How did California tax free pencils and merchandise offered for suggested minimum donations?

Plain-English summary

A redacted nonprofit educational foundation solicited funds to aid redacted schools. It obtained a temporary resale license to participate in a school fall festival, where its booth's main purposes were advertising the foundation's existence and soliciting donations.

The foundation bought pencils, paid sales tax reimbursement, and planned to distribute them randomly without a dollar condition. Staff Counsel Kelly W. Ching assumed random meant the pencils would be given away without charge. On a California purchase, the foundation was consumer, the pencil vendor was retailer, and the vendor owed sales tax measured by its pencil-sale receipts. The vendor could collect reimbursement if the contract provided for it; the foundation said it had paid that reimbursement.

The foundation's later no-charge transfers were not taxed. Because those transfers were not sales, Regulation 1700(b)(1) barred the foundation from charging any amount designated as tax or tax reimbursement on them. If it instead bought pencils outside California and used them here by giving them away, the footnote applied use tax measured by pencil sales price under sections 6201 and 6401 and Regulation 1620.

The ordinary rules still applied to nonprofits: section 6051 taxed retail tangible-property sales measured by gross receipts, section 6007 defined retail sale, and Civil Code section 1656.1 permitted contractually provided tax reimbursement. The opinion cited Annotation 390.0020 for the absence of a general sales-and-use-tax exemption based merely on federal or state income-tax-exempt status.

The foundation also contemplated future gifts varying with contribution level, such as a T-shirt for a $50 donation, with gift value related to the donation. California treated an item furnished for a suggested minimum donation as sold, citing Annotation 495.0370. The foundation would be retailer, its sales-tax measure would be the stated suggested minimum donation, and it could collect contractual tax reimbursement.

Source and live-annotation limits

The official PDF does not include the November 3 request, nonprofit or governing records, school or foundation identities, temporary resale license, festival or booth records, pencil or supply records, purchase invoice, sales-tax reimbursement proof, random-distribution criteria or records, contributor or recipient records, solicitations or contributions, T-shirt or other contemplated gift, value calculations, contracts, customer receipts, returns, exemption or resale documentation, tax calculations or payments, audit, assessment, claim, appeal, or later outcome. The foundation, schools, festival, customers, contributors, recipients, vendors, pencils, prospective gifts, transactions, quantities, prices other than the hypothetical $50, contributions, and tax amounts are redacted, unidentified, hypothetical, or undocumented.

The source prints editorial brackets around [soliciting] and stray middle dots before donation and been; the original-text section preserves those published forms.

The live annotation preserves the educational fundraising purpose, fall-festival booth, awareness and solicitation purposes, random pencils, purchase tax reimbursement, date, consumer status, and no-further-tax conclusion. It omits the request and counsel, temporary-license number, no-dollar-condition question, California-purchase assumption, sections 6007 and 6051, Civil Code section 1656.1, nonprofit no-blanket-exemption rule and Annotation 390.0020, vendor liability and contractual reimbursement, Regulation 1700(b)(1)'s prohibition, out-of-state use-tax footnote and authorities, future gift program, $50 T-shirt example, value relationship, suggested-minimum-sale rule and Annotation 495.0370, foundation-retailer status and tax measure, missing records, redactions and source quirks, and absent outcome.

What this means for you

Nonprofits, donors, event organizers, and tax professionals

Preserve permit and event records, every purchase and vendor invoice, tax reimbursement paid, giveaway rules and distribution records, contribution solicitations and receipts, item values, any stated or suggested minimum, customer contracts, returns, exemption or resale documents, tax calculations, and payments. Document whether an item is available without payment; calling a required amount a donation does not answer the tax question.

Common questions

Was giving away tax-paid pencils taxable again?

No, when they were transferred without charge.

Could the foundation charge tax on a free pencil?

No.

Was a T-shirt offered for a suggested minimum donation a sale?

Yes. The tax measure was the amount identified as the suggested minimum donation.

Why was the foundation the pencil consumer?

Counsel assumed it bought the pencils and transferred them without charge.

Could a vendor collect tax reimbursement on the pencil purchase?

Yes, if the sales contract provided for reimbursement.

What if the pencils were bought outside California?

California use could create use tax measured by the pencils' sales price.

Did nonprofit or income-tax-exempt status create a blanket exemption?

