Exceptions to Sales Tax Exemption

There are times when churches pay—or collect—sales tax.

Many churches erroneously believe that an exemption from federal income taxes extends to all taxes. However, there are times churches do need to pay or collect sales tax, as outlined below.

When to pay

Sales taxes are collected in 45 states and Washington, DC. Each has a different sales tax statute and exempts certain types of purchasers from the payment of sales tax. As a result, you should check with each state revenue department for the applicability of sales tax to a specific type of sale.

Each state that exempts churches from paying sales tax requires the church to give an exemption certificate to the seller. Some states issue an exemption number; some do not. If the seller does not have the certificate on file, or if this certificate is not properly and completely filled out, then the seller must pay sales tax on the sales.

Further, the sale must be paid with church funds. The church’s employee may not use a personal credit card or personal check. Some sellers will not even accept cash. The church should pay by church check or a church credit card. In some states, churches may submit to the revenue department receipts showing sales taxes were collected, and receive a refund of the sales taxes paid.

Most states exempt churches from paying sales tax on purchases that are used within the church’s exempt function. This means that the church may purchase office supplies and computers without paying state sales tax. It does not mean that the church may use its exemption to purchase items that will not be used by the church in its exempt function. For example, if a church purchases prizes to be given away in children’s church, then some states will not consider those prizes as being used within the church’s exempt function. As a result, the church should pay sales tax on prize purchases.

Another mistake regarding sales tax relates to the pastor’s parsonage. In many states, the church may not use its sales-tax exemption to purchase items for the parsonage because the intended use is personal and not related to ministry.

When to collect

Many churches confuse the exemption from paying sales tax with an exemption from collecting sales tax. Most states do not exempt churches from collecting sales tax on taxable transactions. As a result, a church that conducts taxable transactions is required to have a sales tax permit.

Most states have a nuisance exception to the requirement of having a sales tax permit, which allows churches to have taxable sales a couple of days a year without the requirement of collecting sales tax. Since every state is different, you should check with your state revenue department.

Generally, sales tax is required to be collected upon the sale of tangible property. This includes sales of books for adult classes at the church, and in some states, sermon tapes.

Virtually any form of fundraiser that involves the sale of a product will also require the collection of sales tax. Most states collect sales tax on the sales of prepared food, such as the purchase of a meal in a restaurant. Some states have a specific exemption that allows churches to sell Wednesday evening meals without the collection of sales tax.

Most states require the collection of sales tax from all sales at auctions. Some states have specific exemptions for charitable auctions. Since each state’s rules are slightly different, the church should check with the state revenue department to determine whether they can structure an auction to meet the charitable auction exception.

Some churches will host a craft fair or a fall festival where booths are rented to individuals and businesses. These entities and businesses frequently will sell handcrafted items, books, CDs, and tapes to church members. Most of these entities will not have a local sales tax permit. To prevent the avoidance of sales tax, many states have enacted the “flea market” rule.

In its simplest terms, this rule makes the host church liable for the sales taxes due from the sales of those who rent booths. To avoid this liability, churches should require booth renters, as well as any speakers, ministers, or singing groups who sell their books, CDs, or tapes during their appearance, to have a current valid sales tax permit for their state. The church should require a copy of the actual permit before allowing them to sell goods at the church.

Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

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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