Pick your favorite charitable organization, the Boy Scouts, the Habitat for Humanity, the Salvation Army, the Red Cross, the American Cancer Society, the local schools, or any other. These organizations are always looking for contributions especially at this time of year when the Christmas spirit seems to move people to want to give.
Let's say you are a tent manufacturer and you have a surplus of last year's model of tents that would be a blessing to inner-city Boy Scout troops or to provide life-saving shelter for survivors of the earthquake in Haiti. Or let's say you're a retailer of home improvement goods and your company wants to donate some space heaters to the Red Cross. Or you're a contractor who has committed to donating materials and labor to building a house for a needy individual.
WAIT! There may be sales/use tax consequences to consider. You might not know it, but many states actually impose a tax on the giver for donating their own inventory1. That just seems wrong on so many levels, doesn't it? Actually, a majority of states do make you pay tax on your donations of inventory. The question is then what is the basis of the tax and what state's tax applies. In some cases, you would owe tax on just your materials cost of the inventory (don't include your internal labor in that cost) and in others you would owe tax on the fair market value of the inventory donated.2
You may be better off financially just trashing the inventory instead of giving it to these worthy organizations that could use it for good. Why would states have such a grinchy approach?
We already know what the states will say in rebuttal: "Inventory items have never been taxed. In making the donation, companies are "using" that item and so tax must be paid upon the "use" of the item." There is some [Scrooge-esque] logic to taxing the donated items. Heaven forbid that a tent be donated to the Red Cross and that it would escape the long-arm of the Department of Revenue.
But what if you're giving away non-inventory items like some surplus office furniture to the local elementary school?
Non-inventory items are items you're not holding for resale. You paid tax on these items when you bought them. The state got their money. Surely, no state would make you pay tax again just for donating the item to a exempt entity? How many sizes too small is the heart of a state that would tax donations of something that was already taxed once?
But there are states that do tax you even in this situation. We can not understand why they would, even trying to put on our Grinchiest green-colored glasses. In fact, according to a review of the Healy & Schadewald Annual Revenue Department Surveys as published by CCH, 28 states actually tax this transaction.
Let's name names! Let's look at the top 10 states by population and see how Grinchy they are.
CA -- Not Grinchy -- They don't tax most donations to most federally-exempt entities.
TX -- Not Grinchy -- They don't tax donations.
NY -- Grinchy -- They tax non-inventory donations and only inventory by manufacturers are exempt.
FL -- Grinchy -- They tax it all.
IL -- Grinchy -- They tax inventory donations and non-inventory if no tax already paid.
PA -- Grinchy -- See NY.
OH -- Grinchy -- They don't tax inventory donations but they do tax the non-inventory. Seems backward.
MI -- Grinchy -- It looks like they may tax inventory donations and they do tax non-inventory.
GA -- Grinchy -- Georgia has something in common with NY.
NC -- Not Grinchy -- If you want to donate something and you're in Georgia, go to NC and donate it.
Go to this link to see a chart of all the states tax inventory and what states tax non-inventory.
The Grinch's heart grew three sizes the day he saw all the people in Whoville celebrated Christmas whether they had all the trappings and the presents. Scrooge needed three terrifying and sobering ghostly visits to change his ways. What will it take for these Grinchy states to stop taxing charitable giving?
We Have a Chart for That -- You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. This particular matrix addresses this question of how the states tax companies who make charitable donations. If you like to receive one of these charts, please go to this link and download it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.
CALL THE STATE? -- This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.
But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.
Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.
GOOGLE IT? -- With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?
GET A RULING? -- What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.
ASK THE EXPERTS? -- Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.
And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.
Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.
Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.