Sold! The taxability of nonprofit auction sales – Wacky Tax Wednesday

I love listening to auctioneers in action. Their rapid-fire talk conjures childhood memories of visiting rural Maryland, where my grandmother lived adjacent to a stockyard that held weekly auctions. Man, could those men fit a lot of words into a minute!

The auctions I witnessed during my youth were for-profit. Most of the auctions held in my community today are held by nonprofits. The community calendar contains a steady stream of auctions that raise money for a variety of organizations, from churches to farms to sports programs. In fact, I’m attending one in a couple of weeks. And instead of worrying about what I’ll wear (though there are legitimate concerns in that department), I’m wondering how sales tax applies to these types of events.

Sales tax rules and regulations vary by state, and perhaps nowhere is that more true than in the world of nonprofits. Within each state, rules regarding the taxability of nonprofits often depend on the type of nonprofit (e.g., charitable, educational, or religious), the type of event, and what the proceeds are used for.

It can be dizzyingly difficult to understand — kind of like a fast-paced auctioneer. Read on for a sampling.

Most states generally require nonprofits to collect tax on their sales of tangible personal property and taxable services. However, rules vary by state, and there are exceptions to most every rule.

In California, the amount a nonprofit receives in exchange for merchandise is generally taxable. With respect to auctions, the taxable amount is the price set by the organization and/or the full amount received, regardless of the item’s actual value. This is true even if an item sells for much more than its stated value.

The California State Board of Equalization (BOE) specifies that sales shipped to consumers in another state, as could arise during an online auction, are not generally subject to California sales tax (consumers could owe use tax in the other state). The BOE also states that “the sale of travel, home rentals, guide services, personal services, tutoring, and other things of value that are not physical products” are not considered taxable sales.

In New York, sales of tangible personal property made by charitable, educational, or religious organizations at auctions (both traditional and remote) are typically taxable. However, if these nonprofits conduct “no more than two traditional auction events during a calendar year,” those sales are exempt when both the following are conditions are true:

• The exempt organization does not otherwise make sales of similar items at a shop or store
• The auction events are not conducted on the premises of a commercial auction house, or on any premises where an auctioneer is conducting other auction sales

The New York Department of Taxation and Finance further clarifies that if a nonprofit organization plans and holds three or more auctions during a calendar year, sales made at all three auctions are taxable. But if it plans and holds two auctions during a calendar year, and then decides to hold a third because of an excess of donations, only sales made at the third auction are taxable.

Similarly, in Texas, most exempt charitable, educational, or religious organizations are permitted to hold two “one-day, tax-free sales or auctions each calendar year.” Yet the fine print in Texas differs from the fine print in New York. For example, in Texas:

• “The designated one-day, tax-free sale day is either the day the vendor delivers the items to the exempt organization or the day the organization delivers the items to its customers” [emphasis mine]
• The exemption doesn’t apply to items sold for more than $5,000, but it does apply if the item sold is donated to, or manufactured by, the organization — so long as it isn’t sold back to the donor

Texas doesn’t allow this exemption for many other types of nonprofit organizations: “Youth athletic organizations, volunteer fire departments, chambers of commerce and governmental entities may not hold tax-free sales or auctions.” But it allows certain nonprofit organizations, such as student organizations associated with institutions of higher learning or senior citizen groups, to hold more than two one-day, tax-free sales or auctions each year.

If you haven’t heard auctioneers in action, check out this auctioneer beats compilation. And if you haven’t considered how tax automation software can facilitate and improve sales and use tax compliance, check out Avalara.

photo credit: lars hammar Auctioneer via photopin (license)