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SECTION 51: Revenue Generating Activities and Unrelated Business Income Tax (UBIT)

Last updated: September 2022
  1. UBIT Overview
  2. UBIT Criteria
  3. Identifying Unrelated Activities at MSU
    1. Examples of activities that may generate UBIT
    2. Examples of activities that are not considered UBI
  4. Tax Liability
  5. Exhibits

I. UBIT Overview

Michigan State University (MSU) is both a public institution and a 501(c)(3) organization that is exempt from both federal and state income taxes. However, revenue generating activities not related to MSU’s tax-exempt purposes of education, research, and public service may be subject to federal unrelated business income tax (UBIT). The federal government instituted UBIT for exempt organizations to avoid unfair competition between tax-exempt organizations and for-profit taxable businesses. Conducting revenue generating activities that are subject to UBIT is permitted at MSU, but it is important for departments to identify those activities so that appropriate pricing and tax planning decisions can be made.

Note: The acceptance of credit/debit cards as a form of payment, regardless of sales tax implications, must be pre-approved by the Cashier’s Office. Refer to Section 17 of the Manual of Business Procedures.

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II. UBIT Criteria

Per the Internal Revenue Code, an activity is an unrelated business subject to UBIT if it meets three criteria:

  1. It is a trade or business (i.e. has a profit motive)
  2. It is regularly carried on
  3. It is not substantially related to the organization’s exempt purpose

The federal tax law does allow for some exclusions from UBIT even if an activity meets all three criteria to be classified as an unrelated business. These include:

  • Activities carried on primarily for the convenience of students, faculty, and staff
  • Activities conducted primarily by volunteers
  • Dividends and interest
  • Rental of real property with no services rendered
  • Sales of donated merchandise

For UBIT purposes, the IRS is concerned with how the revenue is generated, not how the funds are used. Even if the funds are used to further the organization’s exempt activities, that does not change the taxable nature of the revenue generated by the unrelated activity.

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III. Identifying Unrelated Activities at MSU

Departments need to be aware of UBIT as they engage in revenue generating activities. Work aides have been created and should be used by departments to help review these activities. See Exhibit 51-A for the General Activity UBI Work Aide and Exhibit 51-B for the Fee for Service UBI Work Aide.

Departments need to contact the Office of Tax Services ( or 517-355-0010) for assistance if they are engaging in a potentially unrelated activity. Tax Services will evaluate the activity and determine if there are any exceptions, as well as support the department in documenting proper direct and indirect costs to limit the net income that may be subject to UBIT.

  1. Examples of activities that may generate UBIT
    • Advertising space for commercial businesses on the internet or in printed materials
    • Catering or food service to non-university users
    • Certain fee for service arrangements (as referenced in MBP Section 315.II ), including routine analytical or testing services to non-university users
    • Corporate sponsorships that include advertising return benefits
    • Parking revenue from general public attendance at non-university sponsored events
    • Rental of space (including meeting rooms, office space, residence halls, etc.) that includes services
    • Sales of tangible personal property to the general public
    • Use of athletic facilities by professional teams
  2. Examples of activities that are not considered UBI
    • Activities that collaborate or co-sponsor with external partners and support MSU’s mission
    • Interdepartmental activities (i.e. department services that are internally billed)
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IV. Tax Liability

The department that engages in the activity generating UBIT will bear the tax liability related to that activity. As such, when the department is starting an unrelated activity and determining the price to be charged to external customers based on direct and indirect costs, UBIT should also be included in the pricing. See the Office of Tax Services website ( for more details.

Please be aware that sales of tangible personal property and rental of space or equipment to the general public in Michigan should also include the collection and deposit of Michigan sales/use tax. See MBP Section 50 for more details about sales and use tax requirements.

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V. Exhibits

  1. Exhibit 51–A. General Activity UBI Work Aide
  2. Exhibit 51–B. Fee for Service UBI Work Aide
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