Does a church's conversion from an unincorporated nonprofit association to a corporation sole create Colorado sales or use tax liability on the personal property it already owns?

Plain-English summary

A church operating as an unincorporated nonprofit association (a 501(c)(3) holding a Colorado sales tax exemption certificate) planned to convert to a corporation sole — a single-office corporate form often used by religious organizations — for greater operational efficiency. It owns tangible personal property (but no real property) that it uses exclusively in its religious functions, and asked whether the conversion would create sales or use tax liability on that property. The Department ruled it would not.

Why there's no tax — the charitable exemption settles it. The church offered three arguments: (1) the association and the corporation are the same entity, so there's no transfer/sale; (2) even if property transferred, there's no consideration, so no taxable sale; and (3) even if there were a sale for consideration, purchases by the new entity are exempt as a charitable entity. The Department found it only needed to address argument (3). Colorado exempts the sale, use, storage, or consumption of tangible personal property when the purchaser or user is a charitable entity and uses the property exclusively in its regular charitable (religious) functions (§§ 39-26-718(1)(a) and 713(1)(d)). The church represented that it qualifies as a charitable organization (§ 39-26-102(2.5)) both before and after the conversion and uses the property exclusively in its regular religious functions. So even assuming the conversion is a transfer (sale) supported by consideration, that transfer is exempt — and the church incurs no sales or use tax either as an association or as a corporation sole.

What the Department deliberately did not decide. It did not rule on whether the conversion is a "sale" at all, or whether there is any "consideration." It noted the question is genuinely ambiguous: Colorado's definition of "sale" excludes transfers in corporate reorganizations under I.R.C. § 368(a)(1) (§ 39-26-102(10)(h)), but a conversion of an unincorporated association to a corporation isn't expressly on that list — while a separate corporate statute says a conversion is the continuation of the same entity (§ 7-90-202), suggesting no transfer occurs at all. The Department also assumed, without deciding, that the church qualifies as a charitable organization. It pointed to out-of-state authority treating similar conversions as non-sales (Florida TAA 00A-049; Arizona AG Opinion I89-005(R87-202)).

Because this is a private letter ruling, it is binding on the Department only for this taxpayer and these facts and cannot be relied on by anyone else.

What this means for you

Churches and other charitable/religious organizations

If you change legal form (association → corporation sole, or similar) and you'll keep using your property exclusively in your regular charitable/religious functions, the move generally won't trigger Colorado sales or use tax on property you already own — the charitable exemption covers any transfer that occurs. Keep your charitable status and exemption certificate current, and document that the property's use doesn't change.

Nonprofits restructuring or reorganizing

The exemption that saves this church turns on being a qualifying charitable entity using the property exclusively in charitable functions. A reorganization of a for-profit entity might instead rely on the § 39-26-102(10)(h) reorganization exclusion — but note the Department treats association-to-corporation conversions as not clearly within that list, so don't assume the exclusion applies; the cleaner path here was the charitable exemption.

Accountants and tax professionals

The ruling is a good example of the Department deciding on the narrowest sufficient ground (charitable exemption) and expressly declining to resolve the harder questions (is a conversion a "sale"? is there "consideration"?). If your client isn't a charitable entity, those undecided questions become live — and § 7-90-202's "continuation of the same entity" language plus the reorganization exclusion are the arguments to develop.

Common questions

Q: We're a church changing our legal structure. Will we owe sales/use tax on our furniture, equipment, etc.?
A: Not under this ruling's facts. Because you're a charitable/religious entity using the property exclusively in your regular functions, any transfer that the conversion involves is exempt.

Q: Did the Department say the conversion isn't a taxable sale?
A: No. It expressly did not decide whether the conversion is a sale or whether there's consideration. It ruled that even if it were a sale, the charitable exemption makes it tax-free.

Q: Does this help a for-profit company reorganizing?
A: Not directly. This ruling rests on charitable status. A for-profit reorganization would have to fit the separate reorganization exclusion (§ 39-26-102(10)(h)) — and the Department noted association-to-corporation conversions aren't clearly on that list.

Citations and references

Statutes and authorities:
- § 39-26-718(1)(a), C.R.S. (charitable-entity sales tax exemption); § 39-26-713(1)(d), C.R.S. (charitable-entity use tax exemption)
- § 39-26-102(2.5), C.R.S. (definition of charitable organization)
- § 39-26-102(10), C.R.S. (definition of "sale"; requires consideration); § 39-26-102(10)(h), C.R.S. (reorganization exclusion, I.R.C. § 368(a)(1))
- § 7-52-101 et seq. & § 7-90-201, C.R.S. (conversion to corporation sole); § 7-90-202, C.R.S. (conversion is continuation of the entity)
- Florida TAA 00A-049 (09/14/2000); Arizona AG Opinion I89-005(R87-202)

Related rulings

• [[gil-18-006-taxable-nature-of-church-sales]] — when a church's own sales are taxable
• [[gil-18-014-sales-tax-on-catering-by-charitable-organization]] — charitable-organization activity and the exemption's limits
• [[gil-21-002-sales-and-use-tax-on-items-given-as-gifts-by-a-charitable-organization]] — charitable use vs. taxable disposition

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-10-005.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

