We are considering selling T-shirts, coffee cups, water bottles, and other items in our church’s welcome center. These items have our church logo on them. Does the logo make them “related” to our nonprofit status, or does this create unrelated business income?
Does it make a difference if the proceeds go to, say, “youth missions” versus church revenue? And lastly, do you have any insights on paying sales tax on such items?
First off, it doesn’t matter if your proceeds go toward youth missions or your general revenue budget. What matters is whether or not the items being sold are substantially related to your exempt purposes. Something does not become “related” just because you put your church logo on it.
Determining whether or not an item creates unrelated business income must be determined through an item-by-item analysis. For example, let’s say you sell a T-shirt with a Scripture verse or a Christian symbol—like a cross—on it and the shirt comes with a gospel tract or instructions on how to become a Christian. The sale of a T-shirt in this manner is more likely substantially related to the exempt purposes of spreading the gospel.
Finally, sales tax is determined on a state-by-state basis. 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.
If the church is required to collect sales tax, then these items will likely create a sales tax obligation. As a result, a church that conducts taxable transactions is required to have a sales tax permit. You should check with your state revenue department for the applicability of sales tax to a specific type of sale.
I advise my own church clients to get me involved early on in the process of idea development, so I can help them avoid unrelated business income. I must give you similar advice: Don’t proceed before receiving expert advice from a tax attorney who has experience with churches.
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.