Does a 501(c)(3) charity have to collect Utah sales tax when it sells consigned artwork at a fundraiser and keeps a percentage of the proceeds?

Plain-English summary

A board member of a 501(c)(3) charity ("SERVICES") wrote in about a planned art-sale fundraiser: local artists would display and sell their work, patrons would pay the charity directly, and the charity would pass 65% of each sale to the artist while keeping 35% for its charitable work. He asked three questions: (1) is this a "casual sale" exempt from sales tax, like a glorified yard sale; (2) if tax is owed, is it owed only on the artist's 65% share, or the whole price; and (3) can a purchaser deduct the charity's 35% share as a charitable contribution. (By the time the Commission responded, the event had actually been cancelled, but the requester wanted guidance for future fundraisers.)

The Commission walked through the two exemptions that might apply and found neither one fit:

Isolated or occasional sale exemption -- no. This exemption covers sales by people not regularly engaged in business. But here, the charity is functioning as a consignment agent for the artist -- and the artist himself or herself is regularly in the business of creating and selling art. The charity isn't donating or selling its own goods; it's facilitating sales for a working artist's ongoing business. On top of that, the event had been held before and could be held again regularly, which cuts against calling any single instance "isolated or occasional."

Charitable institution's regular-activities exemption -- no. This exemption covers sales that are part of a charity's own regular charitable functions and activities. The Commission contrasted this case with Youth Tennis Foundation v. Tax Commission, 554 P.2d 220 (Utah 1976), where a foundation formed to promote amateur tennis sold tournament tickets and the proceeds were held nontaxable because ticket sales were directly tied to the foundation's core purpose. Here, selling art isn't part of SERVICES' own mission -- the sale is really the artist's business activity (the artist earns essentially the same profit as if selling through a commercial gallery), just routed through a charity as consignment agent. Because the fundraising sale wasn't itself a charitable function of the organization, the exemption doesn't apply, even though the proceeds ultimately fund charitable work.

Result: tax on the whole price. Because neither exemption applies, sales tax is due on the full amount paid by the patron -- not just the 65% passed through to the artist. On the charitable-deduction question, the Commission noted Utah's income tax follows the federal definition of taxable income (Utah Code §§ 59-10-111, -112, -114), so it largely adopts whatever charitable-deduction treatment applies federally, and recommended posing that specific question to the IRS.

One forward-looking note: the Commission suggested that if the charity instead held a fundraiser selling donated goods (rather than consigned goods from a still-active seller), those sales might qualify for exemption -- a meaningfully different fact pattern from a consignment arrangement.

What this means for you

Nonprofits planning consignment-style art or craft fundraisers

Don't assume a percentage-split consignment sale for a working artist counts as your organization's own "occasional sale" or "charitable activity" -- the Commission looks at whose business the sale really serves, not just where the proceeds end up.

Charities weighing donated-goods sales versus consigned/commission sales

A sale of donated goods is a meaningfully different fact pattern that the Commission signaled could qualify for exemption -- if avoiding sales tax matters to your fundraiser design, that's a real structural choice to make upfront.

Purchasers at charity fundraisers wondering about tax and deductions

Sales tax applies to the full purchase price regardless of how the proceeds are split with the seller. Whether any portion of what you paid is deductible as a charitable contribution is a separate federal (and state, by extension) tax question, not answered by this sales tax ruling.

Common questions

Q: Does a charity avoid sales tax by keeping only part of the proceeds from a fundraiser sale?
A: No -- if the sale is taxable, tax applies to the full purchase price, regardless of how the proceeds are split between the charity and the seller/artist.

Q: Why doesn't the "isolated or occasional sale" exemption cover a one-time charity art fundraiser?
A: Because the charity is acting as agent for an artist who is regularly in the business of selling art, and the event itself could recur -- both cut against "isolated or occasional."

Q: Why didn't the Youth Tennis Foundation precedent help this charity?
A: In that case, ticket sales were directly tied to the foundation's own core charitable purpose (promoting tennis). Here, selling art isn't part of the charity's own mission -- it's facilitating an artist's business.

