Does an organization qualify as a religious organization for the Kansas sales tax exemption on purchases used exclusively for religious purposes?

Plain-English summary

An organization asked whether it "qualifies as a religious organization for purposes of Kansas sales tax." The Department found that it does, and used the letter to explain both the exemption and its limits.

The exemption. Kansas sales tax law 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," under K.S.A. 79-3606(aaa).

What "religious organization" means. Drawing on Notice 98-05 (and K.S.A. 79-4701(e) and 8-1730a), the Department defined a religious organization as "any organization, church, body of communicants, or other group that gathers in common membership for mutual support and edification, in piety, worship, and religious observance, at an established place of worship which the organization maintains for the purpose of conducting regularly scheduled religious services or meetings," where no part of its net earnings benefits a private shareholder or member. An umbrella body of religious organizations "may derive exemption from its members" if all members are themselves exempt religious organizations, it exists exclusively to help them carry out their religious purpose, and it is itself I.R.C. §501(c)(3) exempt.

The holding. "Based solely on the facts of your letter and documents submitted," the Department "determined that [the organization] is a religious organization for purposes of the Kansas Retailers' Sales Tax Act." As a result, "direct purchases, that are used exclusively for religious purposes are exempt from Kansas retailers' sales tax." To buy exempt, the organization gives the retailer "a copy of this letter and an exemption certificate."

The 1998–1999 expansion and refunds. The 1998 Legislature first exempted purchases by religious organizations used exclusively for religious purposes. The 1999 Legislature "expanded this exemption to include sales of tangible property and services to contractors who use such purchases to construct buildings or make other improvements to real property owned by a religious organization and used exclusively for religious purposes" — though this "does not exempt the purchase of any construction machinery, equipment or tools." The 1999 Legislature also directed a refund procedure for sales tax "religious organizations paid indirectly through their contractors on or after July 1, 1998" (Notice 99-05).

What is NOT exempt. The Department flagged two categories that remain taxable: (1) property and services "purchased by a religious organization for use in undertaking business activities, even though the profits . . . may be used exclusively for religious purposes"; and (2) items "such as food, clothing, personal items, meals, drinks, motor vehicles, admission charges, and membership dues, that are for the personal use of ministers, priests, and other employees."

Bottom line: a qualifying 501(c)(3) religious organization's direct purchases used exclusively for religious purposes are exempt from Kansas sales tax, and (since 1999) so are contractor purchases of materials to improve the organization's real property — but not machinery/tools, business-activity inputs, or personal-use items.

What this means for you

Qualifying religious organizations

Your direct purchases used exclusively for religious purposes are exempt. Give each retailer a copy of your exemption ruling/letter and a completed exemption certificate. Keep the exclusive-religious-use standard in mind: a use is still "exclusively" religious only if any other use is minimal, insubstantial, and incidental.

Contractors working on church property

Since the 1999 amendment, materials and services you buy to construct or improve real property owned by a religious organization for exclusively religious use can be purchased exempt — but your construction machinery, equipment, and tools are still taxable. Where you paid tax indirectly on qualifying jobs on or after July 1, 1998, a refund procedure (Notice 99-05) may apply.

Where the exemption stops

Purchases for the organization's business/revenue activities are taxable even if the profits fund religious work. So are personal-use items for ministers and employees — food, clothing, meals, drinks, motor vehicles, admission charges, and membership dues.

Common questions

Q: What makes an organization a "religious organization" for this exemption?
A: It must be an I.R.C. §501(c)(3) group that gathers in common membership for worship and religious observance at an established, maintained place of worship with regularly scheduled services, with no net earnings inuring to a private member (Notice 98-05).

Q: How does a qualifying organization make exempt purchases?
A: It provides the retailer "a copy of this letter and an exemption certificate." Purchases must be direct purchases by the organization and used exclusively for religious purposes.

