Procedure: 403-Revenue Producing Activities

Operating an RPA

  1. Reporting Requirements
  2. General Business Practices
  3. Budget Adjustments
  4. FTE Requests
  5. Unrelated Business Tax Income
  6. State and County Sales Tax
  7. How to Close

Financial Reporting Requirements

Many Revenue Producing Activities will have year-end reporting requirements as prescribed by the Wisconsin Department of Administration. UW-Madison Accounting Services coordinates the year-end reporting process through the department’s Dean’s Office. The following items must be reported at fiscal year end:

Inventories
Combined materials for resale and supplies inventories over $100,000 require year-end reporting.

Accounts Receivable

Services provided or products sold to external customers (customers outside the UW System) but revenue not yet received at year-end, regardless of dollar amount. Faculty, staff and students are generally external customers.

Unearned Revenue

Balances over $5,000 for revenue received and coded to the current fiscal year, but goods or services will be provided in the next fiscal year. In the UW System accounting records, revenues are recognized when payments are processed regardless of whether earned or not.

Prepaid Expenses
 
Expenses incurred in one fiscal year but revenue will be received in the next fiscal year.

General Business Practices

Deficits

At times, deficits may occur in either a fund 101/136, fund 128, or fund 136 RPA account. There could be a number of reasons for the deficit. It may be that the activity required that expenses be incurred before revenue could be received from the users. Or, it may be that rates were underestimated or that some unexpected expenditures were needed. It may be necessary to subsidize the deficit with another fund source if it is not anticipated that pending revenue will cover the deficit. If this happens, expenditures (rather than revenue) should be transferred from the RPA account by submitting a non-salary payment transfer request. All deficits are the responsibility of the division to which the RPA is assigned.

Surpluses

Surpluses may accumulate in an RPA account because rates include the University’s federal indirect cost rate, depreciation, or direct costs were estimated too high. Records should be kept that clearly show the reason for the surplus.

  • A surplus that results from recovery of indirect costs may be used at the discretion of the Dean's Office as long as all expenditures related to the RPA are covered first.
  • A surplus may be used to reduce rates to internal customers; expand the operation by purchasing new equipment or create an operating contingency reserve as allowed by UW-System Financial Policy and Procedure Paper #43.
  • For other than major auxiliaries, a surplus in fund 128 or 136 may accumulate to an amount equal to the accumulated depreciation plus two months of operating costs. Refer to UW-System Financial Policy and Procedure Paper #43 for policies applicable to fund 128 or 136 surplus balances. Contact the Office of Auxiliary Operations Analysis for further information.
  • If direct costs were estimated too high, rates should be adjusted to eliminate that surplus. Rates for internal users should be adjusted first, and then rates for external users.

Interest Earned or Paid

For fund 128 RPAs, interest is earned or charged on average daily cash balance for the month. The interest payment or charge will be recorded to WISDM approximately one month after the interest is earned.

Internal Controls

Please direct questions to Internal Audit at 262-1612.

Budget Adjustments

As circumstances change during a fiscal year, a department may determine the original budget should be adjusted. Budget adjustment requests can be made using the same Budget Adjustment Request (BAR) form departments use to establish a budget for a new RPA. See the section Establishing an RPA - Create a Budget). As is the case with a new RPA, the BAR should be sent to the Dean’s Office for approval. The Dean's Office will forward the BAR to the Office of Auxiliary Operations Analysis if the RPA is in fund 128 or 136 or to the Madison Budget Office if the RPA is in fund 101.

FTE Requests

See the section Establishing an RPA - FTE Requests

Unrelated Business Income Tax

As a non-profit educational institution and an agency of the State of Wisconsin, UW-Madison is generally exempt from federal and state income taxes. However, Section 513 of the Internal Revenue Code requires the university to pay federal taxes on "unrelated business income". This law was created to help ease the concerns of the small business community that believed not-for-profit organizations were using their tax-exempt status to compete unfairly with commercial organizations.

Sales to UW-Madison departments or other UW System institutions do not generate revenue subject to unrelated business income tax. Sales to businesses, the general public and other parties outside UW System may generate revenue which is taxable as unrelated business income if the activity:

The Activity is a Trade or Business

Generally, a trade or business for unrelated business income tax purposes is an activity that is carried on for the production of income from the sale of goods or performance of services and a profit motive is presumed.

