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Church Sales of Music Tapes

Question 1:

A church choir produces and sells a Christmas CD, the proceeds offsetting the cost of making the CD and contributing to its music ministry budget. Will the sales be subject to sales tax?

Answer 1:

Sales taxes are collected by most states, so the law must be considered for the location of each church. Since I'm in Wisconsin, I'll share its law.

According to the State of Wisconsin, Department of Revenue, Publication 206, churches may make such sales without collecting and submitting sales tax to the state authorities if the Occasional Sales Rules apply. In Wisconsin, as long as the church does not otherwise hold a Seller's Permit and, as noted above, the sales receipts are not event admission fees, then the church will not be subject to sales tax collection and payment if it satisfies Wisconsin's definition of "not engaged in a trade or business." Only if a church makes sales of greater than $25,000 in a calendar year and makes sales on more than 20 days will it be considered "engaged in a trade or business" in Wisconsin.

It is important that each church study its local law.

Question 2:

Will these sales be subject to federal unrelated business income tax?

Answer 2:

According to IRS Publication 598, "unrelated business income is the income from a trade or business regularly carried on by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity" (my emphases).

The Publication continues, "business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations."

Further, "a business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Whether an activity contributes importantly depends in each case on the facts involved."

Each church must weigh its own situation, but the occasional production and sale of church music (not "regularly carried on") for the legitimate purpose of putting church music in the hands (and hearts) of people ("substantially related to an organization's exempt purpose") could very well present a defensible position for not classifying the above "profits" as unrelated business income.

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