PLR-10-005
August 17, 2010
XXXXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
Re: Private Letter Ruling
Dear XXXXXXXX,
Your firm submitted on behalf of XXXXXXXXXXXXXXXXXXXXXX (“Church”) a request for a
private letter ruling to the Colorado Department of Revenue (“Department”) pursuant to
Regulation 24-35-103.5. This letter is the Department’s private letter ruling.
Issue
Does the conversion of the Church from a nonprofit association to a corporation sole1
pursuant to §7-52-101, et seq. and §7-90-201, C.R.S. create a sales or use tax liability based
on tangible personal property owned by the Church?
Conclusion
The conversion of the Church from an unincorporated nonprofit association to a corporation
sole does not create sales or use tax liability for the Church based on the tangible personal
property owned by the Church.
Background
The Church makes the following representation of facts and law, which we assume for
purposes of this ruling, are true, accurate, and complete. The Church is currently an
unincorporated nonprofit association organized to operate, and does operate, a church in
XXXXXXXXXXXXX Colorado. The Church operates as a tax exempt organization under 26
U.S.C. §501(c)(3) and possesses a sales tax exemption certificate issued by the
Department.
1

A corporation sole is a corporation with a single office and is typically used by religious organizations.
See, 7-52-102, C.R.S.

–2–

August 18, 2010

Colorado law allows an unincorporated nonprofit association to convert to a corporation sole.
See, §7-52-101, et seq., and §7-90-201(1)(a), C.R.S. The Church will convert its
organizational status from an unincorporated nonprofit association to a corporation sole,
which will provide the Church with greater operational efficiency and reliance upon a more
established and relevant statutory authority.
The Church does not own real property, but does own tangible personal property that it uses
exclusively in the conduct of its religious functions and activities. The Church represents that,
as a corporation sole, it will meet the requirements of a charitable organization as defined in
§39-26-102(2.5), C.R.S. and will use the tangible personal property exclusively in the conduct
of its regular religious functions.
Discussion
The Church advances three independent arguments why the conversion does not create a
sale or use tax liability: (1) the association and corporation are the same entity and,
2
therefore, there is no transfer (sale) of property, (2) even if there were a transfer of property
from the association to the corporation sole, there is no consideration3 for the transfer and,
therefore, there is no taxable sale, and (3) even if there is a sale based on consideration
between the association and corporation sole, purchases by the corporation sole are exempt
because it is a charitable entity. We find it necessary to address only the charitable
4
exemption issue in order to issue this ruling.
The sale, use, storage or consumption of tangible personal property is exempt from sale and
use tax if the purchaser or user is a charitable entity and it uses the property exclusively in
the conduct of its regular charitable (religious) functions. See, §§39-26- 718(1)(a) and
713(1)(d), C.R.S. Thus, and assuming for purposes of this discussion that the conversion of
the association to a corporation sole is a transfer (sale) of assets and the sale is supported
by consideration, such a sale is, nevertheless,

2

Colorado excludes from the definition of “sale” transfers of taxable property made pursuant to the
formation or dissolution of corporations and pass-through entities, such as corporate “reorganizations”
pursuant to §368(a)(1), I.R.C., which includes a mere change in identity or form of a corporation pursuant to
§368(a)(1)(F). See, §39-26-102(10)(h), C.R.S. The conversion at issue in this ruling is not a reorganization of
an existing corporation but, rather, a conversion of an unincorporated nonprofit association to a corporation.
This type of conversion is not expressly included in the list of exclusion under subsection 102(10). The
absence of such a provision creates ambiguity regarding whether the change in organization in this case
creates an exchange of tangible personal property owned by the Church. On the other hand, there are
statutory provisions that suggest that such a conversion does not create a transfer of assets. See, §7-90202, C.R.S., which expressly states that a conversion is the continuation of the entity. See, also, Florida
Technical Assistance Advisement 00A-049, 09/14/2000 (conversion similar to reorganization and, therefore,
no sale for sales tax purposes); Arizona Attorney General Opinion I89-005(R87-202).
3
The statutory definition of “sale” requires that the transaction be for consideration. See §39-26- 102(10),
C.R.S.
4
We do not rule here whether a conversion constitutes a sale for sales tax purposes or whether
there is consideration.

2

–3–

August 18, 2010

exempt if the corporation sole is a charitable entity that uses the property exclusively in the
conduct of its regular religious functions and activities.
The Church represents that it is, as an unincorporated nonprofit association, and will be, as a
corporation sole, a charitable organization as defined in §39-26-102(2.5),
C.R.S.5 and that the tangible personal property at issue will be exclusively used by the
corporation sole in the conduct of its regular religious functions. Therefore, neither the
Church as an association nor the Church as a corporation sole incurs sales or use tax
liability as a result of such conversion.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. You may
wish to consult with local governments which administer their own sales or use taxes about
the applicability of those taxes.
This ruling is premised on the assumption that the Church has completely and accurately
disclosed all material facts. The department reserves the right, among others, to
independently evaluate Church’s representations. This ruling is null and void if any such
representation is incorrect and has a material bearing on the conclusions reached in this
ruling. This ruling is subject to modification or revocation in accordance to Department
Regulation 24-35-103.5
Enclosed is a redacted version of this ruling. Enclosed is a redacted version of this ruling.
You have previously reviewed and stated you have no comment or objection to the
redaction.

Sincerely,

Office of Tax Policy
Colorado Department of Revenue

5

We do not determine here whether the Church qualifies as a charitable organization. We assume for
purposes of this ruling that it does.

3