Does a Kansas 501(c)(3) nonprofit automatically qualify for a sales-tax exemption on its purchases?

Plain-English summary

A nonprofit that runs a crisis-pregnancy, adoption, and life-skills ministry asked whether it could buy things free of Kansas sales tax. It held federal 501(c)(3) status and provided its bylaws and program descriptions.

The Department's answer was no, and the reasoning is important for every Kansas nonprofit: Kansas does not have a broad-based sales-tax exemption for 501(c)(3) organizations. Unlike some states, Kansas grants sales-tax exemptions only when the legislature specifically names an organization (the ruling lists examples such as the American Heart Association Kansas Affiliate, the American Diabetes Association Kansas Affiliate, and others granted exempt status by 2003 HB 2005, Sec. 6(vv)) or when the nonprofit fits a defined category exemption.

The Department then tested the two category exemptions that might have applied:

• "Religious organization" (K.S.A. 79-3606(aaa), as defined in the Department's Notice 99-14). This requires a group that gathers in common membership for worship at an established place of worship where it holds regularly scheduled religious services. Nothing in the ministry's bylaws showed it met that test, so it did not qualify.
• "Educational institution" (K.S.A. 79-3606(b) and (c), with the definition drawn from K.S.A. 74-50,103). This covers accredited schools above the twelfth grade and certain college-affiliated foundations — not a community program offering classes. The ministry did not fit any of those categories.

Because it matched neither exemption, the organization must pay Kansas sales tax on all of its purchases in Kansas.

What this means for you

Kansas nonprofits and 501(c)(3) organizations

Do not assume your federal tax-exempt status carries a Kansas sales-tax exemption — it does not. In Kansas you generally pay sales tax on your purchases unless the legislature has named your specific organization, or you clearly fit a defined category exemption such as religious organization, educational institution, or another enumerated group.

Faith-based and community ministries

Doing spiritually motivated charitable work is not the same as being a "religious organization" for sales-tax purposes. The exemption turns on the narrow Notice 99-14 test (worship at an established place of worship with regularly scheduled services), not on the religious character of your mission.

Accountants advising nonprofits

Budget for sales tax on a Kansas nonprofit client's purchases unless you can point to a specific statutory exemption. If exemption matters to the organization, the realistic paths are fitting a defined category or seeking a legislative grant.

Common questions

Q: We are a 501(c)(3). Are our Kansas purchases tax-exempt?
A: Not automatically. Kansas has no blanket exemption for 501(c)(3) organizations; you must be specifically named by the legislature or fit a defined category exemption.

Q: Our programs are faith-based. Doesn't that make us a "religious organization"?
A: Not necessarily. The Department's Notice 99-14 test requires a congregation that gathers for worship at an established place of worship with regularly scheduled services. A ministry whose bylaws do not show that will not qualify under K.S.A. 79-3606(aaa).

Q: We offer educational programs — could the educational-institution exemption apply?
A: The educational-institution exemption (K.S.A. 79-3606(b) and (c), defined via K.S.A. 74-50,103) covers accredited schools above the twelfth grade and certain college-affiliated entities, not general community programs, so it did not apply here.

Q: How do some Kansas nonprofits end up exempt?
A: Typically because the legislature specifically named them (as it did for a list of health-related organizations in 2003 HB 2005, Sec. 6(vv)) or because they fit a defined category exemption.

Q: Does this ruling apply to my organization?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department analyzes nonprofit exemption claims.

Citations and references

• K.S.A. 79-3606(aaa) — the sales-tax exemption for a "religious organization," which the Department (using its Notice 99-14 definition) found the ministry did not meet.
• K.S.A. 79-3606(b) and (c) — exemptions tied to "educational institutions"; the Department found the ministry did not fit that category.
• K.S.A. 74-50,103 — supplies the definition of "educational institution" referenced by the exemption.
• 2003 HB 2005, Sec. 6(vv) — the legislative provision granting exempt status to specific named organizations, illustrating that Kansas exemptions are typically organization-specific rather than blanket 501(c)(3) exemptions.
• Notice 99-14 — the Department's notice defining "religious organization" for Kansas retailers' sales tax purposes.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2003-059

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

December 12, 2003

XXXX
XXXX
XXXX

RE: Your letter mailed November 24, 2003

Dear XXXX:

Thank you for your recent letter. You represent YYYY ("YYY"), a non-profit corporation located in Arkansas City. You ask if YYY qualifies for exemption from Kansas sales tax on its purchases. In support of your inquiry, you have submitted: 1) a copy of your bylaws; 2) a statement of your 501(c)3 status; and 3) a narrative that describes the purpose and objectives of the organization. The material states:

1. We provide free pregnancy testing and discuss alternatives to abortion.
2. We operate an adoption agency licensed by the State of Kansas.
3. We offer a program called "Work of Art" that provides guidance for women who have had a pregnancy loss of any kind.
4. We offer long-term guidance to help marriages and individuals in crisis.
5. The women served are provided clothes, diapers, formula, and baby equipment as they continue in an integrated program of life skills.
6. We offer a long-term program for drug and alcohol problems called "The Most Excellent Way" which focuses on biblical truths.
7. We have instituted "The Right Finish" which operates as a Christian Finishing School to help young women make healthy-life style choices.
8. We are an integrated resource center for life, health and sexual issues available to the entire community, providing public speaking, videos and the latest curriculum available.
   Your description of the organization establishes that it does not qualify for exemption from paying Kansas retailers sales tax on its purchases.

