I belong to a hamdmade arts organization, we just (finally ) got 501c3 status. If what they say is true now, the acquisition of this status has ruined a valuable part of our org. - our secretary was told directly by an IRS agent that the annual sale we have before Christmas where the artists of this organization are able to sell our handmade goods is now not allowed by the rules of the 501c3. There are other groups similar to ours within a 200 mile radius who organized in earlier times who are doing sales (as in, a handmade arts/goods show and sale) every year. WHY can't we do this any more with exclusive participation by our members? Why can't we do a central cashier, as sponsor of the sale, and why must we open our sale to the public as far as who can sell in our event? We have done a 20% of the total item's price consignment ( donation to the club) before as our main fundraiser, now we are relegated to what? BAKE SALES? Is there something wrong with what the IRS agent told us or are we just idiots for going non profit?

IRS rules regarding 501c3 fundraising.
Charitable organizations may be required to pay tax (UBIT) on income derived from a regularly carried on trade or business if the activity is not substantially related to the organization's exempt purpose (an "unrelated business activity"). This general framework for taxation of income from unrelated business activities contains some exceptions, including, for instance, if in operation of the unrelated activity the charitable organization: 1) utilizes a volunteer workforce; 2) sells donated merchandise; or 3) conducts bingo or similar activities.

Certain fundraising activities may be considered unrelated business activities if they are regularly carried on (for example, weekly or online sales or auctions) and no exception to the UBIT rules applies. Two cautions exist with respect to unrelated business activities and fundraising. The first relates to the scope of the activities, and the second relates to potential tax liability. First, to ensure that it maintains its tax-exemption, an organization should not dedicate a substantial part of its time or resources to "unrelated" activities. Second, unless an exception applies, the income from such unrelated activities will be subject to UBIT.

Do NOT rely on the IRS opinion only. Taxation for 501c3 organizations is a specialized niche in the tax consulting field, so go find such a specialist and use his expertise going forward.

That said, MA0641's post would indicate that your fundraiser is not routine business activity and thus NOT subject to the UBIT. However, I am NOT a 501c3 expert, so you should find one and heed his/her advice.

I would understand it, that it is not an issue of having, or not having the sale... but an issue that, the items at the sale would have to be taxed as it was in prior years, since it is not part of the function of the 501, and it is making profit for those selling.

But using a central cashier, you also, open the issue that your group is then paying the money out, to the artist for their share, which may require sending out 1099 for the money paid out to them,

I am not a tax expert, but I know from being over a 501 group before, that we caused our accountant nightmares when we did things like this.