If a restaurant charges customers a mandatory $1 'donation' to get a discounted meal and then passes that dollar to a charity, does the restaurant owe sales tax on it?

Plain-English summary

A business wrote to the Texas Comptroller's Tax Policy Division about a planned charitable promotion. The idea was for "ABC Company" to issue coupons (likely through direct mail or newspaper ads) letting customers buy a dinner at regular price and then receive the same or a lesser meal for one dollar, with that dollar being passed along to a charitable organization. The business hoped it could simply forward the dollar to the charity without collecting sales tax on it.

The Comptroller's office explained that whether a payment like this is a taxable "sale" or a tax-free "donation" turns on two questions: (1) is the donation amount mandatory, and (2) is the value received commensurate with (roughly equal to or less than) the donation. In the promotion described, the one-dollar payment was mandatory to get the second meal, and the meal was probably worth more than one dollar. Because of that, the Comptroller concluded the dollar had to be treated as consideration paid for the meal — and therefore subject to sales tax — even though the restaurant intended to hand the dollar over to the charity afterward.

The letter also described an alternative that would avoid tax: if the one dollar were a truly voluntary donation to the charity, separately stated and identified as a donation on the customer's check, it would not be taxable. The Comptroller acknowledged that under this approach a customer could theoretically take the discount coupon without paying anything voluntarily, but treated that as an acceptable rare occurrence rather than a reason to deny the exemption.

What this means for you

Restaurants and retailers running charity tie-in promotions

If you require customers to pay a set amount to receive a discounted item — even if you plan to give that money to charity — Texas will likely treat the payment as taxable consideration for the item, not a tax-exempt donation, especially if the item's value exceeds the payment. Structuring the payment as mandatory (a condition of getting the discount) is what triggers the tax, regardless of your charitable intent.

Businesses that want the payment to be a true tax-free donation

Based on this letter, to have a real chance at exempting a charity add-on payment from sales tax, the payment needs to be voluntary (not a condition of getting any product or discount) and separately stated and identified as a donation on the customer's receipt or check. If it's bundled into the price of getting a lesser-priced meal, it isn't voluntary in the Comptroller's eyes.

Accountants and tax professionals advising on charitable promotions

The key test in this letter is (1) whether the donation amount is mandatory, and (2) whether the value given in exchange is commensurate with the donation. Both factors point toward taxability here because the coupon promotion tied payment of the dollar to receipt of a meal worth more than a dollar. Watch for this fact pattern whenever a client's "donation" promotion is really structured as a discount mechanism.

Common questions

Q: If a restaurant donates the money it collects to charity, does that make the charge non-taxable?
A: No. According to this letter, the fact that the dollar is later donated to a charity doesn't change its character — if payment of the dollar was mandatory to receive the meal, and the meal was worth more than the dollar, it's still consideration for a sale and subject to sales tax.

Q: How can a business structure a similar promotion so the dollar isn't taxed?
A: The letter says the donation must be voluntary and separately stated and identified as a donation on the customer's check. If the customer isn't required to pay it to get the coupon benefit, it can be treated as a non-taxable donation.

Q: What if some customers use the coupon without actually paying the voluntary donation?
A: The letter anticipates this possibility, noting a customer could take advantage of the coupon without making a voluntary donation, but calls this a hopefully rare occurrence rather than a problem that defeats the exemption.

Q: Does this letter set a general rule for all charitable promotions in Texas?
A: The letter itself states its opinion is based on the specific facts submitted, and other facts, though similar, may yield different results.

Citations and references

No specific statutes or administrative rules were cited in this letter; the Comptroller's office applied its general mandatory-payment / commensurate-value test for distinguishing sales from donations.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9510530L

Original ruling text

October 6, 1995

Dear *****:

Thank you for your letter concerning a promotion to raise donations for
*****.

The intended form of this promotion would have ABC Company issue coupons
(probably via direct mail or newspaper) offering customers the opportunity to
purchase a dinner at regular price and receive the same or a lessor meal for
one dollar - the dollar being passed on to the charitable organization.

The question arises then, must we record the dollar as a sale, collect sales
tax from our customer and then donate a dollar to the charity, or may we pass
along the dollar directly to the charity exempt from sales tax? Our hope is
that we could merely pass along the dollars directly to the charity without the
collection of tax.

Response: We often get the question of whether a transaction is a sale
(purchase) or a donation. In determining the answer, there are two questions
to ask:

Is the amount of the donation mandatory? And, if so;

Is the value given commensurate with the donation?

In the transaction described, the one dollar donation is mandatory and the
value of the meal is probably greater than the one dollar donation. For that
reason, the one dollar has to be regarded as consideration paid for the meals
and subject to sales even if the dollars are then donated by the restaurant to
the charity.

As an alternative, if the one dollar is a voluntary donation to ***** and
is separately stated and identified as such on the customers check, the
donation is not taxable. Of course, a customer could take advantage of the
coupon without making a voluntary donation, but hopefully that would be a rare
occurrence.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800 531-5441, ext. 5-0030. The direct line is
512-475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division