Proof of Exemption from Sales Tax

Take steps to make sure this exemption is up to date.

Church Finance Today

Proof of Exemption from Sales Tax

Take steps to make sure this exemption is up to date.

Background. In many states, sales of construction materials by suppliers to contractors are exempt from sales tax if the contractor uses the materials on a church construction project. To qualify for the exemption, a contractor ordinarily must obtain an exemption certificate or number from the church that is presented to the supplier.

A recent case. A contractor was hired by a church to complete a construction project. The contractor purchased a large quantity of materials from a supplier, and presented an exemption certificate from the church. On the basis of the certificate, the supplier did not charge sales tax. The state revenue department later audited the supplier, and determined that it owed several thousands of sales taxes on the sales it made to the contractor. It rejected the supplier’s claim that it relied on the exemption certificate presented by the contractor. It insisted that suppliers cannot rely on exemption certificates, but rather must take additional steps to insure that the supplies in fact are used for a church construction project.

An Illinois court rejected the revenue department’s claim, and ruled that the supplier did not owe any taxes. It concluded that suppliers are free to rely on valid exemption certificates presented to them by contractors who are performing church construction projects. They do not have any duty to confirm that the supplies in fact are used on such construction projects. Accepting the state’s argument would “vastly alter the retailer’s burden.”

Relevance to church treasurers. Are sales of materials to churches exempt from sales tax in your state? If so, consider the following two precautions:

* Be sure your exemption is current. In many states, churches must apply for a sales tax exemption, and the exemption lasts only for a specified number of years. In some cases, churches have lost their exemption because of a failure to renew it. This will result in significant and unexpected sales tax liability.

* Contracts. If your church enters into a contract for the purchase of goods (such as a construction contract, or a contact for the purchase of computer equipment), be sure that the issue of sales taxes is addressed. Often it is not, or there is a brief notation that the church is exempt from sales tax. What happens if the church’s exemption is later questioned by the state revenue department? For example, the state asserts (as in this case) that a mere reference to the church’s exemption is not sufficient. A church can protect itself by inserting language in a contract that (1) confirms that the church is exempt from sales tax under state law; and (2) clarifies that the contractor or seller will be responsible for the payment of any sales tax assessed as a result of its failure to comply with any condition required by state law or sales tax regulations. Hess, Inc. v. Department of Revenue, 663 N.E.2d 123 (Ill. App. 1996).

This article originally appeared in Church Treasurer Alert, February 1998.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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