Can a restaurant avoid Texas sales tax by labeling a required meal price as a charitable contribution?

Plain-English summary

The Texas Comptroller ruled that calling a restaurant's menu prices "charitable contributions" did not change the transactions into donations. Customers had to pay set amounts to receive taxable meals, so the payments were taxable sales.

The letter drew a practical line between a contribution and a sale. A person making a contribution may choose any amount. When someone must pay a minimum or fixed amount to receive a taxable item, the transaction is a sale for sales-tax purposes.

The Comptroller also clarified who was making any actual contribution in the proposed arrangement. The restaurant customers were buying meals; if the restaurant later transferred the proceeds to the nonprofit corporation, that transfer was the restaurant's contribution.

What this means for you

Nonprofits and fundraising businesses

Labels do not control the tax result. If a donor must pay a set amount to receive a taxable item, the exchange is treated as a sale.

Restaurants

Meals sold to the public for stated prices remained taxable even when the business intended to pass the proceeds to a nonprofit.

Accountants and tax professionals

Separate the customer transaction from the later charitable transfer. The ruling treated the first as a taxable meal sale and the second as a possible contribution by the restaurant.

Common questions

Q: Is a voluntary contribution subject to sales tax?
A: The letter says a contribution, by itself, is not a sale of a taxable item and is not subject to sales tax.

Q: What if the receipt calls the charge a donation?
A: The label does not matter when the customer must pay a set amount to receive a taxable item.

Q: Did the nonprofit status of the recipient make the meals exempt?
A: No. The ruling assumed the restaurant was open to the public and held that its customers were purchasing taxable meals.

Q: Can another fundraiser rely on this result?
A: Not automatically. The opinion was expressly based on the facts presented, and different facts could change the answer.

Citations and references

The letter did not cite a specific statute or administrative rule for its contribution-versus-sale test.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8501L0618A05

Original ruling text

January 24, 1985

Dear ***:

Thank you for your second letter of January 22, 1985, regarding the
taxation as applies to a specific business operation.

The answers in our letter to you of January 10, 1985, assumes a
restaurant, whether profit or nonprofit, is open to the public (i.e.
feeding the public for "charitable contributions"). The "charitable
contributions" are then given by the restaurant to the nonprofit
corporation. Our answers to you in that letter are correct.

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

You may write to the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division

January 10, 1985

Dear ***:

Thank you for your letter of December 20, 1984, regarding sales tax
relation to certain transactions.

1. Question: "Is (are) charitable contributions to an IRS certified
   non-profit corporation subject to collection and transfer of Texas
   sales tax?"

Answer: A contribution to any recipient is not a sale of a taxable
item and is therefore, not subject to sales tax.

2. Question: "Is there a definition of 'charitable contribution'?"

Answer: There is no formal definition of a "charitable contribution"
in the sales tax law nor in an administrative rule. However, it is
a long-standing policy of the Comptroller that when the transaction
involves the exchange of a taxable item for a set amount, it is a
sale and not a charitable contribution. A contribution implies that
the person making the contribution may contribute any amount he wishes.
If there is a minimum amount or a set amount that must be given in
order to receive something that is a taxable item in return, this is,
for sales tax purposes, not a contribution, but a sale.

3. Question: "Specific case for evaluation. A non-profit corporation
   will be offering low cost training in all aspects of retail business to
   high school graduates with no desire for college/university training.
   In one case a restaurant will be used as a training facility with menu
   "prices" and service/food checks identified in print with the amount as
   a "charitable contribution." If permissible, we do not intend to add or
   collect Texas sales tax. If it is not permissible, please detail why
   and another plan will be submitted or a legislative bill will be pro-
   posed for clarification."

Answer: As stated in the answer to number 2 above, when a taxable item
(a meal) is transferred to a customer for a set amount (the price) a
sale has occurred, regardless of the fact that the words "charitable
contribution" are printed on the sales tickets and menus. Sales tax is
due on this transaction. Any "charitable contribution" that may be being
made in your example appears to be a contribution by the restaurant
to the nonprofit corporation. A contribution is not being made by the
restaurant customers. The customers are purchasing taxable meals for a
set price.

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

You may write to the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division