Does a charity owe sales or use tax when it pulls resale inventory it bought tax-free and gives the items away to donors, customers, or performers?

Plain-English summary

A charitable organization runs a retail store. It buys merchandise tax-free for resale, but instead of selling some of it, it gives those items away — as gifts to potential donors, to regular customers, and to artists who perform at the organization's venue. It asked Colorado whether any tax is due.

The Department walked through the logic in layers:

1. A gift is not a sale. No sales tax is charged on the act of giving something away. But the giver is then treated as the user and consumer of the item.
2. Tax-free resale inventory has a string attached. A retailer (including a charity) can buy goods without paying sales tax because it intends to resell them. If it instead pulls an item out of inventory for its own use — including giving it away — it owes use tax on the price it paid for that item. This is true no matter how the item is used.
3. But charities get a use-tax break for mission use. A charitable organization's use of property is generally exempt from use tax when the property is used in the conduct of its regular charitable functions and activities.
4. The break has a limit. The charitable exemption does not apply to property the charity transfers to someone else for personal use if the charity recoups all or part of the item's price from that person. "Personal use" here means any use by the recipient that isn't exclusively in furtherance of the charity's regular charitable functions.

So the bottom line is fact-dependent: whether a particular giveaway triggers use tax turns on whether handing the item out is part of the organization's regular charitable functions, and whether the charity recovers any of the cost from the recipient.

What this means for you

Nonprofits and charitable retailers

The trap is the tax-free resale purchase. When you divert resale stock to give away — promotional gifts, thank-you items, swag for performers — you've become the consumer and you generally owe use tax on your cost, unless the giveaway genuinely furthers your regular charitable mission. Keep records that distinguish mission-related distributions from marketing or relationship-building giveaways, because the two are treated differently.

Nonprofit finance and operations staff

Watch the "recoup any part of the price" wording: if you recover even part of an item's cost from a recipient who uses it personally, the charitable use-tax exemption is off the table for that item. Also note the separate sales-side rule — a charity's sales may be exempt from state and special-district sales tax only if net proceeds stay under $45,000 in both the current and prior year, and even then generally not for city/county sales tax.

Accountants and tax professionals

The chain is § 39-26-104(1)(a) (sales tax) → gift is not a sale (1 CCR 201-4, Rule 39-26-102(10)) → giver is consumer (1 CCR 201-5, Special Rule 21) → withdrawal-from-inventory use tax (§ 39-26-202(1)(b)) → charitable use exemption (§ 39-26-713(2)(d)) → personal-use/recoupment carve-out (1 CCR 201-4, Rule 39-26-718(5)). The Department read "personal use" (citing its own PLR 20-002) as any recipient use not exclusively furthering the charity's regular functions. As a GIL, it isn't binding.

Common questions

Q: Does a charity charge sales tax when it gives something away?
A: No. Giving a gift is not a sale, so there's no sales tax on the act of giving. But the charity is then the user and consumer of the item, which raises the use-tax question.

Q: We bought merchandise tax-free to resell, then gave some away. Do we owe tax?
A: Generally yes — use tax on what you paid for those items — because pulling resale stock for your own use (including gifting) is a taxable withdrawal from inventory, unless a charitable exemption applies.

Q: When does the charitable exemption save us?
A: When the property is used in the conduct of your regular charitable functions and activities. It does not apply if you transfer the item to someone for their personal use and you recoup all or part of the price from them.

Q: What counts as "personal use" by the recipient?
A: The Department reads it broadly: any use by the recipient that is not exclusively in furtherance of your organization's regular charitable functions and activities.

Q: Can we rely on this letter?
A: Not as binding authority. A General Information Letter is general guidance only, not binding on the Department, and represents the good-faith opinion of Department personnel. Your specific facts control, and a binding answer requires a private letter ruling.

Q: Does this cover city tax too?
A: No. The Department administers state and state-administered local sales and use tax only. Self-collected home-rule cities set their own rules, and the charitable sales exemption generally doesn't extend to city/county sales tax. Check each jurisdiction and DR 1002.

Citations and references

Statutes and rules:
- § 39-26-104(1)(a), C.R.S. (sales tax on retail sales of tangible personal property)
- § 39-26-202(1)(b), C.R.S. (use tax on storage, use, or consumption; withdrawal from inventory)
- § 39-26-713(2)(d), C.R.S. (use-tax exemption for a charity's regular charitable functions)
- § 39-26-718(1)(b), (2), C.R.S. (charitable-organization sales exemption; under-$45,000 threshold)
- 1 CCR 201-4, Rule 39-26-102(10) (a bona fide gift is not a sale)
- 1 CCR 201-5, Special Rule 21 (the giver is the user/consumer of the gifted property)
- 1 CCR 201-4, Rule 39-26-718(5) (no exemption for transfers for personal use where price is recouped)