Q: Are contractor purchases for a church building exempt?
A: Since 1999, materials and services a contractor buys to improve real property owned by a religious organization for exclusively religious use are exempt — but not the contractor's construction machinery, equipment, or tools.

Citations and references

• K.S.A. 79-3606(aaa) — exempts sales of property and services purchased by a 501(c)(3) religious organization and used exclusively for religious purposes; the exemption the organization qualified for.
• K.S.A. 79-4701(e); K.S.A. 8-1730a — cited (with Notice 98-05) in defining "religious organization" and "established place of worship" for exemption purposes.
• Notice 98-05 and Notice 99-05 — the Department's guidance defining religious organizations (98-05) and implementing the 1999 contractor exemption and the refund procedure for tax paid indirectly through contractors on or after July 1, 1998 (99-05).

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-200

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 20, 1999

XXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX

Dear XXXXXXXXXXXXXX:

I have been asked to respond to your letter dated September 2, 1999. In it, you ask if your organization qualifies as a religious organization for purposes of Kansas sales tax.

Kansas sales tax law 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. . .” K.S.A. 79-3606(aaa).

For purposes of the Kansas retailers’ sales tax act, the term “religious organization” means any organization, church, body of communicants, or other group that gathers in common membership for mutual support and edification, in piety, worship, and religious observance, at an established place of worship which the organization maintains for the purpose of conducting regularly scheduled religious services or meetings, and of which no part of the net earnings of such organization inures to the benefit of any private shareholder or individual member. Notice 98-05; See K.S.A. 79-4701(e); K.S.A. 8-1730a. An organization that is composed of religious organizations may derive exemption from its members if all of its members are themselves exempt religious organizations and the derivative organization is organized and operated exclusively to assist its member organizations in carrying out their religious purpose. Such an organization must itself be exempt from tax under I.R.C. §501(c)(3). Notice 98-05; See Trustees of The United Methodist Church v. Cogswell, 205 Kan. 847 (1970).

Based solely on the facts of your letter and documents submitted, the Kansas Department of Revenue has determined that XXXXXXXXXXXXXXX is a religious organization for purposes of the Kansas Retailers’ Sales Tax Act.

Therefore, direct purchases, that are used exclusively for religious purposes are exempt from Kansas retailers’ sales tax. When making an exempt purchase you should provide to the retailer a copy of this letter and an exemption certificate. I have enclosed a copy of the exemption certificate, you may duplicate and issue as needed. The 1998 Kansas Legislature exempted sales of property and services to religious organizations, when such purchases are used exclusively for religious purposes. In 1999 legislature expanded this exemption to include sales of tangible property and services to contractors who use such purchases to construct buildings or make other improvements to real property owned by a religious organization and used exclusively for religious purposes. This does not exempt the purchase of any construction machinery, equipment or tools. In addition to enacting this exemption, the 1999 legislature directed the Department to implement refund procedures to refund the sales tax religious organizations paid indirectly through their contractors on or after July 1, 1998. See Notice 99-05, that I have enclosed

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 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.

Tangible personal property and services will be considered to be "used exclusively" for a religious purpose as long as any other use of the item or service is minimal in scope, insubstantial in nature, and incidental to the exempt purpose. See Midwest Presbytery v. Jefferson County Appraiser, 17 Kan. App. 2d 676, 679 (1992).

Tangible personal property and services that are not exempt include: (1) personal property and services that are purchased by a religious organization for use in undertaking business activities, even though the profits from such enterprises may be used exclusively for religious purposes (See Sunday School Bd. v. McCue, 179 Kan. 1 (1956)); and (2) personal property and services, such as food, clothing, personal items, meals, drinks, motor vehicles, admission charges, and membership dues, that are for the personal use of ministers, priests, and other employees, rather than a use that is exclusively for a religious purpose.

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 in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC: mdc

Enclosure: Notice 99-05
Exemption certificate

Date Composed: 09/28/1999 Date Modified: 10/11/2001

Table 1

Table 2