Unlike some states, Kansas does not have a broad-based sales tax exemption for 501(c)(3) organizations. A number of 501(c)(3) organizations have petitioned the Kansas legislature and been granted an exempt status. These include the following groups.

(1) The American Heart Association, Kansas Affiliate, Inc. for the purposes of providing education, training, certification in emergency cardiac care, research and other related services to reduce disability and death from cardiovascular diseases and stroke;
(2) the Kansas Alliance for the Mentally Ill, Inc. for the purpose of advocacy for persons with mental illness and to education, research and support for their families;
(3) the Kansas Mental Illness Awareness Council for the purposes of advocacy for persons who are mentally ill and to education, research and support for them and their families;
(4) the American Diabetes Association Kansas Affiliate, Inc. for the purpose of eliminating diabetes through medical research, public education focusing on disease prevention and education, patient education including information on coping with diabetes, and professional education and training;
(5) the American Lung Association of Kansas, Inc. for the purpose of eliminating all lung diseases through medical research, public education including information on coping with lung diseases, professional education and training related to lung disease and other related services to reduce the incidence of disability and death due to lung disease;
(6) the Kansas chapters of the Alzheimer's Disease and Related Disorders Association, Inc. for the purpose of providing assistance and support to persons in Kansas with Alzheimer's disease, and their families and caregivers;
(7) the Kansas chapters of the Parkinson's disease association for the purpose of eliminating Parkinson's disease through medical research and public and professional education related to such disease; and
(8) the National Kidney Foundation of Kansas and Western Missouri for the purpose of eliminating kidney disease through medical research and public and private education related to such disease. 2003 HB 2005, Sec. 6(vv).

As this shows, the Kansas legislature typically grants sales tax exemptions only to specific organizations. Your organization is not one of those listed.

There are two broad-based exemptions that might apply to YYY. Because many of YYY programs appear to be spiritually based, one is the exemption for "religious organizations." K.S.A. 79-3606(aaa). The other broad based exemption is for "education institutions." This conceivably could apply to YYY because it offers education programs. A review of Kansas law show that YYY does not qualify for either of these exemptions.

The term "religious organization" has been used in Kansas statutes since the nineteenth century. The court cases that have construe the term provide a fairly clear meaning of the term for tax purposes. These cases allowed the term to be defined for sales tax purposes. This definition is set forth in Notice 99-14:

For purposes of the Kansas retailers' sales tax act, "religious organization" shall mean 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. See K.S.A. 79-4701(e); K.S.A. 8-1730a.

Nothing in the by-laws of YYY suggest that the organization is a "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. . . ." Accordingly, YYY does not qualify for exemption from Kansas sales tax as a religious organization.

The second broad-based exemption that might apply is for educational institutions. The Kansas legislature defined the term "educational institution" for purposes of K.S.A. 79-3606(b) and K.S.A. 79-3606(c). This definition provides:

(s) "Educational institution'" means any nonprofit school, college and university that offers education at a level above the twelfth grade, and conducts regular classes and courses of study required for accreditation by, or membership in, the North Central Association of Colleges and Schools, the state board of education, or that otherwise qualify as an "educational institution," as defined by K.S.A. 74-50,103, and amendments thereto. Such phrase shall include: (1) A group of educational institutions that operates exclusively for an educational purpose; (2) non-profit endowment associations and foundations organized and operated exclusively to receive, hold, invest and administer moneys and property as a permanent fund for the support and sole benefit of an educational institution; (3) nonprofit trusts, foundations and other entities organized and operated principally to hold and own receipts from intercollegiate sporting events and to disburse such receipts, as well as grants and gifts, in the interest of collegiate and intercollegiate athletic programs for the support and sole benefit of an educational institution; and (4) nonprofit trusts, foundations and other entities organized and operated for the primary purpose of encouraging, fostering and conducting scholarly investigations and industrial and other types of research for the support and sole benefit of an educational institution.

This definition shows that the term "educational institutions" includes accredited colleges and universities, certain other schools above the twelfth grade, and certain corporations and foundations that serve as adjuncts to colleges and universities. YYY does not fit into any of these categories. Accordingly, YYY does not qualify for exemption from sales tax. YYY must pay Kansas sales tax on all of its purchases in Kansas.

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 effects this private letter ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 12/19/2003 Date Modified: 12/19/2003

Table 1

Table 2