Can a 501(c)(3) organization that runs a regular retail store still hold two tax-free sale days a year, and how must it document them?

Subject

Two One — Day Tax Free Sales Or Auctions — Exempt Org Should Designate In Advance So General Public Will Be Aware That Tax Will Not Be Collected

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1294D02

Plain-English Summary

A 501(c)(3) organization that holds a Texas sales and use tax permit and regularly sells tangible personal property through a store asked the Comptroller several questions about the "two one-day tax-free sale" exemption available to qualified nonprofits.

The Comptroller confirmed that holding a sales tax permit and running a regular store does not disqualify the organization from also designating two days a year as tax-free sale or auction days. The organization does not need to hold a "special" one-day event — it can simply pick two days at its existing store and treat those as the tax-free days.

Key requirements from the ruling:

• The two tax-free days must be designated in advance, so that purchasers know at the time of sale that no tax is being charged.
• The organization's records must clearly identify which two sales or auction days were chosen as the tax-free ones.
• The organization cannot collect tax on those transactions and keep it under the tax-free exemption — the sales must actually be tax-free.
• Acceptable documentation includes a "no tax" notation on invoices for that day, or copies of advertising promoting the tax-free sale.
• If the organization holds more than two one-day sales or auctions during the year, it may choose which two of those events will be the tax-free ones, following the same designation and documentation rules.
• For a silent auction where bids are placed on a "Bid Sheet" that acts as a contract, and payment/possession of the item happen after the auction date, the sale still counts as occurring on the designated tax-free day — as long as title passes to the winning bidder on that day. The fact that the buyer picks up the item later does not, by itself, cause the exemption to be lost.

What This Means For You

If you run a 501(c)(3) organization with a regular store or sales tax permit: You can still take advantage of the two tax-free sale days per year. Decide on your two days ahead of time and make sure customers know in advance (through in-store notices or advertising) that no tax will be charged on those days.

If you hold multiple one-day sales or fundraising events during the year: You get to choose which two of those events are your official tax-free days — but you must clearly document which two you picked, so a Comptroller auditor can verify it later.

If you run a silent auction as one of your tax-free events: Make sure the auction terms establish that title to the auctioned item transfers to the winning bidder on the day of the auction, even if the bidder does not physically pick up the item or pay until later. That is what preserves the tax-free treatment for that item.

Documentation matters: Keep records such as "no tax" notations on invoices for your designated tax-free days, or copies of the advertising you used to promote the tax-free sale, so you can show an auditor exactly which two days and which sales were covered.

Q&A

Q: Our nonprofit already holds a Texas sales tax permit and sells items through a store all year. Can we still have two tax-free sale days?
A: Yes. Holding a permit and regularly selling taxable items does not prevent a qualified 501(c)(3) organization from designating two days a year as tax-free sale days at that same store.

Q: What do we need to do to document our two tax-free days for an audit?
A: Designate the two days in advance so buyers know the sales are tax-free, and keep records identifying exactly which two days/events were chosen — for example, a "no tax" notation on invoices for that day or copies of advertising promoting the tax-free sale.

Q: We run a silent auction where the winning bidder pays and picks up the item a week later. Does that break the "one-day" tax-free treatment?
A: No, as long as title to the item passes to the winning bidder on the day of the auction. The Comptroller noted that a sale requires either transfer of title or possession, and if title passes on the designated tax-free day, the fact that possession happens later does not by itself cause the exemption to be lost.

Original ruling text

March 18, 1994

Dear *****:

This is in response to your fax transmittal to this office
on March 17, 1994, regarding a tax-free sale or auction by a 501 (c)(3)
organization.

The following questions are ask by a 501 (c)(3) corporation.

QUESTION 1

If the corporation holds a Texas sales and use tax permit
and regularly sells items of tangible personal property at a
store that is part of its operations, will it still be able
to hold two tax-free sales or auctions during a calendar year?

RESPONSE: Yes.

The remaining questions are based on the facts in question
one and assume that the answer to question one is "yes".

QUESTION 2

If the corporation does not hold any "special" one-day sale
or auction, will the corporation be permitted to designate
two days during the calendar year as tax-free sale days at
the store that is part of its operation? If so, what
documentation would be necessary to establish to the
satisfaction of a Comptroller auditor the two days that the
corporation has designated as tax-free at the store?

RESPONSE: A qualified organization may designate any two
days to be their tax-free sale or auction. Each of the tax-
free sales or auctions must be designated in advance in
order that purchasers are aware that the sales are not subject to tax.

The organization's records must identify which two sales or
auctions were designated as the two tax-free sales or
auctions. The corporation may not collect tax on the
transactions and keep the tax under the "tax-free" sale
exemption. The sales must be actually "tax-free".
Documentation could be evidence such as "no tax" notation on
the invoices, for that day, or copies of advertising
promoting the tax free sale. Generally sales receipts have a
indication for sales tax; a tax-free sale should be noted on
each invoice for the protection of both the buyer and seller.

QUESTION 3

If the corporation holds more than two one-day sales or
auctions during a calendar year, would the corporation be
permitted to designate the two one-day sales or auctions
(whether "special" sales or auctions or sale days at the
store) that will be tax-free? If so, what documentation
would be necessary to establish to the satisfaction of a
Comptroller auditor the two one-day sales or auctions
that the corporation has designated as tax-free?

RESPONSE: Same answer as #1 above.

QUESTION 4

The corporation holds an annual fund raising silent auction,
during which items of tangible personal property and
services are auctioned. The items or descriptions of the
items being auctioned are displayed on tables. A bidder
places his name, phone number and bid on a sheet of paper
(the "Bid Sheet") that contains a description of the
particular item being auctioned. The Bid Sheet contains a
statement that it constitutes a contract. Persons desiring
to make a higher bid place their bids on the Bid Sheet. The
person having placed the highest bid on the Bid Sheet is the
winner and provides his or her payment to the corporation
and receives the purchased item during the week following
the auction. Will the silent auction be treated as a one-day
sale, even though the payment and the item are exchanged
after the date of the auction?

RESPONSE: The definition of a sale was changed by the
legislature in 1984. Since then, there must be either the
transfer of title or possession to goods before a sale has
occurred. With this in mind, if title passes on the
designated silent auction day the fact that possession
occurs later will not in itself cause the exemption to be lost.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If
you have any questions or need more information, please
write or call me toll free at 1-800-531-5441, extension
50330, or 512-475-0330.

Sincerely

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9403213L