There are times when giving products away makes sense for a business. It could be a donation to a charity that promotes a product or product line. It might be a customer giveaway to raise brand awareness. Either way, many businesses believe that if you give products away, you don’t have to worry about paying sales or use tax. Unfortunately, these businesses soon discover that this is not always the case.
For example, let’s assume a business has a retail business with employees in California. As such, it is required to pay sales tax on all of the retail sales that it makes in California for the privilege of doing business here. Of course, this retailer may collect sales tax reimbursement from its customers. It is also responsible for remitting the sales taxes to the California Department of Tax and Fee Administration on a regular basis. Given these parameters, how does a charitable donation or customer giveaway impact this business’ sales and use tax responsibilities in California?
Charitable Donations
California law is clear when it comes to charitable donations and taxes. Under the law, a sale in California is defined as a transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for consideration.
In short, only transfers of tangible property “for consideration” are considered sales. Therefore, a gift is not a sale, because the transfer of the property does not involve consideration. This would make it appear that charitable donations by a business are not subject to sales taxes since they are donated, not sold. Yet, this is not entirely true.
A donation could still be subject to California’s use tax, even though it is essentially a gift. When it comes to gifts, the law, or more specifically California Sales Tax Regulation 1670, states that individuals who make gifts of property to others are the consumers of that property and the applicable use tax applies for the purchase of tangible personal property for use, storage or consumption in the state. There is an exception to this general rule, however. Any property donated by a retailer to an organization located in California that is described in Section 170(b)(1)(A) of the Internal Revenue Code is exempt from the use tax. (Rev. & Tax. Code § 6403.)
In the Internal Revenue Code, a Section 170(b)(1)(A) organization is defined as:
- A church, a convention of churches or an association of churches;
- An educational organization that:
- Has a primary function of presenting formal instruction;
- Maintains a regular faculty and curriculum; and
- Has a regularly enrolled body of students;
- An organization operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a state college or university;
- Hospitals and medical research organizations;
- A governmental unit as defined in IRC Section 170(c)(1);
- An organization referred to in IRC Section 170(c)(2) which normally receives a substantial part of its support from a governmental unit or from the general public;
- Certain private foundations; and
- An organization described in IRC Sections 509(a)(2) or 509(a)(3).
So in order to be exempt from California sales and use taxes, a retailer must donate to an organization located in California that qualifies as an IRC Section 170(b)(1)(A) organization. If the donation is made to an organization in California that does not qualify as an exempt donee organization under IRC Section 170(b)(1)(A), a use tax will be incurred.
Customer Giveaways
When it comes to giving products away to customers for promotional purposes, we run squarely into Sales and Use Tax Regulation 1670, referred to above. Such a giveaway is considered a gift, so there is no sales tax liability. However, the use tax will still apply because, under the law, the individual (in this case, a business) making the gift is considered a consumer of the tangible personal property involved.
It makes sense for a business to engage in philanthropic activities. Donating to charity or to customers can lead to a better public image and a healthier bottom line. However, when considering philanthropy, it pays to plan ahead. If you’re considering a charitable donation or giveaway involving retail products, an experienced California tax attorney or tax professional can help with this planning. We can guide you through the sales and use tax issues involved and help you avoid the penalties and interest involved when you miscalculate your sales and use taxes. Contact us today for a free and confidential initial consultation.