Does an association of churches with an IRS 501(c)(3) letter qualify as a Kansas 'religious organization' exempt on its purchases?

Plain-English summary

An organization asked whether it qualifies as a "religious organization" for the sales tax exemption that 1998 Senate Bill 493 extended to religious groups. It supplied a copy of its IRS 501(c)(3) recognition-of-exemption letter and its by-laws.

What the exemption covers. SB 493 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."

Derivative exemption for associations of churches. The Department pointed to Notice 98-05, which allows an organization "composed of religious organizations" to "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." The derivative organization must itself be exempt under I.R.C. §501(c)(3). The Notice cites Trustees of The United Methodist Church v. Cogswell, 205 Kan. 847 (1970), and recognizes that the exemption extends to "associations of churches" as described in IRS Publication 557.

The organization qualified. "The IRS letter establishes that [the organization] is such an organization." Accordingly, it "qualifies for exemption as a religious organization under 1998 SB 493 and is exempt from paying sales tax on purchases that are 'used exclusively for religious purposes.'" Those exempt uses are "fairly broad" and are discussed in Paragraph III of Notice 98-05.

Bottom line: an umbrella body made up of churches, with its own 501(c)(3) status, can qualify as a Kansas "religious organization" and buy tax-free for religious purposes, even though it is not itself a single congregation.

What this means for you

An "association of churches" can qualify by derivation

A group whose members are all exempt religious organizations, and which exists only to help those members carry out their religious purpose, can derive the exemption from its members — provided the umbrella organization is itself a 501(c)(3).

Two things must both be true

The organization must (1) hold IRS 501(c)(3) recognition and (2) be organized and operated exclusively to assist its member religious organizations in their religious purpose. The IRS letter here established the qualifying status.

The exemption is for purchases used exclusively for religious purposes

Qualifying gets the organization tax-free treatment on its purchases used exclusively for religious purposes — not a blanket exemption for everything it does. Notice 98-05, Paragraph III describes the range of exempt uses.

This is a purchases exemption, not a sales exemption

Like the rest of the SB 493 religious-organization exemption, this covers what the organization buys for religious use. It does not by itself make the organization's own retail sales tax-free.

Common questions

Can an organization made up of churches qualify as a religious organization?
Yes. Under Notice 98-05, an organization composed of religious organizations can derive the exemption from its members if all members are exempt religious organizations, it exists to assist them in their religious purpose, and it holds its own 501(c)(3) status.

What proof did the Department rely on?
The organization's IRS 501(c)(3) recognition letter, which established that it was an "association of churches" of the kind described in IRS Publication 557.

What can the organization buy tax-free?
Purchases used exclusively for religious purposes. The Department described these exempt uses as "fairly broad" and pointed to Paragraph III of Notice 98-05.

Does this exempt the organization's sales too?
No. The SB 493 exemption applies to purchases used exclusively for religious purposes, not to the organization's own sales.

Citations and references

• 1998 Senate Bill 493 — extended a Kansas sales tax exemption to religious organizations exempt under I.R.C. §501(c)(3) for purchases used exclusively for religious purposes.
• Notice 98-05 — the Department's guidance implementing the exemption; it allows an "association of churches" to derive the exemption from its members and describes the exempt uses (Paragraph III).
• Trustees of The United Methodist Church v. Cogswell, 205 Kan. 847 (1970) — cited in Notice 98-05 in support of the derivative exemption.
• I.R.C. §501(c)(3) and IRS Publication 557 — the federal exemption and the "associations of churches" description the Department relied on.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued September 14, 1998 by Thomas E. Hatten, Attorney, Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-131

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 14, 1998

XXXX
XXXX
XXXX

RE: Your letter of September 3, 1998

Dear XXXX:

I have been asked to respond to your letter of September 3, 1998. Your letter includes a copy of a recognition of exemption letter that was issued by the IRS to XXXX and a copy of the organization’s by-laws. You ask whether XXXX qualifies as a “religious organization” for purposes of the sales tax exemption extended by 1998 Senate Bill 493. This 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.

The Department of Revenue issued Notice 98-05 to explain the implementation of the new law. It provides:

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). See Trustees of The United Methodist Church v. Cogswell, 205 Kan. 847 (1970).

The discussion is intended to recognizes that the exemption extends to “associations of churches” as mentioned in I.R.S. Publication 557. The IRS letter establishes that XXXX is such an organization.

Accordingly, XXXX qualifies for exemption as a religious organization under 1998 SB 493 and is exempt from paying sales tax on purchases that are “used exclusively for religious purposes. These exempt uses are fairly broad and are discussed in Paragraph III of Notice 98-05.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided with 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 by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination. Please call me if you have any additional questions.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 09/29/1998 Date Modified: 10/10/2001

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