"Passive income" such as dividends, interest, investment income, gain on the sale of property, royalties, and rents (where no service is provided as part of the rental fee) is not considered to be generated from a trade or business and is generally not considered taxable. Passive income is only considered taxable if it results from debt-financed property or if earned by a separate corporation owned by the university.

The Activity is Regularly Carried On

Unrelated business income tax applies only to a business activity that is regularly carried on as distinguished from commercial transactions that are sporadic or infrequent. Short term activities are “regular” if a nonexempt business would conduct them on a year-round basis. Intermittent, casual or sporadic activities are generally not regular. However, year-round activities are regular even if they are conducted only one day a week. Seasonal activities conducted in season are also regular.

The tax regulation states that “activities will not be regarded as regularly carried on merely because they are conducted on an annually recurrent basis.” Therefore, such events as annual recitals, performances and style shows would not necessarily be considered to generate unrelated business income.

The Activity Does Not Contribute Substantially to Exempt Purpose

Income from an activity, even though a “trade or business” and “regularly carried on,” will be treated as unrelated business income if the activity is not “substantially related” to the educational mission of the university.

The activity is considered substantially related if:

  1. Students are directly involved in the activity through coursework or as part of a training program;
  2. The activity involves primarily the conduct of research (not including mere product-testing); or
  3. The activity is directly related to the university’s outreach mission.

This includes activities providing instruction or training of individuals or instruction of the public on subjects useful to the individual and beneficial to the community. Particular emphasis is placed on the size and extent of the activity. Thus, if an activity is conducted on a scale larger than reasonably necessary to carry out the exempt purpose, it is more likely to be treated as unrelated.

Research activities may be taxable, regardless of the source of funding. Revenue from grants and contracts will generally not be considered taxable if the purpose is for fundamental research (carried on solely for the purpose of satisfying human curiosity) or applied research (conducted for the primary purpose of commercial or industrial application). Activities which are incidental to commercial or industrial operations, such as testing of products or the design or construction of equipment, may be taxable. These, however, may be exempt from taxation if students participate in performing the activities, because this contributes to their education.

Exceptions

Even if an activity meets the definition of an unrelated trade or business, the activity can avoid being taxed if the activity:

  1. Has substantially all work performed by unpaid volunteers;
  2. Is carried on primarily for the convenience of students, faculty, staff or patients;
  3. Consists of the sale of donated merchandise; or
  4. Is unrelated but required by state or federal law.
Uncompensated Volunteers
Any activity in which substantially all (probably 85%) of the work of the trade or business is performed without compensation is exempt from tax. However, in assessing the contribution made by volunteers, the University must consider such factors as the monetary value of the respective services rendered, the number of hours worked, the intrinsic importance of the volunteer work performed, and the degree of reliance placed upon volunteers.
 
Convenience
Income from an activity is also exempt from unrelated business income tax if it is conducted for the convenience of student, faculty, staff, or patients. This includes certain retail facilities operated on campus for the accommodation of its students and faculty. Examples include photocopy machines; student dining and snack facilities; hospital cafeterias; operations which sell books, magazines, stationery, student supplies. If the activity is a bookstore or gift shop, the IRS looks at the sale of each individual item to apply this exception -- not the store as a whole. This exception does not apply to alumni.
 
Sales of Donated Merchandise
Any unrelated activity engaged in the selling of merchandise, substantially all (probably 85%) of which was received as gifts or contributions, is exempt from tax regardless of whether the labor to operate the activity is paid or volunteered.
 
Unrelated but Required Activities
Activities which the University is required to perform as a result of federal or state law are considered exempt.

Advertising vs. Sponsorship

Revenue from the sale of advertising is considered unrelated business. Advertising as part of an instructional program or as an "informational function" rather than as a means of stimulating demand for products would be exempt. Messages that include the following constitute advertising:

  • Qualitative or comparative language;
  • Price information;
  • A call to action;
  • An endorsement; or
  • An inducement to buy, sell, rent or lease the sponsor’s product.

