Auctions are a great way to raise funds for nonprofit organizations, however there are strict federal and state laws that may affect these activities concerning documentation requirements, collection and payment of sales tax, and payment of unrelated business income tax.
Whether an auction is live, silent, or online there are documentation requirements regarding the donation and selling of donated items. When donations received are $250 or more in value, the nonprofit organization must give a written acknowledgement to the donor that states:
- Name of the charitable organization
- Description of the donated property (but not the value)
- One of the following:
- A statement that no goods or services were provided in return for the contribution
- A description and good faith estimate of the value of any goods and services provided in return for the contribution (certain token items may be disregarded)
- A statement that goods and services provided in return for the contribution were limited to intangible religious benefit
Donors who purchase items at charity auctions may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value. This is important to note from the donee running the auction because the donor must be able to show that he or she knew that the value of the item was less than the amount paid. Because of this need for substantiation, it is a good idea for a charity to publish a catalog that provides a good faith estimate of all the items that will be available for bidding. The difference between the amount the donor paid at the auction and the price in the catalog will constitute his or her charitable contribution deduction. While providing a catalog is not required, it can reduce time spent after the auction communicating individually with each donor about the specific good faith estimate of their purchased property.
Some donations received require the charitable organization to complete a Donee Information Return (Form 8282). Donee organizations use Form 8282 to report information to the IRS and donors about dispositions of certain charitable deduction property made within three years after the donor contributed the property. The informational form is used to identify the original donor, successor (if any), previous donees (if any), as well as detailed information on the donated property. Form 8282 is required to be sent to the IRS as well as to the donor of the property.
Because auctions involve the sale of goods, most states require nonprofits to collect sales tax on the goods in the same manner as for-profit enterprises. In most states there are some exemptions for such requirements that are common for certain fundraising activities. However, in California there are no exemptions, but rather specific rules that exempt some sales or purchases by nonprofit organizations. For example, the Sales and Use Tax Law includes special exemptions for qualifying charitable organizations that relieve poverty and distress. The best way to determine the specific rules concerning sales and purchases that pertain to your charitable organization is to reference the California State Board of Equalization’s guide to the Sales and Use Tax Law and Regulations publication in the following link. (http://www.boe.ca.gov/pdf/pub18.pdf)
Unrelated Business Income Tax (UBIT)
In addition to the collection and payment of sales tax for auctioned items, charitable organizations may be required to pay unrelated business income tax on the proceeds from their auctions. Unrelated business income is income derived from a regularly carried-on trade or business if the activity is not substantially related to the organization’s exempt purpose (an unrelated business activity). The regulations provide that intermittent auction activities, including an annual fundraising event, are not subject to unrelated business income tax. However, auctions that are regularly carried on will be subject to such tax unless the auction meets one of two UBIT exceptions: if an activity is conducted with substantially all volunteer labor or the organization sells merchandise, substantially all of which is donated.
As you can see, laws and regulations concerning charitable auctions can be quite complicated. Please call us at 858-558-9200 if you have further questions regarding the documentation, collection of sales tax, and payment of unrelated business income tax that may be required for your nonprofit organization.