Nonprofit organizations often organize silent auctions to raise funds. To take part in an auction, participants offer bids on specific items and the organizers sell the item to the person who bids the highest price. If the auction is silent, participants write their bids down and an auctioneer is not required. Most states require nonprofit organizations to register before soliciting charitable donations, whether by means of a silent auction or in any other way. State rules may also state that certain organizations file annual financial returns.
The organizers of an auction may be liable for state sales tax on any item sold. Sales tax is levied on the market value of the item and not the price paid. Certain exemptions may apply if the state operates a charity sales tax exception. For example, the state of Texas allows charities two one-day sales per calendar year when sales tax is not collected.
State gambling laws classify many fund-raising activities, such as raffles, as gaming and strictly control such activities even when carried out by nonprofit or charitable organizations. An auction -- silent or otherwise -- is not classified as gaming and, therefore, does not have to comply with gambling regulations.
If a nonprofit organization provides alcohol -- for example, as part of dinner/auction -- it must ensure that it complies with the venue’s alcohol license. Many auctions also include alcoholic beverages, such as bottles of champagne or cases of wine, in their items being auctioned. State laws may regulate the sale and display of alcoholic auction items; for example, they may require organizers to keep alcoholic drinks separate from other auction items.
Purchasers' Charitable Contributions
If you purchase an item at an auction at a price greater than the fair market value, you may claim from the IRS a charitable contribution deduction. The amount of the deduction should be calculated as the excess of the purchase price over its market value. The IRS will require a purchaser to show that he knew that he was paying more than the market value. In some cases, the organizers of an auction provide estimates of the value of items.
Anyone who donates goods for a nonprofit silent auction may claim a charitable tax deduction for making the donation. The amount that the donor can claim is not the market value of the item, but is usually the amount that he paid for the item, unless the fair market value is lower.
References & Resources
- Public Counsel Newsletter: Fundraising Issues for Nonprofit Organizations
- IRS.gov: Charitable Solicitation – State Requirements
- Thompson & Knight, LLP: Legal Issues of Fundraising Via Charitable Raffles, Poker, Auctions and other Gaming
- IRS.gov: Charity Auctions
- IRS Publication 561: Determining the Value of Donated Property
- Comstock/Comstock/Getty Images