However, mere acknowledgment of a corporate name or logo generally is considered to be “corporate sponsorship” as opposed to advertising.

Summary of Interpretations

Unless there is a specific provision to the contrary, UW System will make the following interpretations in determining whether or not an activity is related:

  • The sale of educational materials to other schools, whether high schools or colleges, are considered educationally related and, therefore, exempt.
  • Generally sales to those who are neither faculty, staff, nor students are unrelated. However, if these sales amount to less than 15% of the total sales or usage, the sales/usage would be considered not material and not regularly carried on. The primary purpose would be either educationally-related or for convenience of faculty, staff, or students. For these purposes, alumni are considered to be general public.
  • The issue to be addressed is primary purpose, primary use, primary users, etc. Consideration must be given to whether or not we actively solicit outside participation or sales.
  • Lab testing will be considered related if it is unique or unavailable in the community. Lab testing will also be related if it provides clinical experience for students.
  • The UW System will support the position taken by the National Association of College Stores, Inc., i.e., all items sold in college and university bookstores are for the convenience of faculty, staff, and students. The pricing structure is such that miscellaneous items are purchased primarily for convenience. In addition, these miscellaneous items make up a very small percentage of total sales. Bookstores primarily offer those items which are educationally related.
  • If an item is being sold on an RPA basis, with price set to cover costs, it is the UW System position that those activities have no profit motive and, therefore, are not businesses.
  • If a campus is leasing a facility to another state agency, the UW System believes the state has an obligation to maximize its facilities and campuses must cooperate with this obligation.

Examples

TAXABLE NOT TAXABLE
A university receives an off-campus restaurant as a gift . Profits from running the restaurant are used for the general scholarship fund. A university serves meals to the general public at its student union on campus. (Not taxable because primary purpose is convenience of faculty, staff, and students.)

A University receives an off-campus restaurant as a gift. The restaurant is managed and operated by students in Hotel/Restaurant Management. (Not taxable because contributes importantly to the educational mission.)
A university leases its athletic facilities as a training camp for a professional football team each year. Included in the rental fee is dormitory usage, room cleaning, linen service, meal service, and use of the athletic facilities. A university leases its athletic facilities as a training camp for a professional football team each year. The football team uses local hotels and restaurants for its meals and lodging. The lease includes the use of athletic facilities only. (Non-taxable - rent of space only, no payment for services.)

Determination of Taxability

Departments should inform Accounting Services if new RPAs could generate unrelated business income. In most cases, RPAs are clearly related to the educational mission and are not taxable. If it appears the activity may be taxable, Accounting Services may request additional information or help you to structure the activity so it becomes non-taxable. If Accounting Services is still unable to find a reason for exemption, we will consult with Administrative Legal Services for further advice. Administrative Legal Services will make the final determination regarding taxability.

Periodically, Accounting Services will survey the campus regarding all Revenue Producing Activities. From responses, we will identify potentially reportable activities. These will be referred to Administrative Legal Services for a final determination. If your division is involved in an activity you believe may be taxable, call Accounting Services at 262-0582.

Calculation of Tax

At the end of each fiscal year, Accounting Services works with departments that have taxable income to determine gross income and deductible expenses. We help in identifying potential deductions and calculating depreciation. We also calculate indirect costs, such as janitorial service, utilities, and building depreciation associated with the operation. In many cases, the net result is a loss after all allowable deductions are made from income.

The UW System combines calculations for all unrelated activities to determine net taxable income for the System as a whole. If the net result is a loss, the return is filed and no taxes are paid. If the net result is a gain, taxes are divided among departments with taxable income. Accounting Services informs departments of their net tax liability and initiates the charge.

Departments with taxable activities will be required to provide estimates of taxable income or losses each quarter, and may be required to pay a quarterly estimated tax.

State and County Sales Tax

If your department is selling goods or services to customers outside the University, including faculty and staff and students as external users/customers, the sales may be subject to Wisconsin sales tax. The department where the sale is conducted is responsible for the collection and payment of sales tax and is liable for any penalties for failure to do so.

