Many churches erroneously believe that an exemption from federal income taxes extends to all taxes. This article focuses on sales tax issues that churches frequently encounter.
When to Pay
Sales taxes are collected in 44 states. Each state 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.