The Arkansas Supreme Court addressed the issue of a religious organization's eligibility for exemption from state sales taxes. A religious organization operated a variety of retail businesses, including a restaurant, grocery store, two service stations, a clothing store, and an auto repair shop. Members of the organization performed services for these businesses without compensation other than the receipt of food, shelter, and clothing at no cost.
A state agency determined that the organization's provision of food and clothing to its members, in exchange for their services, constituted "sales" subject to the state sales tax. A trial court upheld the assessment of the sales tax, and the organization appealed.
The state supreme court agreed that the transfers of food and clothing were sales subject to tax, since they were "transfers for valuable consideration." The court rejected the organization's argument that its constitutional right of religious freedom was being abridged, since "religious organizations entering the commercial and secular world necessarily do so with the understanding that they no longer enjoy the constitutional protections afforded religious organizations.
There are no shields once they cross the line that separates church and state. They are no longer considered a church or religious organization, because they are not acting like one …. The [organization] elected to operate retail businesses for profit and, having made that choice, it must abide by the same rules under which all secular businesses operate, including taxation." This reasoning is clearly flawed, since churches and religious organizations are perfectly free to engage in commercial endeavors without "loss of the constitutional protections afforded religious organizations"—so long as those endeavors are insubstantial.
The Internal Revenue Code recognizes this principle by preserving the exempt status of churches that are engaged in insubstantial commercial activities, while at the same time subjecting some of those activities to the tax on unrelated business income. To say that such churches have ceased to be churches, or that they have lost the constitutional protections afforded religious organizations, is incorrect. Tony & Susan Alamo Foundation v. Ragland, 746 S.W.2d 45 (Ark. 1988)