)(3) organizations are allowed to do, as long as those activities are fallen within the mission of the university. The mission of the University is constant and continuous, the most recent mission statement is found here http://bulletin.sfsu.edu/about-sfsu
SF State is, however, not exempt from tax imposed by Code sections 511, 512, and 513 on activities, which are unrelated to those exempt purposes. The Internal Revenue Service imposes a tax called the unrelated business income tax on exempt organizations, such as universities, which recognizes revenues from activities that are not related to the mission of these organizations. The unrelated activity may be taxed even when the profits are used to fund activities related to the mission of the organization, such as a university’s education and research activities. Therefore, each activity must be scrutinized to determine whether an exempt purpose is being served.
The UBIT Rules
An activity will be subject to unrelated business income tax if it meets the following criteria: (1) it is a trade or business, (2) it is “regularly carried on”, and (3) it is not substantially related to the university's mission for exempt purposes.
In order to determine whether income may be taxable, the three-part test must be applied to the activity itself, regardless of the intended purpose for any profit realized from the activity.
To determine if the activity might be considered unrelated business income, you need to answer the following questions:
- Is the activity substantially unrelated to the university’s exempt purpose of education and research?
- Is the activity a trade or business as evidenced by intent to profit?
- Is the activity regularly carried on as evidenced by frequency and continuity of the activity?
If the activity does not meet all three criteria, it fails to constitute to be a UBIT. However, If you answered "yes" to all of these questions, please review the discussion of SF State’s UBIT policies and procedures for reporting unrelated business income and determining whether the activity is taxable. There are certain exceptions and statutory exemptions. For the relevant UBIT rules, the Review Guidelines is provided here UBIT Guidelines.
The university must identify campus business income deriving from unrelated business taxable income, and report the unrelated business income to the CSU Chancellor’s Office, in order for the Chancellor’s Office to file a CSU group return of Form 990-T annually with the Internal Revenue Service, and to pay for income tax calculated on the unrelated business income. The preparation of unrelated business taxable income report by the university is requisite for the CSU system-wide compliance with the federal UBIT reporting.
The university departments, schools, divisions or other university units generating income that does not directly further the university’s mission must maintain proper UBIT reporting system, and prepare UBIT report annually.
- General Procedures - Pursuant to the Policy on Unrelated Business Income, department responsibilities include:
- Familiarize themselves with unrelated business income guidelines.
- Ensure that income is properly identified between the department’s exempt functions and unrelated functions.
- Ensure that detailed records are maintained that segregate the department’s unrelated and related income, and
- Notify the University Tax Specialist about unrelated business income activities.
At any time during the year and as necessary, the department should consult with the University Tax Specialist whether such income is subject to Unrelated Business Income Tax, and when in planning such activity has unrelated business income tax potential.
- Specific Procedures - To comply with the specific procedures, department responsibilities include:
- Complete the UBIT Questionnaire annually, and
- Send the complete Questionnaire to the University Tax Specialist by the end of September.
To follow the specific procedures, department must complete the general UBIT Questionnaire (UQ), and additionally, a supplemental UBIT Questionnaire, when provided by the University Tax Specialist. The UQ lists the basis for establishing the tax status of an activity. The department should complete a questionnaire for existing, and any probable activity, as follows:
- Each “new” activity initiated during the current year with a potential for generating unrelated business income;
- Any activity reviewed in a prior reporting year that has changed its mode or scope of operations during the current year, and,
- Highly visible activities (e.g., advertising, facilities usage, joint venture, sponsorship, property rental, services provided to general public, etc.) that has frequently been determined to be UBIT activities.
The department head should review and approve the UQ. Then the approved UQ should be sent to the University Tax Specialist in Fiscal Affairs, ADM358.
If you believe your department may be involved in activities that may be subject to tax or have additional questions, please contact Young Kim, the University Tax Specialist, at email@example.com or calling to x82325.