Does a Tennessee nonprofit (including a church) that runs a retreat center, hotel, or guest house with food and lodging have to collect and remit sales tax and local occupancy tax from its guests?

Subject

Tax-Exempt Lodging Operator's Responsibility to Collect Sales Tax and Occupancy Tax

Plain-English summary

A 501(c)(3) nonprofit, including a church, can buy goods for its own use without paying Tennessee sales tax. That is the "purchases" exemption. But when the nonprofit turns around and sells something taxable, like a hotel room, a meal, or a soda, it stands in the same position as any other seller. It must register, collect Tennessee state and local sales tax from the buyer, and remit that money to the state. The same goes for local hotel-occupancy taxes (sometimes called transient or tourist taxes). The fact that the operator is a religious organization does not change the result. The Tennessee Supreme Court's decision in Covenant Community Church v. Lowe established that the occupancy tax falls on the secular act of renting a room, not on religious practice, and the relevant tax laws are neutral and generally applicable, so they survive Free Exercise scrutiny under Employment Division v. Smith and Fulton v. Philadelphia.

What this means for you

For a nonprofit retreat center, summer camp, or guest house

The opinion holds that a 501(c)(3) organization that charges guests for lodging, food, or beverages must collect and remit Tennessee sales tax on those sales. The purchasing exemption under § 67-6-322(b) covers only what the organization buys, not what it sells. Under § 67-6-201 and the broad definition of "person" in § 67-6-102(69), the organization is liable for collecting tax on its taxable sales.

For a church operating a parsonage, family camp, or conference facility

The opinion holds that a religious 501(c)(3) is treated no differently. The exemption for the organization's own purchases does not extend to lodging, food, or beverages it sells. The AG relies on Covenant Community Church v. Lowe, where the Tennessee Supreme Court held the occupancy tax falls on the secular act of occupying a room.

For city and county finance officers

The opinion reads the occupancy-tax statutes (§§ 7-4-102 to -112, § 67-4-1402, and local private acts) together with § 67-4-1404 to require nonprofit and religious lodging operators to collect and remit the tax. The AG states it is aware of no law that exempts them.

For accountants advising small nonprofits

The opinion reaffirms the distinction the office drew in 1984 (Op. 84-036): the purchase exemption is broad, but there is no nonprofit exemption from collecting tax on taxable sales.

For travelers booking a religious retreat

Under the opinion, a Tennessee retreat center that charges for lodging is required to add state sales tax and any applicable local occupancy tax to the bill.

Common questions

My nonprofit has a state sales tax exemption certificate. Why do I have to charge sales tax on rooms?

The certificate exempts your purchases. Your sales are governed by a different rule. The Retailers' Sales Tax Act applies to "every person" who sells taxable property or services, and "person" specifically includes corporations, associations, and nonprofit groups. The exemption is one-way.

What is occupancy tax?

It is a local tax on hotel and short-term lodging rentals, also called the transient occupancy tax, hotel-motel tax, or tourist accommodation tax. Tennessee authorizes counties (with metropolitan governments) and municipalities to impose it. The hotel operator collects it from the guest and remits it to the local government.

Does it matter that we serve church members or a religious community rather than the general public?

The Tennessee Supreme Court held in Covenant Community Church v. Lowe that occupancy tax applies to religious organizations because the tax is on the secular act of occupying a room. Once you charge for lodging, you are operating a "hotel" for tax purposes regardless of who your guests are.

Is there a Free Exercise defense?

Likely not. Under Employment Division v. Smith and Fulton v. Philadelphia, a neutral and generally applicable tax law survives a Free Exercise challenge unless the law has a "mechanism for individualized exemptions" that excludes religion. Tennessee's lodging tax framework applies across the board to anyone providing rooms for consideration. The opinion notes that several Justices have questioned Smith, but Smith remains the law.

Are food and beverage sales also taxable?

Yes. The same reasoning applies. The opinion expressly addresses "lodging, food, and beverages."

Does federal law preempt this?

No. Section 501(c)(3) is a federal income tax provision. It has nothing to say about state sales or occupancy taxes.

Background and statutory framework

Federal tax law exempts qualified charitable, religious, educational, and similar organizations from federal income tax under 26 U.S.C. § 501(c)(3). Tennessee piggybacks on that designation by exempting 501(c)(3) organizations from sales and use tax on their purchases under Tenn. Code Ann. § 67-6-322(b). That is the limit of the exemption.

