Does a nonprofit organization have to collect sales tax on snack items its youth members sell as part of a fundraising drive?

Subject

Nonprofit Organization/Volunteer Groups — Annual Food/Drinks/Beverages Sales/Fundraising Event/Banquets — Guidelines

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1430D04

Plain-English summary

A 501(c)(3) nonprofit ballet company asked the Comptroller about sales tax on snack items its students (ages 12 to 18) sold as part of the organization's fund-raising program. The money raised funds the company's performances and a community education outreach program.

The Comptroller's answer walked through two separate exemptions that could make the sales tax-free, and explained what happens if neither applies:

1. Two tax-free days a year. Under Tax Code Section 151.310(c), a 501(c)(3) organization can hold two one-day tax-free sales or auctions each calendar year, as long as it designates in advance which sales during the year are exempt. Any taxable sales made outside those two designated days are taxable.
2. Youth fundraising exemption. Separately, sales tax law exempts food products, candy, carbonated beverages, and diluted juices sold by a person under 19 who is a member of a nonprofit organization devoted exclusively to education or physical training, as part of a fund-raising drive sponsored by that organization -- as long as the funds raised go to the organization for its exclusive use. (See Rule 3.293(c)(2)(D).)

If the sales don't qualify under either exemption, sales tax must be collected. But the Comptroller noted that, of the specific snack items the ballet company listed, only the candy and soft drinks were taxable -- the rest were not. The Comptroller also enclosed a copy of Rule 3.322 covering exempt organizations, specifically Subsection (g)(2).

What this means for you

Nonprofit organizations and volunteer groups running fundraisers

If your 501(c)(3) sells food and snack items to raise money, check whether your sale falls on one of your two designated tax-free days per year (you must designate these in advance) or whether it's made by an under-19 member as part of a fundraising drive for an organization devoted to education or physical training. Either exemption can make the sale tax-free. Outside those exemptions, you generally must collect sales tax -- though, as this letter shows, not every snack item is automatically taxable; it depends on what's being sold.

Youth sports, arts, and education groups

The under-19 fundraising exemption is specific: it applies to food products, candy, carbonated beverages, and diluted juices sold by a member under 19 of a nonprofit devoted exclusively to education or physical training, where the funds go back to the organization. A ballet company's students selling snacks to fund performances and community education outreach fit this description.

Accountants and tax professionals advising nonprofit clients

When a nonprofit client asks about tax on fundraiser food sales, check both exemptions in order: the two-day tax-free sale/auction rule (Tax Code Section 151.310(c), requiring advance designation) and the under-19 member fundraising exemption (Rule 3.293(c)(2)(D)). If neither applies, tax is due, but confirm which specific items are taxable -- in this ruling, only candy and soft drinks were taxable among the snack items at issue, per Rule 3.322(g)(2).

Common questions

Q: Does a nonprofit have to collect sales tax on snacks sold as part of a fundraiser?
A: Not necessarily. If the sale happens on one of the organization's two designated tax-free days per year, or if it's sold by a member under 19 of a nonprofit devoted exclusively to education or physical training as part of a fundraising drive (with funds going to the organization), it can be exempt. Outside those situations, tax is generally due.

Q: How many tax-free sale days does a 501(c)(3) organization get?
A: Two one-day tax-free sales or auctions per calendar year, and the organization must designate in advance which sales during the year are exempt.

Q: Which snack items were taxable in this ruling?
A: Of the snack items the ballet company listed, only the candy and soft drinks were taxable.

Q: Who can use the under-19 fundraising exemption?
A: A person under 19 who is a member of a nonprofit organization devoted to the exclusive purpose of education or physical training, selling food products, candy, carbonated beverages, or diluted juices as part of a fund-raising drive sponsored by the organization, with the funds going to the organization for its exclusive use.

Citations and references

Statutes and rules:

• Tax Code Section 151.310(c) (two one-day tax-free sales/auctions per year for 501(c)(3) organizations)
• Rule 3.293(c)(2)(D) (exemption for food products, candy, carbonated beverages, and diluted juices sold by under-19 members as part of a fundraising drive)
• Rule 3.322(g)(2) (exempt organizations)

Original ruling text

September 26, 1996

Dear ***:

Mr. Sharp has asked me to answer your letter concerning sales tax on
snack items sold by a 501(c)(3) organization as part of its
fund-raising program.

The non-profit organization is a ballet company, and the snack items
are sold to the ballet students (ages 12 to 18). The money raised is
used to fund the performances and a community education outreach
program.

Tax Code Section 151.310(c) authorizes an organization that is
designated by IRS as a 501(c)(3) organization to hold two one-day
tax-free sales or auctions each calendar year. The exempt organization
must designate in advance which sales during the year are exempt. For
any taxable sales made outside the two tax-free days, tax is due.

In addition, the sales tax law exempts food products, candy, carbonated
beverages, and diluted juices sold by a person under 19 years of age
who is a member of a nonprofit organization devoted to the exclusive
purpose of education or physical training as part of a fund-raising
drive sponsored by the organization. The funds raised must go to the
organization for its exclusive use. [See Section (c)(2)(D) of Rule 3.293.]

If your sales do not qualify for either of these exemptions, you must
collect sales tax. However, of the snack items you listed, only the
candy and soft drinks are taxable. I am enclosing a copy of Rule 3.322
regarding exempt organizations [see Subsection (g)(2)].

If you have any further questions about this information, please feel
free to call Joan Hale of the Tax Policy Division toll free at
1-800-531-5441, extension 3-4663.

Sincerely,

Karey W. Barton
Manager, Tax Policy Division

NOTE: Previous Accession Number 9609555L