Even though NDSU is exempt from Federal income tax under section 115 of the Internal Revenue Code as an instrumentality of the state of ND, NDSU must pay income taxes on any income generated from activities that are not substantially related to the exempt purpose of the university. As a Land-Grant institution NDSU was created to serve three basic functions: resident education, research and extension.
In order for an activity to be considered unrelated business income (UBI), the following elements must exist:
- The activity is a trade or business that is conducted with a profit motive – The activity is priced above cost and is operated to generate income.
- The trade or business is regularly carried on – The activity is conducted on a regular basis and is not a one-time event.
- The conduct of the activity is unrelated to the tax exempt purpose of education, research and extension.
NDSU currently engages in a number of activities that are treated as unrelated and tax is paid on the net income from these activities. Tax expenses are billed back to the department generating the income.
Examples of potential UBI activities include:
- Operation of a parking lot for private events
- Operation of a fitness center for the general public
- Advertising to the general public
- Sales of excess utilities
- Rental of space to the general public
- Sales of goods/services to the general public
- Operation of a cafeteria for catering to the general public
Departments should be on the alert for any revenue generating activities, unrelated to the mission of the University, that are currently proceeding or planned, and contact the Accounting Office for a ruling as to whether the activity should be reported to the IRS.