The Retailers' Sales Tax Act, Tenn. Code Ann. § 67-6-201, imposes sales and use tax on "every person" who sells taxable goods or services at retail. The Act defines "person" broadly in § 67-6-102(69) to include "any individual, firm, co-partnership, joint venture, association, corporation, estate, trust, business trust, receiver, syndicate, any governmental agency whose services are essentially a private commercial concern, or other group or combination acting as a unit." A 501(c)(3) corporation, association, or other group falls inside that definition.

Local occupancy taxes are authorized by a patchwork of statutes: Tenn. Code Ann. §§ 7-4-102 to -112 (counties with metropolitan governments), Tenn. Code Ann. § 67-4-1402 (municipalities), and various private acts (e.g., 1991 Tenn. Priv. Acts, ch. 19, for Bradley County). Under Tenn. Code Ann. § 67-4-1404, hotel operators collect the tax and remit it. A "hotel" under § 67-4-1401(2) means any structure used for transient lodging, including hotels, inns, motels, and "any place in which rooms, lodgings, or accommodations are furnished to transients for consideration."

The Tennessee Supreme Court's decision in Covenant Community Church v. Lowe, 698 S.W.2d 339, 341 (Tenn. 1985), supplies the religious-organization rule. The court treated occupancy tax as a tax on the secular act of occupying a room, not on the church's religious mission, and rejected the church's exemption claim.

On the constitutional Free Exercise question, the AG cites Fulton v. Philadelphia, 593 U.S. 522, 533 (2021), and notes the concurring Justices' criticism of Employment Division v. Smith. Under current doctrine, a neutral and generally applicable law survives Free Exercise review. Tennessee's tax laws contain no individualized-exemption mechanism that targets religion.

The 1984 AG opinion (Tenn. Att'y Gen. Op. 84-036) reached the same result and is treated as still authoritative.

Citations

• Tenn. Code Ann. § 67-6-322(b) (purchases exemption for 501(c)(3) entities)
• Tenn. Code Ann. § 67-6-201 (sales-tax liability for "every person")
• Tenn. Code Ann. § 67-6-102(69) (broad definition of "person")
• Tenn. Code Ann. §§ 7-4-102 to -112 (metropolitan-government occupancy taxes)
• Tenn. Code Ann. § 67-4-1402 (municipal occupancy taxes)
• Tenn. Code Ann. § 67-4-1404 (collection by operator)
• Tenn. Code Ann. § 67-4-1401(2) (definition of hotel)
• 26 U.S.C. § 501(c)(3)
• Covenant Cmty. Church v. Lowe, 698 S.W.2d 339 (Tenn. 1985)
• United States v. Lee, 455 U.S. 252 (1982)
• Fulton v. Philadelphia, 593 U.S. 522 (2021)
• Employment Div., Dept. of Human Resources of Ore. v. Smith, 494 U.S. 872 (1990)
• Tenn. Att'y Gen. Op. 84-036 (Jan. 31, 1984)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2024/op24-012.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
July 19, 2024
Opinion No. 24-012

Tax-Exempt Lodging Operator's Responsibility to Collect Sales Tax and Occupancy Tax

Question 1
Is a 501(c)(3) organization that offers lodging, food, and beverages responsible for collecting and remitting sales tax and occupancy tax?

Opinion 1
Yes.

Question 2
If a 501(c)(3) organization that offers lodging, food, and beverages is a religious organization, is it still required to collect and remit sales tax and occupancy tax?

Opinion 2
Yes.

ANALYSIS

1. Federal law exempts certain organizations—including those operated exclusively for religious purposes—from federal income taxes pursuant to 26 U.S.C. § 501(c)(3). Generally, these "501(c)(3) organizations" are also exempt from paying Tennessee sales and use taxes on purchases they make. See Tenn. Code Ann. § 67-6-322(b). But, as this Office previously opined, "if an entity which qualifies for [§ 67-6-322's] exemption engages regularly in the business of selling tangible personal property, such an entity would be liable for sales tax on its sales of tangible personal property or taxable services." Tenn. Att'y Gen. Op. 84-036 (Jan. 31, 1984). That conclusion follows directly from the relevant statutory text.

The Retailers' Sales Tax Act provides that "every person" who engages in the selling of tangible personal property at retail in this State, or who rents or furnishes any of the things or services taxable under the Act, is liable for sales and use taxes. Tenn. Code Ann. § 67-6-201. The Act, in turn, broadly defines "person" as "any individual, firm, co-partnership, joint venture, association, corporation, estate, trust, business trust, receiver, syndicate, any governmental agency whose services are essentially a private commercial concern, or other group or combination acting as a unit." Tenn. Code Ann. § 67-6-102(69). That broad language encompasses 501(c)(3) organizations organized as a corporation, association, or other group. So although a 501(c)(3) organization may be exempt from the payment of sales and use taxes for purchases, it is not relieved of the responsibility to collect and remit sales taxes if it sells tangible personal property or furnishes services that are taxable under the Act. See Tenn. Att'y Gen. Op. 84-036 (Jan. 31, 1984).

