In most states, churches are exempt from paying sales tax. However, some states do not give this benefit to all nonprofits. In this particular case, the state has decided that a not-for-profit food pantry will not be exempt from paying sales tax.
While the intent is to help the food pantry keep their costs down by avoiding sales tax, it is not appropriate for the church to allow another organization to use the church’s sale tax exemption form to avoid paying sales tax.
For whatever reason, this particular state has determined that a food pantry will have to pay sales tax on its purchases. The state remarked in its denial letter that “most nonprofit, community service organizations do not enjoy sales tax exemption status.” Therefore, the food pantry is expected to pay sales tax in this state.
Allowing the food pantry to use the church’s sales tax exemption would be an obvious attempt to bypass state laws, which could be construed as tax evasion. No church wants to be associated with tax evasion!
However, the church could support the food pantry by purchasing supplies and donating them to the organization because one 501(c)3 can make donations to another 501(c)3.
But, if the church requests payment, or a “donation” in exchange for the supplies, I believe the same negative conclusion can be made. The reality of the transaction is that the two organizations are trying to get around state sales tax laws.
I would caution you from these arrangements, so that no one can accuse the church of unethical actions, or at worst, tax evasion.
Rollie Dimos, CIA, CISA, CFE, is the Director of Internal Audit and the Center for Leadership and Stewardship Excellence at the AG National Office. As an auditor in the government and nonprofit sectors, Rollie has been helping leaders assess the strength of their organizational controls for over 25 years. If you have a question about this article, you can contact Rollie at firstname.lastname@example.org.
Rollie is the author of two books: Integrity at Stake: Safeguarding Your Church From Financial Fraud and Balanced Budget, Balanced Life. Using real-life fraud cases, Integrity at Stake helps churches assess their internal controls and minimize the risk of fraud. In Balanced Budget, Balanced Life, Rollie helps the reader create a personalized financial plan to achieve the balance between saving enough to live on and spending to enjoy a life worth living.