Office of the Controller
Unrelated Business Income Tax
Unrelated Business Income Tax
The University of Southern Mississippi is exempt from taxation under Section 115 of the Internal Revenue Code. However, the University is required to pay Federal income tax on net income from activities unrelated to the exempt mission of the University: education, research and public service.
It is very important that all unrelated business activities of the University be reported on the Federal tax return. The Internal Revenue Service can and will assess costly penalties and interest charges for underpayment of taxes.
Three elements must be considered to determine if an activity is subject to unrelated business income tax. The activity must:
- Be conducted as a trade or business
- Be regularly carried on
- Not be substantially related to the tax exempt mission of the University
Trade or Business: Includes any activity carried on for the production of income from selling goods or performing services.
Regularly Carried On: UBIT applies only to a business activity that is regularly carried on, as opposed to transactions that are sporadic or infrequent. An activity is considered regularly carried on if it is conducted with a frequency and manner comparable to the conduct of a similar activity by a taxed business.
Not Substantially Related: The activity must not be substantially related to the exempt mission of the University. To decide if an activity is related or unrelated, determine the nature of the activity and how essential it is to accomplish the mission of the University: education, research and public service.
The following are examples of activities that are not related to the mission of the University and subject to unrelated business income tax:
- Computer time sold to an outside company
- Income from advertising placed by a company in an athletic or performing arts program.
- Income from advertising on the Internet.
- Sale of mailing lists or other data to commercial entities.
- Sale of CDs, DVDs, and other gift items by the bookstore.
- Gift shop sales (evaluated on an item-by-item basis).
- Sale of advertising space in a Journal or regularly scheduled periodical.
- Sales of art objects at exhibits.
- On-line stores (i.e. charity malls) or auctions linked to the USM web site.
- A hyperlink from the USM web site to a sponsor’s web site where an endorsement appears by USM for the sponsor’s product.
- Commercially sponsored scientific research if the results are not made available to the public or directed toward benefiting the public.
- Rental of apartments to the general public where the building is financed by tax exempt bonds.
- Rental of sports facilities such as stadiums, soccer fields, etc. where services are provided.
- A travel tour programs operated by a college/department or the alumni association that are not authentic educational activities (i.e. sightseeing, recreational, social, cruise, etc.)
- Rental payments for the lease of space on antenna towers and transmission facilities.
- Summer Sports Camps that are not part of educational programs offered by the University.
- Corporate sponsorship payments where the sponsor receives a substantial return benefit that has a fair market value of more than 2 percent of the entire payment.
- Pharmacy sales to the general public.
- Sale of merchandise (evaluated on an item-by-item basis).
- Pet boarding and grooming services for the general public.
- Commercial activities exploiting the University’s educational purpose.
- Joint ventures with for-profit organizations such as technology transfers forming partnerships with individuals, corporations, or limited liability companies that do not serve the University’s charitable purposes and do benefit the for-profit partner and/or insiders.
- Professional entertainment events operated in a commercial manner and not part of an educational program.
- Exclusive provider arrangements where the University performs substantial services.
- Direct operation of parking lots.
- Advertising in the telephone directory or yearbook.
- Dual use of assets or facilities for public events including evening hours.
- Intellectual property where substantial services are provided in connection with the activity (facts and circumstances must be evaluated).
- A fitness center sells memberships to the general public.
- Book publishing where the University owns the rights to a book which does not relate to the educational purposes of the University (i.e. exploits the book in a commercial manner).
The following are examples of activities that are related to the mission of the University:
- Computer time sold to university departments.
- Income from advertising placed on the University newspaper when the newspaper is run by the students as part of an educational program.
- Sale of books and class material by the bookstore.
- Meetings, conferences and seminars where education or training is provided by USM. However, tangible personal property provided as part of the meeting packages can be unrelated (i.e. audio/visual equipment).
- Non-patient diagnostic laboratory testing performed by a teaching hospital on specimens needed for the conduct of its teaching activities.
- The sale of broadcasting rights for athletic events.
- Sponsoring entertainment events for the appearance of professional theater companies and symphony orchestras that present drama and musical performances for students, faculty, and the general public.
- Intellectual property royalties as a result of licensing to a third party.
Certain exclusions exist to the criteria set forth above. An activity that would ordinarily be considered unrelated and subject to income tax is exempt from UBIT if any of the following conditions exist:
Member Convenience: An unrelated activity conducted by the University for the benefit of its members (students, faculty, and staff) is not subject to UBIT unless the income is generated from sales to non-members. In this case, only non-members sales are taxed. Examples of activities that are not subject to UBIT under the convenience exception include:
- Laundry facility for the students
- Rental of parking spaces to university students and employees
Volunteer Work: UBIT does not apply to income from an activity in which substantially all of the work is performed without compensation.
Donated Property: Income from the sale of merchandise, substantially all of which has been donated by a gift or contribution.
Government Research: Income from research conducted for the U.S., its instrumentalities or agencies, or any State, or its instrumentalities or political subdivisions.
Tax-Exempt Colleges, Universities, and Hospitals: Income from research and all deductions directly connected with the income for tax-exempt colleges, universities, and hospitals.
Rental of Real Property: In general, the rental of real property is not subject to unrelated business income tax unless personal services are rendered that are not customarily or usual to the rental of space.
Dividends, Interest, Annuities, and Royalties: In general, not subject to UBIT.
Frequently Asked Questions:
How do we know if we owe this tax? If the project or activity is selling goods or providing services to the general public, a taxable UBIT evaluation must take place and the true “general public” net profit of the activity will be subject to this tax. Some exceptions may apply.
With the current financial position of the University, wouldn’t generating revenue be a good thing? Yes, it can be a good thing, but this tax is a cost of doing business. The activity will owe this tax, and the tax should be factored in when pricing and planning the project’s activity.