Q: Would selling donated goods (instead of consigned goods) change the outcome?
A: The Commission indicated it might -- a fundraiser selling goods actually donated to the charity is a different fact pattern that could qualify for exemption.

Q: Can a purchaser deduct part of the price as a charitable contribution?
A: That's a federal tax law question; Utah's income tax generally follows the federal charitable-contribution treatment, so the Commission recommended asking the IRS.

Citations and references

Statutes and case law cited:

• Utah Code Ann. § 59-12-104(13) (isolated or occasional sales exemption)
• Utah Code Ann. § 59-12-104(8) (charitable institution's regular functions and activities exemption)
• Utah Code Ann. § 59-10-111 (federal taxable income definition)
• Utah Code Ann. § 59-10-112 (state taxable income definition)
• Utah Code Ann. § 59-10-114 (modifications to federal taxable income)
• Youth Tennis Foundation v. Tax Comm'n, 554 P.2d 220 (Utah 1976) (ticket sales directly tied to a foundation's charitable purpose held nontaxable)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/04-002.pdf

Original ruling text

REQUEST LETTER
04-002

NAME
ADDRESS

Hi, TP REPRESENTATIVE. It was nice to see you in Atlanta in October.

I'm sending this note in my capacity as a member of the Board of Trustees of SERVICES. Even
though we are not FAITH, my wife and I have supported their outreach efforts for years. They
do a terrific job for the disadvantaged among us.

SERVICES plans to hold a fund raising event DATE. Known as the EVENT, FESTIVAL ", it
offers an opportunity for local artists to show and hopefully sell their wares, with a portion of the
proceeds going to SERVICES. The mechanics of the event are simple. Patrons purchase artwork,
paying SERVICES. SERVICES in turn pays the artist 65% of the proceeds, and keeps the rest
for its charitable work.

I'm helping to organize the event this year, and being an old tax guy, a whole bunch of questions
popped into my mind.

1. Since SERVICES is an IRS qualified charity, not in the business of selling paintings, isn't this
   event a casual sale event such that SERVICES need not collect sales tax? It reminds me of a
   glorified yard sale.
2. If SERVICES must collect sales tax, must they collect sales tax on the entire amount, or just
   the amount that is passed on to the artist? In other words, isn't at least the "charity" portion of the
   proceeds exempt from sales tax? [By the way, that is the position that was taken by the last
   organizers of this event.]
3. For Utah purposes (and by implication Federal purposes) doesn't 35% of the amount paid by a
   patron count as a charitable deduction? One could take the position that the fair value of the
   goods received is equal to the amount that the artist received. [Note that the artist would receive
   the same amount if his/her work were sold in an art gallery, with the art gallery retaining 35% of
   the proceeds as revenues in a profit making business.]

Any light you or your staff could shed on this arrangement will be helpful.
We want to do the right thing.

NAME
PHONE

Page 2

                                 RESPONSE LETTER

RE: Private Letter Ruling Request –

                                          August 4, 2004

NAME
ADDRESS

Dear NAME,

    We received your request for sales tax information pertaining to sales of art by

SERVICES. TP REPRESENTATIVES, one of our Administrative Law Judges, also received a
voice mail from you stating the event mentioned in your letter had been cancelled. You
requested a response for guidance in future fundraisers. You posed three questions: Must
SERVICES collect sales tax on art sold at the event; if sales tax is collected, on what portion of
the sales price; and, is the purchaser entitled to treat the 35% of the purchase price retained by
SERVICES as a charitable deduction. We offer the following:

    Although SERVICES, as a 501(c)(3), qualifies as a charitable institution, the fundraising

activity described does not automatically qualify for the sales tax exemption.

   Exemptions may be permitted under either of two scenarios:

1. Isolated or occasional sales by persons not regularly engaged in business (13)
2. Conduct of regular . . . charitable functions and activities (8)

Isolated or Occasional Sales

    In determining an isolated or occasional sale, the Commission will examine several

factors. First, in this case, we examine the characteristics of consignments in general and this
event in particular

• Under the definition of a consignment, the putative seller is acting as an agent for the true
seller
• In this case, the sale is made by SERVICES as agent for the artist
• The artist is regularly engaged in business of selling art
• The sale of artwork is a taxable transaction
• The artist is effectively donating 35% of sales price to SERVICES

Page 3

   Because SERVICES is acting as an agent for the artist, who is regularly engaged in the

business of creating and selling art, and is not donating the art to SERVICES, the transactions
cannot be considered as an isolated or occasional.

