I work with the Auxikary for a volunteer Fire Dept. My question is we receive water donations from various sources to use when on fires. Are we allowed to sell this donated water at fund raisers to earn money for the Fire Dept?

You would need a Sales Tax number. The people who donate would need to be advised that their donation is being sold.

This can be tricky - Non Profit Corporation Law & Legal Definition

Yes, you can do this. However, you always want to be transparent as possible with donors, so you should make sure that they are made aware that their gifts may be sold to help raise $$. If the donors are under the impression that all water donations are used to fight fires there could be an issue, especially if they indicate that this is their expectation - if they "restrict" their gift to that sole purpose and you accept the gift then you are obligated to use the gift for that purpose alone. For example you couldn't use it in training exercises. So my advice is that you have a written policy that is shared with donors stating that donated water may be used in support of the fire station's operations (which may include fighting fires, training exercises, equipment maintenance and testing, etc) or may be sold at management's discretion.

I'm curious as to whom you sell this water to? If to individuals you may have a sales tax collection issue.