Sales to certain agencies such as Wisconsin state agencies, public schools, and municipalities are exempt from sales tax. The sales of items shipped outside of Wisconsin are exempt. Non-profit organizations usually qualify for sales tax exemption, but they must supply a Certificate of Exempt Status number.

Generally, sales tax applies to the sale of "tangible personal property" and does not apply to services. However, sales of the following services are taxable: admissions to athletic, entertainment, or recreational events; fees for the use of recreational facilities; and fees for parking spaces.

Sales of personal property and services that are subject to state sales tax are also subject to county sales tax if the sale takes place in a county that has adopted the county sales tax. For more information, contact Accounting Services at 262-0582, or see the Wisconsin Department of Revenue Publication 204, Sales and Use Tax Information for Colleges, Universities and Technical Colleges available at http://www.dor.state.wi.us/pubs/pb204.pdf.

The location of the sale, the tax status of the purchaser and the product or service sold determines the applicability of state and county sales tax. Following are specific guidelines.

Location

The sale occurs when property transfers from the seller or the seller's agent to the buyer or buyer's agent. Sales where the transfer takes place outside of Wisconsin, including materials mailed or shipped out of state, are not subject to Wisconsin sales tax. The Post Office and common carriers are considered agents of the seller.

When the seller arranges transportation, transportation charges (postage, for example) are also subject to sales tax.

When delivery takes place in a county that charges county sales tax, the University is required to collect that county's sales tax.

Tax Status of Purchaser

Sales to agencies of the State of Wisconsin, including the university and vocational and technical schools, are exempt from state and county sales tax, as are Wisconsin cities, counties, towns, villages, and school districts. Sales to the federal government and its agencies are also exempt. An exemption certificate or reseller's permit is not required. However, the purchaser must provide a purchase order or similar document clearly identifying itself, or a record of the exempt status (CES) number on the invoice. This exemption does not apply to other states, their agencies, or local units of government. However, most of these sales are exempt because the location of the sale is generally out of state.

Non-profit organizations, including charities, student organizations and private schools may or may not be exempt from state sales tax. To claim the exemption, the purchaser must obtain a Certificate of Exempt Status (CES) number from the Wisconsin Department of Revenue and provide the number to the University department at the time of purchase. If a number is not provided, sales tax should be charged if the sale would otherwise be taxable.

Miscellaneous exemptions from sales tax are also provided to individuals or companies. Departments may accept Reseller's Certificates, Farmer's Exemption Certificates, Manufacturer's Exemption Certificates, and Certificates of Exemption as evidence of tax exemption.

Departments are responsible for keeping documentation on file as justification for not charging the tax.

Taxability of Products and Services

Section II of Wisconsin Department of Revenue Publication 204 (http://www.dor.state.wi.us/pubs/pb204.pdf) contains a summary of taxable vs. non-taxable sales. Following are specific situations commonly found at the university that are not addressed in the publication.

Printed Materials
A common activity that requires the payment of sales tax is the sale of printed materials. Printed materials are generally subject to sales tax unless they are sold by subscription and are issued on a regular basis at least every 3 months. This, of course, does not apply if the sale is made to a tax-exempt organization or if sale is made through the mail to a customer in another state.

Data Processing, Computer Hardware or Software
Data processing services, such as computer searches, customized programming, etc. are not taxable. However, sale of hardware or non-customized software is taxable.

Canadian Goods and Services Tax
If a department in your division ships $30,000 (Canadian) or more in products to customers in Canada, you may be required to collect a 7% Canadian national sales tax or risk having packages stopped at the border. Because this is a rare situation, Accounting Services works with departments on an individual basis to develop workable procedures to collect and remit the tax. If you feel this tax may apply to you, call Accounting Services at 262-0582.

How to Close a Revenue Producing Activity Account

If the purpose for which the RPA was created no longer exists and the cash balance is zero, the RPA account should be closed. If a positive cash balance remains after all expenses related to the RPA have been paid, the surplus may be used for other normal operating expenses at the discretion of the Dean. If a deficit exists, expenditures must be transferred to another fund source. This can be done by submitting a Non-Salary Payment Transfer Request. When the RPA account has a zero balance, submit a UDDS Action Request to close out the account.

Procedure: 403-Revenue Producing Activities