Sales and Use Tax on Charitible Donations

Our firm has represented many of our business clients in MN Sales and Use Tax audits, with more sure to come since the state's goal is to audit every MN business.

The good news is that when we work with our clients in their businesses, we always want to consider their sales and use tax obligations so that when the eventual audit comes up, our clients are well-prepared and there is minimal pain involved.

Unfortunately, I think there is one area where clients may surprised by their sales/use tax liability and it is this:  If you have inventory which you purchased for resale and exempt from sales tax and you later donate any of that inventory to a tax-exempt organization, you must self-assess the sales/use tax and pay the tax to the state of Minnesota. 

The situation that unfortunately arose with a client is that they had obsolete inventory they were taking off their books.  They could have trashed it, but they found a school that could use it as instructional materials and donated it.  They owe tax on the donation but would not owe tax if they had trashed it. 

This was confirmed by a state auditor who offered another solution:  The company making the donation can sell the goods to the donee for a nominal amount, say $1.  Then the tax is avoided.

Oh these taxing times!