Why Your Church May Not Have Sales Tax Exemption

By Raul Rivera

I want you to briefly close your eyes and think back to that moment when you first answered “Yes” to the voice of God calling you to the ministry. For you, that day could have been 25 years ago, or perhaps it was just one year ago. However long ago it was, you cannot deny excitement, energy, passion, and zeal that you first experienced when you began to walk in the calling that God has on your life. Then shortly after taking that step of faith, reality set in. You all of the sudden found yourself concerned with church operations, church bills, and balancing the church’s annual budget. Yet, what many pastors are unaware of, and what we teach all of the pastors who attend our Ultimate Church Structure Conferences, is that there is a simple and often overlooked way to increase your church’s annual budget anywhere between 4% and 8.5%.  I am a firm believer that churches today need to expand their horizons and look at biblical models of structuring for-profit ventures to increase their capacity to reach the communities that surround them.  I passionately teach those concepts and church structures.  However, today I want to talk about a small administrative step you can take; it is securing sales tax exemption on the things that the church buys.

Common misconceptions by churches

There are two common misconceptions amongst many churches today concerning sales tax. The first misconception is the belief that when churches and ministries incorporate then they are automatically considered exempt from having to pay sales tax. There are only a very small number of states for which this is true. Though your organization may qualify once incorporated, there are still steps to be taken to obtain the exemption. Consider the following examples.

1. The State of Washington allows churches to incorporate as nonprofit organizations. This exempts them from certain income and corporate taxes that are imposed on other corporate entities. This, however, does not exempt the organization from sales taxes, as Washington does not offer sales tax exemption to churches, ministries, or other nonprofits.
2. There are a couple of states that grant “automatic exemption” of sales taxes to certain organizations once incorporation. For example, the State of Ohio grants an automatic sales tax exemption to churches after incorporation, but requires religious nonprofit organizations such as food pantries or homeless shelters to obtain 501(c)(3) approval.

The second misconception is the idea that when a nonprofit corporation receives its 501(c)(3) exemption status, it does not have to pay sales tax. Although your church may qualify once the IRS has approved it, there are still steps to be taken in order to receive your church’s sales tax exemption. Such is the case with Utah. Utah requires churches to be incorporated with the state, obtain an FEIN, and receive 501(c)(3) status before gaining sales tax exemption via Form TC-160.  Florida requires that you fill out Form DR-5.  In all, over 30 states allow this exemption.  

The necessity of applying for sales tax exemption

Up until 1981, it was assumed that churches were exempt from paying state sales tax under the Free Exercise Clause of the First Amendment. This clause guarantees the free exercise of religion without hindrance. 

In 1989, Swaggart Ministries presented the free exercise of religion argument to the California Board of Equalization stating that to require them to collect and pay sales tax impaired their freedom to exercise their religion. Swaggart Ministries claimed that California singled out their religious organization and placed an undo burden on them by forcing them to pay sales tax. The court ruled on two main points:

1. The California sales tax as imposed by the state was not a “tax on the right to disseminate religious information” and, religious organizations were not “singled out for special and burdensome treatment.”
2. The court ruled that as long as the law (or tax) is evenly applied to organizations, without discrimination, it was fair to charge sales tax.

Although many states today offer sales tax exemption to churches, most states that do offer the exemption to churches will require that the church to go through an application process. The benefit of obtaining state sales tax exemption is that the exemption pertains to any purchase made specifically for the church’s use and purposes. Therefore, depending on your state’s sales tax percentage, receiving the exemption is equivalent to receiving a 4% to 8.5% increase in your annual operating budget.

How to apply for state sales tax exemption

More than 30 states offer sales tax exemption. If your church were to gain sales tax-exempt status, the only requirement to receive the benefit is proof of exemption at any retailer at the time of purchase. However, any exempt purchases made by your church must be used exclusively for the purpose of the church. Typically, a state will issue an organization proof of exemption with either a sales tax certificate or identification number.

In general, when applying for sales tax exemption your state will require the following items: 

Articles of incorporation: The articles of incorporation always have a purpose statement explaining some of the basic functions of your church or ministry. This document will help serve as proof that the church has incorporated with the state and help explain some of the details as to why it is a nonprofit.

F.E.I.N: The Federal Employment Identification Number is always required in order for a church or ministry to incorporate in a state. When applying for sales tax exemption, the F.E.I.N of the church needs to match the name that appears on your articles of incorporation.

IRS determination letter: This letter is also known as an “approval letter” for 501(c)(3) status. Many states require nonprofits to obtain their 501(c)(3) status with the IRS before applying for sales tax exemption. This is because the states recognize that the IRS has certain requirements that nonprofits must meet before becoming federally tax-exempt. The states’ requirements often mirror those of the IRS, allowing the state to rely on the IRS’ determination of an organization’s tax-exempt status.

Financial statement: Most states require a copy of a church’s latest financial statement. This is so that the state can monitor the financial activity of the church to see that its intended purpose is truly that of a nonprofit. If your church is less than one year old, we recommend that you submit a financial statement covering the time from incorporation until the present, and then a one-year projected budget. This is so that the state can see how the church intends to use sales tax exemption, if approved.

What if my state does not offer sales tax exemption?

We encourage all churches and ministries to apply for sales tax exemption and make the most of the finances they steward. The benefits received through exemption are worth looking into, and could save your church thousands of dollars in its annual operating budget. For more information on sales tax exemption offered in your state, or any other exemptions, I encourage you to attend one of our Ultimate Church Structure Conferences or give our office a call at 770-638-3444 and ask to speak with one of our church plant consultants.

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