The IRS focuses on school, college and university bookstores.

• Author: Whitman, Kelcy M.

Schools, colleges and universities, like other organizations exempt under Sec. 501(c)(3), are subject to Federal tax on their unrelated business income (UBI). Thus, an educational institution that conducts an activity possessing three specifically defined characteristics will find itself paying tax on the net income derived from that activity. An activity is considered "taxable" if it is: 1. Not substantially related to the purpose(s) for which the organization's exemption was granted by the IRS; 2. A trade or business; and 3. Regularly carried on.

There are several activities conducted by schools, colleges and universities that are not commonly engaged in by other Sec. 501(c)(3) organizations, e.g., diverse revenues generated by athletic programs; operation of certain facilities (such as dining rooms, laundries and bookstores); travel tours, and contract education.

Since the early 1990s, these activities have received increased scrutiny from the Service. As an example, it has been widely reported that a major emphasis of the coordinated examination program (CEP) is on colleges and universities. In August 1994, in Ann. 94-112, the Service noted that it had issued final examination guidelines for colleges and universities. These guidelines provide helpful informations about the IRS's perception of the activities of colleges and universities, as well as offering specific guidance on the audit areas and issues on which agents intend to focus. Clearly, the IRS regards these entities as large, complex and financially sophisticated enterprises. The guidelines highlight many areas of concern involving UBI, particularly the application of the so-called "convenience" exception to the sales of merchandise in school bookstores.

Most educational institutions operate stores that sell to students books and materials that are required for their course instruction or that otherwise further their education. Some bookstores also sell items unrelated to the education of students, such as wearing apparel, small appliances, wristwatches, pennants, cosmetics and a variety of other retail offerings. The examination guidelines discuss the treatment of these items and provide some valuable insight as to whether the revenues from these sales are subject to tax. As will be discussed more fully the guidelines apply either the "substantially related" test or the "convenience" exception to conclude that most sales by university bookstores will not produce UBI. *...