Does the religious-organization exemption cover a church's purchases for a reading room that is also used as a retail store?

Plain-English summary

A church operates a reading room open to the public — a place to read the church's religious publications — and also uses the reading room "to sell religious books, literature, and supplies to the public." The church asked whether the religious-organization exemption covers its purchases of furniture, fixtures, equipment, utilities, and other things for the reading room.

The exemption. K.S.A. 79-3606(aaa) exempts "all sales of tangible personal property and services purchased by a religious organization which is exempt from federal income taxation pursuant to section 501(c)(3) of the federal internal revenue code, and used exclusively for religious purposes." The Department restated the two requirements: (1) qualify as a nonprofit 501(c)(3) organization, and (2) use the item or service purchased "exclusively for religious purposes."

The guidance. The Department implemented the exemption through Notice 98-05, whose Paragraph III lists property and services considered used exclusively for religious purposes — those used in or to facilitate worship services, religious ceremonies, and the religious work of the organization, and used to construct, furnish, equip, remodel, or maintain a facility used exclusively for religious objectives (a church, church grounds, administration building, camp, parsonage, rectory, or convent), purchased directly by the organization.

The holding. "Because the reading room is used as a retail store, it is not being 'used exclusively for religious purposes.' Even if these retail sales were not taking place there, the reading room would probably not qualify for exemption under the guidelines set out in Notice 98-05. Accordingly, the sales tax exemption for religious organizations does not apply to purchases made for the reading room."

Bottom line: running a retail store out of the reading room defeats the "exclusively for religious purposes" requirement, so the church's purchases for the reading room are taxable — and the Department signaled the room likely would not qualify even without the sales.

What this means for you

"Exclusively for religious purposes" is a strict test

The 79-3606(aaa) exemption applies only where the purchased property or service is used exclusively for religious purposes. A mixed use — especially a commercial retail use — takes the purchase outside the exemption.

Retail activity defeats the exemption

Selling books, literature, and supplies to the public makes the reading room a retail store, not a space used exclusively for religious purposes. Purchases for that space (furniture, fixtures, equipment, utilities) are therefore taxable.

501(c)(3) status is necessary but not sufficient

Being a 501(c)(3) religious organization is only the first requirement. The second — exclusive religious use of the specific item or service — must also be met for each purchase. The church's federal status did not save the reading-room purchases.

Consult Notice 98-05 for what qualifies

Notice 98-05 describes the property and services the Department treats as used exclusively for religious purposes (worship, ceremonies, the organization's religious work, and facilities like the church, camp, parsonage, or convent purchased directly by the organization). Purchases for a public-facing reading room / store fall outside those categories.

Common questions

Q: Are the church's purchases for the reading room exempt under the religious-organization exemption?
A: No. Because the reading room is used as a retail store, it is not used exclusively for religious purposes, so the exemption does not apply.

Q: Would the reading room qualify if it stopped selling items?
A: The Department said it "would probably not qualify for exemption under the guidelines set out in Notice 98-05" even without the retail sales — so removing the sales would not clearly make the purchases exempt.

Q: Isn't 501(c)(3) status enough?
A: No. The organization must be a 501(c)(3) religious organization AND use the item or service exclusively for religious purposes. Both requirements must be met.

Citations and references

• K.S.A. 79-3606(aaa) — exempts a 501(c)(3) religious organization's purchases of tangible personal property and services used exclusively for religious purposes; a retail/commercial use defeats the "exclusively" requirement.
• Notice 98-05 — the Department's guidance implementing 79-3606(aaa), construing "used exclusively for religious purposes" (referenced in the ruling; described here in prose, not as a statute citation).
• K.A.R. 92-19-59 — the regulation authorizing private letter rulings; this ruling was issued under it and binds the Department only as to the requesting taxpayer.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-106

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 10, 1999

XXXXXX
XXXXXX
XXXXXX

Dear XXXXX:

I have been asked to respond to your letter received in December. I apologize for my delay in preparing this response. The XXXXX Church Operates its church in XXXX. In addition, the church operates a reading room at XXXX. The reading room offer the public a place to read the religious publications of the church. The church also uses the reading room to sell religious books, literature, and supplies to the public. You ask whether or not the new sales tax exemption for religious organizations applies to exempt the church’s purchases of furniture, fixtures, equipment, utilities and various other things for the reading room.

The exemption for religious organizations was enacted last year and is codified at K.S.A. 79-3606(aaa) It exempts:

all sales of tangible personal property and services purchased by a religious organization which is exempt from federal income taxation pursuant to section 501(c)(3) of the federal internal revenue code, and used exclusively for religious purposes.

For exemption, this law requires the religious organization: (1) to qualify as a nonprofit 501(c)(3) organization under the IRC Code, and (2) to use the item or service being purchased “exclusively for religious purposes.”

To implement the new law, the department issued Notice 98-05. Paragraph III construes the term “used exclusively for religious purposes.” It states:

a) Tangible personal property and services that are considered to be used exclusively for religious purposes include, but are not limited to, personal property and services:

· used exclusively in, or to facilitate, religious worship services by a congregation or church membership while meeting together at a single location.
· used exclusively in, or to facilitate, religious ceremonies.
· used exclusively in, or to facilitate, carrying out the religious work of the organization.
· used to construct, furnish, equip, remodel, or maintain a facility used exclusively for religious objectives including, but not limited to, a church, church grounds, a church administration building, a church camp, a parsonage, rectory, or convent. Such property must be purchased directly by the religious organization and not through a contractor. See Kansas City Dist. Advisory Bd. v. Board of Johnson Country Comm’rs, 5 Kan App. 2d 538, 542 (1980).
· used exclusively to administer, manage, or operate religious facilities or to administer religious activities.

Because the reading room is used as a retail store, it is not being “used exclusively for religious purposes.” Even if these retail sales were not taking place there, the reading room would probably not qualify for exemption under the guidelines set out in Notice 98-05. Accordingly, the sales tax exemption for religious organizations does not apply to purchases made for the reading room.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 04/26/1999 Date Modified: 10/11/2001

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