Are Gifts and Donations to Charities Exempt from Sales Tax
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings to his audience in order to help them navigate the tricky world of taxes.
In this episode…
The last quarter of the year is often characterized as a time of giving, with many businesses sending gifts and donations to different charities. However, what companies may not be aware of is that these charitable actions can create tax consequences.
So, what do these companies need to pay attention to in order to determine whether these acts of charity are exempt or taxable? Michael J. Fleming of Sales Tax and More has a few insights.
In this episode of Sales Tax and More, Michael J. Fleming is interviewed by his co-host Ellie Moffat about the tax implications of gifts and donations to charities. Michael explains the two main factors that determine the taxation of these charitable acts, and what different states take into consideration when approaching use tax exemptions. Stay tuned.
Here’s a glimpse of what you’ll learn:
Do gifts and donations to charities create tax consequences for the giving companies?
The factors that determine whether or not gifts and donations are taxable
Michael J. Fleming shares how specific states approach use tax exemptions
Why businesses should take note of the language used by different states when it comes to sales tax rules
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here is your host, Michael Fleming.
[0:26] Mike: Mike Fleming here, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is, of course, sales tax. Today, my co-host, Ellie is going to be interviewing me about gifts and donations to charities, whether they're exempt or not. As we're going into the fourth quarter here, or as we're in the fourth quarter, we've got the holidays on the horizon. And I think this is a very timely topic. It does apply all year round, but especially in this season of giving. So before we get started, let me introduce it, Ellie.
[1:05] Ellie: Hi, everyone, it's really great to be here. I am very excited about today's topic, I think it's gonna be a really interesting one. But before we get started, I want to do a quick introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of sales tax returns, sales tax registration, sales tax audit, consulting, research, and like our name states, more. So if you have questions about our services, please reach out and ask, we will give you plenty of ways to do so. And, Mike, as you said, we're entering the fourth quarter, we see a lot of companies making gifts and donations to charities. And well, I hope that all the states would allow this on a tax-free basis. Do some of these gifts and donations create tax consequences for the companies?
[2:06] Mike: Well, Ellie, can you guess what my answer is gonna be? It's my favorite.
[2:11] Ellie: I think I can guess I'm gonna go ahead and say that it depends.
[2:15] Mike: Yes, it absolutely depends. But yes, in some circumstances, it can create tax consequences for the given company. In general, if you pull an item from inventory then a use taxes is due, and in a lot of states, they don't care if you know, it's for charity or not, but sometimes they do. So it depends.
[2:45] Ellie: Okay, so, Mike I’ll bite here, what does it depend on this time?
[2:52] Mike: All right. So, as always the state, that's going to be the biggest determining factor, because different states do things a different way. Some states want to tax it all. So we call those the stingiest states or the scroogiest states during the holiday season. Other states, they're the exact opposite end of the spectrum here. So they're going to pretty much allow everything. And then we have everything, you know, across the spectrum in between those two, polar opposites. Now, the term withdrawn from inventory is going to play a major part. So some states will say that if it's withdrawn from inventory, and it's given to a, you know, some type of charity, and sometimes they spell that out. That's one of the other factors we'll look at: who's the gift being provided to? So it's being withdrawn from inventory and given to a specific charitable institution? And the answer is yes. But in a state like Virginia, I was reading a couple of the case studies, we're creating a chart for these topics. And because the items were deemed not to be withdrawn from inventory, then the exemption did not apply for them. So withdrawn from inventory. We're going to see that with a lot of these states. And then, you know, a big determining factor tax has been paid on the purchase. If not, why not? And all of these are factors that states look at when determining if this is going to be exempt for use tax or if it's going to be a permissible withdrawal from inventory without having to pay a use tax on it. You know, the exemption would be for charitable giving.
[4:58] Ellie: Okay, so quite a few caveats there. Mike, can you speak specifically about some of the states?
