It seems innocent enough – you bought t-shirts with your church logo and you want to sell them in your ‘lobby’. It’s not like you’re making a huge profit. Mostly you’re just trying to get your brand and website out there. But can churches sell t-shirts without any tax ramifications?
I found bits and pieces of the answer across the interwebs, so let me boil down what I’ve read. Here are the 4 things you need to know:
1. Federal Corporate Tax Doesn’t Apply
The first issue you have to consider is whether or not you’re creating taxable income for the church. Of course the IRS doesn’t tax donation income. But what if an established church with property gets a check every month because they let the cell company put a tower on their property? Taxable. What if you want to run any other type of non-ministry-related business venture to create revenue for the church? Might not be a bad idea, but in most cases taxable.
Churches don’t have to file annual corporate tax returns for their regular ministry activities. But unrelated business income over $1,000 a year triggers the IRS to require a 990-T corporate tax return. Surprise!
Fortunately, the IRS gave churches a couple of exceptions:
- the sale of merchandise for the convenience of members
- the sale of donated merchandise (think thrift store)
- the selling is done by volunteers
Since you’re not running a retail store 7 days a week and your table is staffed by a volunteer, seems like you’d be pretty safe.
2. State Corporate Tax Probably Doesn’t Apply
I haven’t worked in all 50 states, but I haven’t served a church planter in a state yet where the state doesn’t just follow the Fed’s lead here. You probably want to check your state’s specific requirements, but chances are good that if the Feds aren’t collecting corporate income tax, neither will the state.
BUT not every state automatically exempts your church from corporate income taxes. My own great State of CA, for example, isn’t impressed by Federal non-profit exemption, whether automatic or applied for and in writing. You have to file another exemption application with CA or they’ll start taxing all of the church’s income as profit, including otherwise charitable donations. For real.
3. State & Local Sales Tax May Still Apply
A completely different issue is whether your state has the right to collect sales tax on things your church sells, like t-shirts. Even if there’s no unrelated business income created (as above), that doesn’t mean the state doesn’t want their sales tax on the transaction.
Again, starting with my own state, CA isn’t going to cut churches any slack:
Although many nonprofit and religious organizations are exempt from federal and state income tax, there is no similar broad exemption from California sales and use tax. Generally, a nonprofit’s sales… are taxable. In other words, nonprofit and religious organizations, in general, are treated just like other California sellers and buyers for sales and use tax purposes.” Board of Equalization Publication 18
They even go so far as to use a super-broad definition: “A sale is an exchange of merchandise or goods for something else of value: money, barter, or trade.” Which could include:
- Sale of booklets, books, pamphlets and so forth
- Sale of tickets for fundraising events
- Sale of items at rummage sales, bazaars, carnival booths, community events, and other fundraisers
I even tried to look for a loophole where the t-shirt, coffee mug, etc. becomes a thank you for a donation. But if the donation is given with the expectation of getting something, it’s still a sale in their eyes.
4. If So, You’re Going to Need a Seller’s Permit
For CA, “Unless all of your sales are exempt from tax, religious organizations and churches that make sales of goods or merchandise must hold a seller’s permit… and file sales and use tax returns.” Doesn’t get any more plain than that.
If you have specific experience with sales tax and reseller permit requirements for your state, I’d love to hear back from you. Hit me on social media or use my contact form.