Did a nonprofit make taxable sales when it gave donated red ribbons to contributors and noncontributors?

Plain-English summary

A redacted nonprofit, exempt under Internal Revenue Code section 501(c)(3), consisted of physicians, scientists, and community leaders seeking better HIV treatments and an AIDS cure, mainly through research trials.

A supporter made and donated red ribbons to the organization without charge. The described ribbons were about three inches long, made from red satin ribbon, and covered with red beads. The supporter paid sales tax when purchasing every supply used to assemble them. The nonprofit provided ribbons to contributors and would also give them away without receiving a contribution.

Regulation 1670(a), quoted in the opinion, treated a person who gave property to another as consumer and applied tax to the sale of the property to that donor. Senior Tax Counsel Gordon P. Adelman treated the supporter as consumer of the supplies and noted that the nonprofit purchased nothing.

Because the ribbons were incidental to the nonprofit's research goals and also available without a contribution, counsel found no exchange and treated the organization as giving the ribbons away, not selling them. Under those expressly unique circumstances, the nonprofit's conclusion that tax did not apply was correct. The live annotation states the two sides explicitly: no purchase meant no basis for use-tax liability, and distribution independent of a donation meant no sale or sales-tax liability.

Source and live-annotation limits

The official PDF does not include the February 1 request, section 501(c)(3) determination, governing or nonprofit records, physician, scientist or leader identities, research protocols or trials, supporter identity, any ribbon or supply, purchase receipts, sales-tax payment proof, assembly or donation records, contributor or noncontributor records, contribution solicitations or amounts, distribution criteria or records, invoices, returns, exemption documentation, tax calculations or payments, audit, assessment, claim, appeal, or later outcome. The nonprofit, supporter, contributors, recipients, vendors, ribbons, supplies, transactions, quantities beyond the described ribbon length, prices, contributions, and tax amounts are redacted, unidentified, or undocumented.

The source says no bartered for exchange; the original-text section preserves that published wording rather than silently rewriting it. The live annotation calls the ribbons bows, a term absent from the supporting opinion. It preserves the research purpose, donated ribbons, supporter assembly and material tax, contributor and free distributions, date, and no-use-tax and no-sales-tax results. It omits the request and counsel, section 501(c)(3), organizational membership, HIV-treatment objective and research-trial method, no-charge receipt, dimensions and bead construction, Regulation 1670(a), consumer rule, incidental-purpose and unique-circumstances reasoning, Culver City copy, missing records, redaction, source wording, and absent outcome.

What this means for you

Nonprofits, donors, fundraisers, and tax professionals

Preserve the donor's supply invoices and tax payments, assembly and donation records, the nonprofit's receipt and distribution records, contribution requests and amounts, written criteria showing whether an item depends on payment, item values, returns, exemption documents, tax calculations, and payments. A required payment, threshold, purchase by the nonprofit, or different acquisition and distribution facts could change the analysis.

Common questions

Did giving a ribbon to a contributor make it a sale?

Not on these facts, because ribbons were also available without a contribution and there was no bargained-for exchange.

Who was the consumer of the ribbon materials?

The supporter who made and donated the ribbons.

Why was there no use-tax basis for the nonprofit?

It received the ribbons without charge and purchased nothing.

What were the ribbons made from?

About three inches of red satin ribbon covered with red beads, under the described facts.

What did the nonprofit do?

Its physicians, scientists, and community leaders sought better HIV treatments and an AIDS cure, mainly through research trials.

Did the source document actual ribbons or contributions?

No.

Was the result stated as a general rule for all nonprofit giveaways?

No. Counsel expressly called the circumstances unique.

Citations and references

• California Code of Regulations, title 18, § 1670(a)
• Internal Revenue Code § 501(c)(3)
• February 1 request; nonprofit, research, ribbon, supply-purchase, contribution, distribution, and tax records; and outcome — described or implicated but not documented

Verbatim support

From the official Senior Tax Counsel opinion:

Sales and Use Tax Regulation 1670(a) provides that "Persons who make gifts of property to others are the consumers of the property and the tax applies with respect to the sale of the property to such persons."

The organization is not purchasing anything.

Under these unique circumstances, there is no bartered for exchange and the organization is giving away the ribbons, not selling them.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/390-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/390-0085.pdf

Original ruling text

390.0085

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

February 8, 1993

Dear
In your letter of February 1, 1993 you related the following facts.
--- is a nonprofit organization exempt under Internal Revenue Code Section 501(c) (3). The organization is made up of physicians, scientists, and community leaders who are dedicated to finding better treatments against HIV and a cure for AIDS. This is mainly done through the performance of research trials. The organization receives at no charge, red ribbons from a supporter of the organization. The individual donating the red ribbons makes them and pays sales tax upon the purchase of any supplies utilized in assembling the ribbons. The ribbons are approximately three inches in length and are made of red satin ribbon covered with red beads. The organization provides the ribbons to contributors, and the organization will give away ribbons without receiving a contribution. Sales and Use Tax Regulation 1670(a) provides that "Persons who make gifts of property to others are the consumers of the property and the tax applies with respect to the sale of the property to such persons." There is no doubt that the provider of the ribbons is a consumer, pays tax on the purchase of materials and donates them to the organization. The organization is not purchasing anything. The ribbons are incidental to the organization's primary goals of seeking better treatments against HIV and a cure for AIDS. Under these unique circumstances, there is no bartered for exchange and the organization is giving away the ribbons, not selling them. Thus, your conclusion that tax does not apply is correct.

Very truly yours,

Gordon P. Adelman
Senior Tax Counsel
GPA:sr
bc: Culver City District Administrator