No.

Did the source document the festival or future T-shirt program?

No.

Citations and references

• California Revenue and Taxation Code §§ 6007, 6051, 6201, and 6401
• California Civil Code § 1656.1
• California Code of Regulations, title 18, §§ 1620 and 1700(b)(1)
• California Business Taxes Law Guide Annotations 390.0020 (August 24, 1964) and 495.0370 (October 16, 1972)
• November 3 request; foundation, permit, festival, pencil, prospective-gift, contribution, sales, and tax records; and outcome — described or implicated but not documented

Verbatim support

From the official Staff Counsel opinion:

Your transfers of the pencils without charge are not subject to tax; therefore, you may not charge an amount designated as tax or tax reimbursement on such transfers.

Items furnished for a suggested minimum donation are regarded as having· been sold for sales and use tax purposes.

We have previously determined that where an item is furnished in exchange for a suggested minimum donation, the sales price is the amount identified as being the suggested minimum donation.

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/390-0092.pdf

Original ruling text

390.0092

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
•
January 18, 1996

Dear
This is in response to your letter dated November 3, 1995 regarding the application of tax to your organization's fundraising activities. You state: “The --- Educational Foundation is a non-profit organization [soliciting] funds to aid the --- schools. We were required to obtain a temporary resale license # --- in order to participate in the --- Fall Festival. The main purpose of the booth was to advertise the existence of the foundation and solicit donations. "We purchased some pencils we planned on giving out on a random basis. "We paid sales tax on the purchase. No dollar condition was set for giving out the pencils. Are these pencils subject to greater sales tax than the purchase price and if so how much? "We may in the future give gifts of items based on a certain level of donation, i.e. t-shirts for $50.00 donation, etc. The value of the gift will have some relationship to the ·donation. "Are any of the above gifts subject to sales tax and if so, what is the formula for calculating the sales tax."

DISCUSSION
Retail sales of tangible personal property in California are subject to sales tax, measured by gross receipts, unless specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) A retail sale is a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) A retailer may collect reimbursement from its customers for its sales tax liability if its contracts of sale provide for such reimbursement. (Civ. Code § 1656.1.) Although many nonprofit organizations have tax exempt status for federal and state income tax purposes, California law does not provide a general, blanket exemption

from tax for sales and use tax purposes. This means that a retail sale of tangible personal property to or by such an organization will be subject to tax measured by the full selling price unless specifically exempt from taxation by statute. (Business taxes Law Guide Annotation 390.0020 (8/24/64).) With respect to the pencils you purchased and planned on "giving out on a random basis," we assume you mean you planned to give the pencils away without charge. You are the consumer of the pencils you purchased and gave away at no charge. Assuming the pencil sales took place inside of California, the vendor who sold you the pencils is the retailer and owes sales tax on those sales, measured by the gross receipts from the sales of the pencils (the sales price of the pencils). The vendor was entitled to reimbursement for its sales tax liability from you if the contracts of sale so provided, and indeed, you indicate that you paid sales tax reimbursement when you purchased the pencils.1 Your transfers of the pencils without charge are not subject to tax; therefore, you may not charge an amount designated as tax or tax reimbursement on such transfers. (See Reg. 1700(b)(1).) You state that you are considering giving gifts in the future in exchange for suggested minimum donations that would vary according to the value of each gift. Items furnished for a suggested minimum donation are regarded as having· been sold for sales and use tax purposes. (BTLG Ann 495.0370 (10/16/72).) Thus, when you furnish items for a suggested minimum donation, you are the retailer rather than the consumer of such items, and you therefore owe sales tax measured by the sales price of those items. We have previously determined that where an item is furnished in exchange for a suggested minimum donation, the sales price is the amount identified as being the suggested minimum donation. You may collect reimbursement from your customers for your sales tax liability if your contracts of sale so provide. If you have further questions, please feel free to write again.

Sincerely,

Kelly W. Ching
Staff Counsel
KWC:cl
cc:
District Administrator
1 If you purchased the pencils outside of California and then used them in this state, such as by giving them away as you have described, sales tax would not apply; instead, you would owe use tax on your use of the pencils, measured by the sales price of the pencils. (Rev. & Tax. Code §§ 6201, 6401; Reg. 1620.)