When a company charges donors a separate fee to notify a recipient (by letter or by e-mail) that a charitable gift was made in their name, is that notification fee taxable in Texas?

Plain-English summary

A law firm asked the Comptroller about a "charity gift" business model: a donor pays a company to make a charitable donation on behalf of a friend or relative, and the company charges an extra fee to notify that friend or relative that the gift was made in their name — $5 if the notification goes by physical letter, $3 if it goes by e-mail. The amount of the underlying gift doesn't change the notification fee.

The Comptroller split the two delivery methods:

• Letter notification fee: not taxable. The separately stated charge for mailing the notification letter is not subject to Texas sales tax.
• E-mail notification fee: taxable. The separately stated charge for sending the notification by e-mail is a taxable telecommunications service under Comptroller's Rule 3.344.

Because the letter charge came out non-taxable, the follow-up questions about sourcing letters to in-state vs. out-of-state recipients were "not applicable." For the taxable e-mail charge, the Comptroller applied the standard telecommunications sourcing rule: it's taxable when it's a long-distance service that is both originated from and billed to a Texas phone number or billing/service address. If the e-mail instead originates from a server located outside Texas, the charge is not a taxable telecommunications service.

What this means for you

Businesses that charge a separate "notification" or "acknowledgment" fee

How you deliver a paid notification matters for Texas sales tax, even when the underlying transaction (here, a charitable gift) isn't itself taxable. A separately stated fee for physical mail delivery is treated differently than one for electronic delivery, because e-mail delivery was analyzed here as a telecommunications service.

Multi-state or online service providers

If your billed service is delivered electronically and sourced under the telecommunications rules, look at where the message both originates and is billed — Texas taxes the charge only when both the origination and the billing/service address are in Texas.

Accountants and tax professionals

This 2000-era letter applies the long-distance telecommunications sourcing test (origination and billing address both in Texas) under 34 Tex. Admin. Code Rule 3.344 to an e-mail delivery charge — a useful example of how "telecommunications service" was construed to reach electronic message delivery, distinct from the nontaxable service of mailing a paper letter.

Common questions

Q: Is a fee to notify someone their friend made a charitable gift in their name taxable?
A: It depends how it's delivered. A separately stated letter-notification fee is not taxable; a separately stated e-mail-notification fee is a taxable telecommunications service.

Q: Does it matter where the donor or recipient is located?
A: For the (nontaxable) letter fee, no — the question was moot. For the (taxable) e-mail fee, what matters is where the message originates and where it's billed: it's taxable only if both are in Texas.

Q: Can I rely on this letter for my own business?
A: No. This opinion is based on the facts presented, and additional or different facts could change the outcome; it can be relied on only by the taxpayer it was issued to.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.344 (taxability of telecommunications services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200003601L

Original ruling text

March 7, 2000

Thank you for your letter concerning the taxability of charity gift
notifications.

Your firm represents **, a Texas corporation ("CORPORATION"), and
INCORPORATED, a Texas not-for-profit corporation and wholly-owned subsidiary of
** ("COMPANY"). Both CORPORATION and COMPANY are located in Texas
and together provide the service of making charitable gifts on behalf of donors
who wish to have the gift shown as made in the name of a third individual. For
example, if a friend's mother passed away and you wished to make a donation of
$1000 to the Cancer Society in her name, you could contact COMPANY. COMPANY
would take the donation and CORPORATION would charge a fee for notifying your
friend that the gift had been made. Your friend could be notified either by
letter or e-mail. If you choose a letter, the charge would be approximately $5;
and if e-mail, the charge would be approximately $3. Therefore, you would send
a check to COMPANY for either $1005 or $1003. CORPORATION would then see that
the donation was made to the Cancer Society and would notify your friend by
either letter or e-mail that a gift of $1000 had been made to the Cancer
Society in your friend's name.

COMPANY provides its service to individuals located throughout the United
States and sends e-mails and letters from Texas to individuals in Texas and the
United States. Therefore, the donor could be located either outside Texas or in
the state; and similarly, the recipient of the letter or e-mail could be
located either in the state or outside Texas.

The amount of the gift does not affect the charge for notification. Therefore,
if the gift is $10 or $1,000,000, the charge to notify would be either $5 or
$3. CORPORATION is compensated in part for this service through the charge for
the letter or e-mail.

It is your position that the donor is not buying a card or an e-mail but a
non-taxable service in connection with which the cards and e-mails are merely
incidental charges. While it is true that these charges generate income for the
taxpayer, the essence of the transaction as far as the customer is concerned is
the larger service described above.

Therefore, you request a response to the following questions:

1. Is the letter charge subject to tax, and if so, why?

Response. The charge to send the letter notification is not subject to tax.

2. Is the e-mail charge subject to tax, and if so, why?

Response. The separately stated charge to send the e-mail is a taxable
telecommunication service. See enclosed Rule 3.344.

3. If your answer to (1) is "yes", is COMPANY required to collect tax on
   letters sent from Texas to individuals located outside Texas? If your answer is
   "yes", would it make a difference if the letters were sent from outside Texas
   to individuals outside Texas? If your answer is "yes", does it make a
   difference where the donor is located?

Response. Not applicable.

4. If your answer to (2) is "yes", under what circumstances is COMPANY
   required to tax? Would it make a difference if the e-mails were sent from a
   server outside of Texas?

Response. Long-distance telecommunications services which are both originated
from, and billed to, a telephone number or billing or service address within
Texas. If the call originates out of state (server location), the charge is
not a taxable telecommunication service.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division

cc: Adina Christian