[5:05] Mike: You didn't? You didn't like my big generalizations there. And you know, as I stumbled through, yeah, we can talk about some specifics. So, let's look at California. You know, California has language that says if it's withdrawn from inventory, and is being gifted or donated to a qualified organization, then there's a use tax exemption that they can take care of. So the normal rule is you pull something out of inventory, you gotta pay, use tax. But if it's being pulled from inventory and given to a qualified organization, then you get that use tax exemption. Now, what's a qualified organization in California defines that, as anyone who falls under Section 170 (B)(1)(A), of the Internal Revenue Code, I mean, it's the usual, you know, your churches, religious organizations, you know, other nonprofits. So a pretty long list of companies that fall under the qualified organization. And again, that's Section 170 (B)(1)(A), of the Internal Revenue Code that you would look at for a full listing of these qualified organizations. We've got New York, pretty similar. You know, again, we see this withdrawn from inventory language, and donated to an exempt organization. And again, there's a listing of what those exempt organizations are pretty much, you know, most of the nonprofits that you would think of are listed as a part of the exempt organization. In North Carolina we have again, very similar language, withdrawn from inventory, donated to a federally exempt nonprofit. So very similar to California, they just worded a little bit differently. Now, New Jersey, they're one of the stingy states and one of the Scroggie states, no exceptions for charities and withdrawals from inventories. If you're pulling it out of inventory, they don't care if you're giving it to a charity or not. It's going to be subject to the use tax. Wisconsin and Maine, very similar to New Jersey, there are stingy or scrooge states. You know, if you're pulling things from inventory, they're going to be subject to the use tax. Now, in all of these states, you know, if you're buying something to donate to charity, generally you have to pay tax on that. There are not too many exemptions out there that say that, well, I'm going to be giving this to charity. So you get to buy tax-free, inventory generally has a whole different set of rules than if you're buying something specifically to give to charity.
[8:28] Ellie: Okay, well, I mean, we obviously can't go through all the states in this short amount of time, Mike, is there anything else that sellers should know, though? Or that they need to know?
[8:39] Mike: I think there is, you know if we got to pay attention to the language, I mean, not just in this scenario, in all of sales tax, but, you know, I mentioned earlier, you know, if a state says withdrawn from inventory, it means just that I came across a number of cases in Virginia where, you know, the use tax exemption, the state was saying they were not eligible for it because the items were not withdrawn from inventory. So that does make a difference. You can't say that. You know, well, we, you know, let's say you were using a desk and it wasn't something that you purchased from inventory, you know, that's a totally different situation. So if it says withdrawn from inventory, it's really got to be withdrawn from inventory. Also, use tax is a really big area for auditors to take a look at. I mean, when an auditor comes out, they're not just looking at your purchases to make sure that excuse me, not just looking at your sales to make sure that you've collected the right amount of tax, and then all of the tax has been turned in. They're also looking at your purchases. Because they want to make sure that all of the tax was paid correctly. And this then goes into, you know them digging a little bit deeper because use tax is the second biggest reason or the first biggest reason depending on what type of company you are for larger assessments in an audit. So you want to make sure that you're staying on top of this. It's something that auditors are going to be looking for. So we applaud all of you, who are so generous. But you gotta be careful, you got to protect yourself, or at least you need to know what the different state's rules are. And to that, we're putting together as I mentioned, a number of charts that cover these subjects. So we're going to talk about withdrawals from inventory in general. And then we're gonna have a second chart that talks about donations and gifts to charity.
[11:02] Ellie: Thank you so much, Mike, for this great information. I think it's of great interest, especially this time of year. Yeah, and I also just want to say that if you have any sales tax needs, Sales Tax and More we do offer many solutions and services, you can reach out to me directly at emoffat@salestaxandmore.com. You can also visit our website at www.salestaxandmore.com and in addition to our services, we offer a series of free webinars to offer CPE credit, like Mike was mentioning before we have a lot of resources out there that are free and paid for, that is incredibly helpful, Like this chart that Mike was talking about. Mike, is there anything else you want to say?
[11:53] Mike: I just want to thank everyone for joining us on this episode of the Sales Tax and More podcast and we hope that you'll be joining us on the next episode of the Sales Tax and More podcast. Thank you, everyone.
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