Unrelated Business Income Taxation

Cal State University, Fullerton (CSUF) is exempt from taxation under Section 115(I) of the Internal Revenue Code on revenues that are generated through activities, (non-commercial research, teaching and instruction, and public service) that further the mission or purpose of our institution. Selling goods or services to the general public via activities that are not directly connected to the University’s primary mission may create income that will be subject to unrelated business income tax, even if the funds are used for mission-related purposes. 

Primary Mission of CSUF - Undergraduate and graduate instruction, including teacher education.  Research, scholarship, and creative activity in support of the instructional mission is authorized.  (Ed. Code 66010 et al)

The Unrelated Business Income Tax (UBIT) is a tax imposed on a nonprofit, exempt organization on income derived from an activity of a trade or business, regularly carried on, that is not substantially related to the organization's tax exempt purpose.

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: 

  1. Be conducted as a trade or business
  2. Be regularly carried on  
  3. Not be substantially related to the tax exempt mission of the University

Trade or Business: Generally, a trade or business for unrelated business income tax purposes is any activity that is carried on for the production of income from the sale of goods or the performance of services. However, an activity will not lose its identity as a trade or business merely because it is carried on within a larger framework of activities that may relate to an organization's exempt purpose. In addition, the regulations state that where an activity carried on for the production of income constitutes an unrelated trade or business, no part of the trade or business shall be excluded from such classification merely because it does not result in a profit (Reg. § 1.513-1(b)).

Trade or Business

  • If have 85% or more of the income from the activity generated from the sale of donated goods.

Additional Notes:

  • An activity does not lose its character as a trade or business even if carried on as part of a larger, related endeavor.
  • An activity conducted without a profit motive is not a trade or business
  • An activity that does not actually generate a profit for a period of time may still constitute a trade or business

Regularly Carried On: UBIT applies only to a business activity that is regularly carried on, as opposed to transactions that are sporadic or infrequent in nature.  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. Factors will include is it a frequent event, continuous in nature, annually recurring activities, and conducted in a manner that is consistent with a commercial business (Reg. § 1.513-1(c)(1)).

For example, a hospital auxiliary's operation of a sandwich stand for two weeks at a state fair would not be the regular conduct of a trade or business. The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or 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 to the University, determine the nature of the activity and how essential it is to accomplish the mission of the University: education, research and public service.   Thus, to be related to the University’s educational or research exempt purpose, there must be a substantial casual relationship, i.e., activity must contribute importantly to the accomplishment of the exempt purpose (other than the University’s need to produce income).

To determine if not substantially related to the exempt mission of the University ask the following questions:

  • Is there a lack of a substantive relationship to our exempt purpose?
  • Is the activity conducted solely to produce revenue?
  • How is the money earned?

It is how the income is generated that is important — do not confuse how the income is generated with how the income is used. Just because you use the income from the event does not change an "unrelated" activity to a related activity.

Size and Extent - In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they are intended to serve.  For example, to the extent that an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. The part of the activity that is more than is needed to accomplish the exempt purpose is an unrelated trade or business (Reg. § 1.513-1(d)(2) and (3)).

Dual Use of Facilities or Personnel – The use of facilities or personnel for both exempt and commercial purposes will not necessarily exempt the income derived from the commercial use unless the commercial activity “contributes importantly” to the accomplishment of an organization’s exempt purposes (Reg. § 1.513-1(d)(4)(iii)).


The three criteria outlined above are applied on a collective basis. If a taxpayer can demonstrate that any one of the three does not apply to a particular activity, no UBIT will be assessed on that activity.

Three questions to ask:

  1. What are the exempt purposes of the organization?
  2. What is the income-producing activity?
  3. What is the relationship of the activity to the exempt purpose?
    • "Contributes importantly" to exempt purpose
    • "Substantial causal relationship" to exempt purpose

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. 


The University is required to report any UBIT related income on an annual basis to the CSU Chancellor’s Office so it can be official reported on the CSU Form 990-T. The campus community is asked to report any non-primary mission or UBIT reportable activities that are conducted on a regular basis (at least annually) to the University Tax Compliance Manager, Greg Sweet.  A sampling of some of the information that must be provided for such UBIT activities includes:

  1. A report listing the inventory of all products to be sold at the festival or event. This report should provide a description of the products, costs of the products, sales prices, sales premiums or discounts, sales taxes, and a grand total for all product sales. 
  2. Copies of all contracts and/or agreements with corporate sponsors approved by authorized University officials. These contracts and/or agreements should stipulate the Fair Market Value (FMV) of any income and/or item that is substantially benefiting CSUF. 
  3. If auctions are conducted at the event, a detailed description of the auction activities must be provided.
  4. Copies of all advertising and fundraising materials and flyers, including Internet source advertising activities.
  5. Copies of rental agreements, if renting space or facilities to outside third-party vendors or individuals (i.e. athletic facilities, classrooms, theaters, parking lots, dormitory rentals, etc.).
  6. A listing of companies and individuals doing business with CSUF for these activities.
  7. If parking fees are being charged, a detailed report of parking revenue collected.
  8. A list of any other activities that are operated involving the selling of goods or performing services (e.g. golf tournaments where entrance fees are assessed). 
  9. A list of any persons volunteering their time to the festivals or event.


For further clarification regarding Unrelated Business Income Taxation activities by Cal State University, Fullerton, please contact the University Tax Compliance Manager, Greg Sweet, at gsweet@fullerton.edu.


While Cal State Fullerton's Financial Services has made every effort to use the most current and accurate data, tax laws change frequently, and it is possible that some of the information may no longer be accurate. The University disclaims all liability form the mistreatment of information and materials contained in the tax web page.  Its function is for administrative purposes only for Cal State University Fullerton. Information regarding employment and tax filing substantial authority are the responsibility of each individual. Please keep in mind that no one in their official role at the university, can act as a tax consultant, give personal, legal, or tax advice, or represent an individual dealing with the Internal Revenue Service (IRS). Thus, any assistance the following information may provide is given as a courtesy to you, and as such, should not be construed in any way as the rendering of legal or tax advice per IRS Circular 230.

The Tax Compliance Manager can only provide information from the IRS, California Franchise Tax Board, Board of Equalization, and other taxing agencies.  Information regarding immigration and naturalization, employment, and tax filing regulations are the responsibility of each individual who receives payment from Cal State University Fullerton or its auxiliaries.