   In addition, we note that this event, regardless of whether products are consigned or not,

has been held in the past and may be held on a regular basis in the future. We would not view
any transaction that was under consideration to be scheduled on a regular basis as isolated or
occasional.

Sales by a Charitable Institution

    In determining whether sales by SERVICES are part of its regular functions and

activities, the Commission again considers several factors:

• Although not an essential requirement, fundraising in general is not identified in Art. of
Inc.
• SERVICES is not selling a donated good
• Sales of consigned property in general and artwork in particular are not identified in Art.
of Inc.
• The sale of art is not otherwise directly related to SERVICES regular functions and
activities.

    An example of a directly related activity is found in Youth Tennis Foundation v. Tax

Commission, 554 P.2d 220 (Utah 1976). In that case, the Youth Tennis Foundation, established
to sponsor, promote, and encourage amateur tennis, held a tournament and charged admission.
The proceeds of ticket sales were applied to the costs of the tournament. The excess was
reserved for future activities consistent with the purposes of the Foundation. The Court held the
proceeds from the ticket sales were not taxable, as they were part of its regular charitable
activities.

    The sale of artwork does not appear to be related to SERVICES regular functions and

activities. And, although the Commission would not necessarily rule against fundraising as part
of SERVICES regular activities on the basis of any single factor listed above, the fact that none
of the factors are present indicates that the activity you have described would not qualify for the
exemption.

    And, although the sale of property may be consistent with the charitable purpose, if the

proceeds are used to fund those activities, there is also an associated purpose – that of the artist’s
business enterprise. The artist receives a profit just as he or she would if the art were sold in a
gallery or through some other medium, with appropriate adjustments for expenses.

    In the future, should SERVICES hold fundraisers where goods are donated, those

transactions may be considered to be exempt.

AMOUNT OF SALE SUBJECT TO TAX

Page 4

    As outlined above, we do not see a basis for exempting the sale of art from sales

tax. Sales tax would be due on the total amount of the sale.

DEDUCTIBILITY OF THE 35% RECEIVED BY SERVICES.

    The State of Utah has adopted the definition of Federal Taxable Income defined in Utah

Code Annotated ∋59-10-111 which states: "'Federal taxable income' means taxable income as
currently defined in Section 63, Internal Revenue Code of 1986." State taxable income is also
defined in Utah Code Annotated §59-10-112 as follows: "'State taxable income' in the case of a
resident individual means his federal taxable income (as defined by ∋59-10-111) with the
modifications, subtractions, and adjustments provided in ∋59-10-114..."

    Based on these code sections, Utah accepts the same itemized deductions that are allowed on

the federal return with certain modifications found in Utah Code Annotated ∋59-10-114. Since Utah
accepts, in most cases, the charitable contributions claimed on the federal return it is recommended
that this question be posed to the Internal Revenue Service.

Conclusion

     While the Commission would not necessarily rule out all consignment sales as isolated or

occasional, in this case the specific nature of a professional artist putting up art for sale on
consignment would disqualify the exemption. Similarly, regular business transactions, whether
on consignment or not, do not qualify for the charitable exemption unless the nature of the
business itself is part of a charity’s regular functions and activities. In this case, SERVICES is
not engaged in an activity related to the arts. The Commission, again, would not necessarily find
against fund-raising as a qualified activity, even if not addressed in the articles of incorporation,
in this particular case, the business related component of the transaction disqualifies the sale of
art from the charitable exemption.

   Sales tax would be due on the total amount of the sale. Whether the buyer would be able

to deduct a portion of the purchase price as a charitable contribution is a question of federal tax
law.

   Please let us know if you have further questions.

                                                  For the Commission,


                                                  Marc B. Johnson
                                                  Commissioner

MBJ/SR
04-002