The same analysis seemingly applies to occupancy taxes in Tennessee (also known as hotel-motel taxes, transient taxes, or tourist accommodation taxes). Through a patchwork of statutes, the State has authorized localities to impose these taxes on lodging. See Tenn. Code Ann. §§ 7-4-102 to -112 (authorizing counties with metropolitan forms of government to levy occupancy taxes); id. § 67-4-1402 (authorizing municipalities to levy occupancy taxes); 1991 Tenn. Priv. Acts, ch. 19 (authorizing an occupancy tax in Bradley County). And while this Office has not reviewed every public and private act related to occupancy taxes, we are aware of no law that exempts a nonprofit or religious organization from collecting and remitting those taxes.

Nor does state law itself exempt 501(c)(3) organizations from occupancy taxes. In counties and municipalities where such a tax has been levied, hotel operators are generally required to collect and remit the taxes to the local government. See, e.g., Tenn. Code Ann. § 67-4-1404. A hotel "means any structure or space, or any portion thereof, that is occupied or intended or designed for occupancy by transients for dwelling, lodging, or sleeping purposes, and includes privately, publicly, or government-owned hotels, inns, . . . motels, . . . or any place in which rooms, lodgings, or accommodations are furnished to transients for consideration." Tenn. Code Ann. § 67-4-1401(2). Similar to the sales and use tax, the occupancy tax broadly applies to any hotel operator that provides lodging even if the hotel operator would otherwise be exempt from the payment of sales and use taxes on its own purchases. See id.

In short, a 501(c)(3) organization that offers lodging, food, and beverages is responsible for collecting and remitting sales tax and occupancy tax.

2. Religious 501(c)(3) organizations are treated no differently under state law. Again, the Retailers' Sales Tax Act exempts religious organizations from paying sales tax on their purchases only. The Act provides no exemption from the obligation to collect and remit sales taxes if an organization sells tangible personal property or furnishes services that are taxable under the Act.

There is no wholesale bar to the imposition of tax obligations on religious entities. In fact, the Tennessee Supreme Court has held that religious organizations may be required to pay a hotel occupancy tax because it "is a tax on the secular activity of occupying a hotel or motel room." Covenant Cmty. Church v. Lowe, 698 S.W.2d 339, 341 (Tenn. 1985). If a religious organization can be required to pay a hotel occupancy tax, it follows that the organization can be required to collect and remit such a tax when it provides lodging.

And even assuming that taxing an organization for offering lodging, food, and beverages somehow impinges on some religious belief or activity, that does not necessarily excuse the entity from its tax obligations. See generally United States v. Lee, 455 U.S. 252, 260-61 (1982). The question, at least under the U.S. Supreme Court's current doctrine, is whether the tax law at issue is "neutral and generally applicable." Fulton v. Philadelphia, 593 U.S. 522, 533 (2021); but see id. at 543 (Barrett, J., joined by Kavanaugh, J., concurring) (questioning validity of neutral-and-generally-applicable test from Employment Div., Dept. of Human Resources of Ore. v. Smith, 494 U.S. 872 (1990)); id. at 545 (Alito, J., joined by Thomas, J. and Gorsuch, J., concurring in the judgment) (calling for Court to overrule Smith). Here, Tennessee law generally requires any organization selling tangible personal property or providing taxable services to collect sales tax regardless of the organization's religious, charitable, educational, governmental, or nonprofit status or affiliation. And to the extent a local occupancy tax applies, it applies to all organizations providing lodging. State law contains no "mechanism for individualized exemptions" and imposes no burden on religious entities "because of their religious nature." Id. at 533.

Accordingly, a religious 501(c)(3) organization that offers lodging, food, and beverages is responsible for collecting and remitting sales tax and occupancy tax.

JONATHAN SKRMETTI
Attorney General and Reporter

MATTHEW RICE
Solicitor General

MARY ELLEN KNACK
Senior Assistant Attorney General

Requested by:
The Honorable Todd Gardenhire
State Senator
425 Rep. John Lewis Way
Suite 716 Cordell Hull Building
Nashville, Tennessee 37243