Other authority:
- Int'l Bus. Mach. Corp. v. Charnes, 601 P.2d 622 (Colo. 1979)
- Colorado PLR 20-002 (meaning of "personal use"; cannot be relied on by other taxpayers)

Subject

Sales and use tax on items given as gifts by a charitable organization

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-21-002.pdf

Original ruling text

Office of Tax Policy Analysis
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL 21-002
June 4, 2021
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Re: Sales and use tax on items given as gifts by a charitable organization
Dear XXXXXXXXXX:
You submitted a request for a general information letter regarding sales and use tax on items given
as gifts by a charitable organization. The Colorado Department of Revenue (“Department”) issues
general information letters and private letter rulings. A general information letter provides a general
overview of the relevant tax issues, but is not binding on the Department. A private letter ruling
provides a specific determination for a specific set of facts, is binding on the Department, and
requires payment of a fee. For more information about general information letters and private letter
rulings, please see 1 CCR 201-1, Rule 24-35-103.5.
Issue
Is sales or use tax due on items a charitable organization purchases tax-free for resale at a store the
organization operates, but then gives away as gifts to potential donors, regular customers, and
artists performing at the organization’s venue?
Discussion
Colorado imposes sales tax on retail sales of tangible personal property.1 In general, a charitable
organization that engages in the business of selling at retail in Colorado is considered a retailer and
is required to obtain a sales tax license and collect tax on any retail sales it makes.2
However, a bona fide gift of tangible personal property is not considered a sale and sales tax does
not apply to the act of giving a gift.3 Instead, the person, business, or organization giving the gift is
considered the user and consumer of the property and is liable for sales or use tax.4 If the giver did

1 Section 39-26-104(1)(a), C.R.S.
2 See sections 39-26-102(2), -102(2.5), -102(3), -102(8), -102(9), -102(10), -103, -103(9)(a), -105, C.R.S. Sales made

by a charitable organization may be exempt from state and state-administered special district sales taxes if the net
proceeds from the charitable organization’s annual sales in both the current and prior year are less than $45,000.
Section 39-26-718(1)(b) and (2), C.R.S. However, the exemption generally does not apply to state-administered city
and county sales taxes. See Department publication DR 1002, Colorado Sales/Use Tax Rates for information about
local sales tax exemptions.
3 1 CCR 201-4, 39-26-102(10).
4 1 CCR 201-5, Special Rule 21.

GIL 21-002
June 4, 2021
Page 2
not pay sales tax when they acquired the property (because, for example, the giver originally
purchased the property with the intention of reselling it), the giver is liable for use tax on the item.5
A retailer, including any charitable organization engaged in the business of selling at retail, may
purchase tangible personal property for resale without paying sales tax at the time of purchase.6
However, if the retailer withdraws an item purchased tax-free from inventory for the retailer’s own
use, the retailer will owe use tax on that item.7 The use tax is calculated on the purchase price the
retailer paid to acquire the item.8 Use tax applies regardless of the manner in which the retailer uses
the withdrawn item and regardless of whether the retailer uses the withdrawn item as a gift the
retailer gives away.9
However, the use of tangible personal property by a charitable organization is generally exempt from
use tax, provided the organization uses the property in the conduct of its regular charitable functions
and activities.10 Colorado statute and regulation generally do not prescribe explicit criteria for
determining the scope of an organization’s regular charitable functions and activities and whether a
particular use of property qualifies for exemption depends on the specific facts and circumstances.
Department regulation states that the sales tax exemption for charitable organizations does not
apply to property a charitable organization transfers to anyone else for personal use if all or part of
the price of the good is recouped from the transferee.11 The Department previously noted that
“personal use” as it is used in the regulation refers to any use by the transferee that is not
exclusively in furtherance of the regular charitable functions and activities of the exempt
organization.12
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination on any of the
issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter does
not address sales and use taxes administered by self-collected home-rule cities. You may wish to
consult with those local governments that administer their own sales or use taxes about the
applicability of those taxes. Visit our website at Tax.Colorado.gov for more information about state
and local sales taxes.
Sincerely,

Office of Tax Policy Analysis
Colorado Department of Revenue
5 Section 39-26-202(1)(b), C.R.S.
6 Sections 39-26-102(9), -102(19), -104(1), and -105(3), C.R.S. See also 1 CCR 201-4, Rule 39-26-105-3.
7 Section 39-26-202(1)(b), C.R.S.; 1 CCR 201-4, Rule 39-26-713-3; and Int’l. Bus. Mach. Corp. v. Charnes, 601 P.2d

622 (Colo. 1979).
8 Sections 39-26-201(1) and -202(1)(b), C.R.S.
9 1 CCR 201-5, Special Rule 21.
10 Section 39-26-713(2)(d), C.R.S.
11 1 CCR 201-4, Rule 39-26-718(5).
12 Private Letter Ruling 20-002. Please note that private letter rulings cannot be relied upon by any taxpayer other
than the taxpayer to whom the ruling is made.