It is spring. The birds are singing, flowers are starting to bloom, and you and your company are feeling philanthropic. So, you want to give something away! Perhaps your company has a really cool new product (“ProductWow”) and wants to give some of its own inventory away to a local charity in the form of promotional items, or customized ProductWow gifts to a few good customers. If you’re just giving these items away, you shouldn’t have to worry about sales or use tax – right? Not so fast!
Let’s assume that PWow Inc. has nexus in California by virtue of its headquarters and employees in the state. As such, the company is a retailer and subject to sales tax on its retail sales to customers in California. And let’s further assume that the company is already properly collecting and remitting California sales tax on retail sales of ProductWow to its California customers.
Gifts to Charity
With respect to the gifts of the products to charities, we look to the following:
In California, a “sale” includes “any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration (emphasis added).” (Only transfers of property “for consideration” are included in the statutory definition of a sale; therefore gifts are not subject to sales tax.)
However, the transaction could be subject to California use tax. California sales tax Regulation 1670(a), related to gifts, states: “Persons who make gifts of property to others are the consumers of the property and the (use) tax applies with respect to the sale of the property to such persons.” However, there is an exemption for donations to specific entities: “The storage, use, or other consumption in this state of property donated by any seller to any organization described in §170(b)(1)(A) of the Internal Revenue Code and located in California is exempt from the use tax.” Some organizations included under that code section include (but not limited to):
- A church or a convention or association of churches;
- An educational organization which normally maintains faculty, curriculum and has regularly enrolled students in attendance at the place where the educational activities take place;
- A facility whose primary purpose is providing medical or hospital care, medical education or medical research;
- An organization that is owned by, and normally receives a substantial part of its support from, the United States, its political subdivisions, and has been organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a qualifying college or university;
- Certain private foundations;
- An organization described in IRC section 509(a)(2)or IRC Section 509(a)(3)
Thus, to the extent that PWow makes donations of ProductWow to organizations in California that ARE qualified under IRC Section 170(b)(1)(a), the donations are exempt from use tax. However, to the extent that PW makes donations of ProductWow to organizations in California, that are NOT qualified under IRC Section 170(b)(1)(A), use tax shall be accrued and remitted to the state on the wholesale value of such product.
What if ProductWow is shipped from California to a charitable organization in another state? Pursuant to court rulings in Yamaha Corp of America v. California State Board of Equalization[i], in such a situation, California use tax is due on the item. Under the Yamaha decisions, items delivered to a common carrier in California for delivery as promotional items (gifts) to out-of-state parties are subject to the state’s use tax because the gift takes place upon delivery to the common carrier in California.
Gifts to Customers
What about items pulled out of inventory, customized for a particular customer and given as a gift? Now we’re back to Regulation 1670, mentioned above, and use tax is owed on the value of the inventory given away to customers (or employees).
Our recommendation: Be philanthropic and think ahead.
So, as you pack that picnic basket and head out for a nice lunch on the meadow in the spring sunshine and are feeling charitable, remember that there is no free lunch when it comes to use tax! The gift you make may have some use tax consequences. But I’d like to see you make it anyway. It’s nice to have a giving spirit – sales tax or not. And the recipients of your gifts will enjoy the surprise. Your company, however, wants to know the rules up front to avoid surprises later. (Of course, that’s just my personal opinion as I sit on my blanket in the meadow and enjoy the California sunshine, my new ProductWow and a glass of Chardonnay!)
[i] See Yamaha Corp of America v. California State Board of Equalization, 61 Cal. Rptr. 2d 244 (Cal. Ct. App. 1997) and Yamaha Corp of America v. California State Board of Equalization, 86 Cal. Rptr. 2d 362 (Cal. Ct. App. 1999)
Other recent “California (CA)” posts by Monika Miles, CPA:
- CA Board of Equalization: Changes to Sales-Use Tax Administration
- SaaS Taxation in California - An Overview
- CA District Taxes – Are You Calculating the Full Rate?
- Business Donations in CA: No Free Lunch When It Comes to Use Tax
- When Is Food Taxable in California?