Does a separately incorporated group that includes churches, businesses, and lay persons qualify for the Kansas religious-organization exemption?

Plain-English summary

A law firm asked, on behalf of a client, whether the client qualifies as a "religious organization" for the Kansas sales tax exemption under K.S.A. 79-3606(aaa). The client is a separately incorporated nonprofit Kansas corporation, recognized as 501(c)(3) through an IRS group ruling, described as a district composed of churches that conduct regular worship and that exists to carry out faith-based mission and service.

The exemption and its definition. K.S.A. 79-3606(aaa) 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) . . . and used exclusively for religious purposes." The Department, quoting Notice 98-05, defined a "religious organization" as a group that "gathers in common membership for mutual support and edification, in piety, worship, and religious observance, at an established place of worship . . . for the purpose of conducting regularly scheduled religious services or meetings," with no net earnings inuring to any private shareholder or member.

Derivative exemption — the all-members test. "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," and it "must itself be exempt from tax under I.R.C. §501(c)(3)" (Notice 98-05; citing Trustees of The United Methodist Church v. Cogswell, 205 Kan. 847 (1970)).

Why this group fails. "Charitable organizations that are composed of churches, businesses, and lay persons are separately incorporated organizations that are not composed exclusively of churches or other religious organizations . . . . Therefore, these groups do not qualify as a religious organization." The Department pointed to the client's own amended bylaws, under which "[a]ny other eligible person may become . . . a member of the corporation" — meaning the membership is not exclusively churches or religious organizations.

The holding. "[Y]our organization does not meet the necessary criteria to be a religious organization exempt pursuant to K.S.A. 79-3606(aaa)."

Bottom line: an umbrella or district organization can qualify for the religious-organization exemption only if all its members are exempt religious organizations and it exists exclusively to further their religious purpose. Once its membership admits businesses and lay persons, it is not composed exclusively of religious organizations and does not qualify — even with 501(c)(3) status and member churches that worship.

What this means for you

The derivative exemption is all-or-nothing on membership

An organization made up of religious organizations can inherit the exemption from its members, but only if every member is an exempt religious organization and the group exists exclusively to help members carry out their religious purpose. A single category of non-religious members breaks it.

Check your bylaws, not just your mission

The Department looked at the actual membership terms in the amended bylaws, not the stated faith-based mission. Bylaws that let "any other eligible person" join make the group non-exclusive and disqualify it, regardless of its purpose.

501(c)(3) status is necessary but not sufficient

Federal 501(c)(3) recognition (even through a group ruling) does not by itself make a group a Kansas "religious organization." It must also meet the state definition — worship at an established place of worship, or the strict all-members derivative test — to buy exempt under K.S.A. 79-3606(aaa).

Common questions

Q: Does a group of churches automatically qualify for the Kansas religious-organization exemption?
A: Not if its membership also includes businesses and lay persons. Such a group "is not composed exclusively of churches or other religious organizations," so it "do[es] not qualify as a religious organization."

Q: Can an umbrella organization inherit the exemption from its member churches?
A: Only if "all of its members are themselves exempt religious organizations" and it "is organized and operated exclusively to assist its member organizations in carrying out their religious purpose" (and is itself 501(c)(3)).

Q: What disqualified this particular organization?
A: Its amended bylaws allowed "[a]ny other eligible person" to become a member, so it was not composed exclusively of religious organizations.

Citations and references

• K.S.A. 79-3606(aaa) — exempts sales to a 501(c)(3) religious organization for property/services used exclusively for religious purposes; the exemption the client sought and was denied.
• Notice 98-05 — the Department's guidance defining "religious organization" and the derivative all-members test for a group composed of religious organizations.
• Trustees of The United Methodist Church v. Cogswell, 205 Kan. 847 (1970) — cited (via Notice 98-05) for the standard governing when an organization composed of religious organizations may derive the exemption from its members.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-150

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

July 12, 1999

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Dear XXXXXXXXX:

I have been asked to respond to your letter dated December 11, 1998. In it, you ask if your client qualifies as a religious organization for purposes of Kansas sales tax.

In your letter you stated:

This law firm represents XXXXXXXXXXXXXXXX XXXXXX. Our client requests a Private Letter Ruling from the Department of Revenue (“Department”) pursuant to K.A.R. 92-19-59, interpreting statute K.S.A. 79-3606(aaa) and the corresponding regulations with respect to XXXXXXXXX.

Specifically, XXXXXXXXX requests the Department to clarify whether XXXXXXXXX is a “Religious Organization” as defined by the statute and regulations.

I first summarize the organizational structure of XXXXXXXXX. Second, an overview of the mission and purpose of XXXXXXXXX is presented.

XXXXXXXXX is a separately incorporated, non-profit Kansas corporation. XXXXXXXXX was formed by the XXXXXXXXX The members of XXXXXXXXX are XXXXXXXXX. XXXXXXXXX.

XXXXXXXXX is recognized as a Section 501(c)(3) tax exempt entity by virtue of the Internal Revenue Service’s group ruling for all XXXXXXXXX entities within the XXXXXXXXX. Enclosed are a copy of the group ruling letter from the Internal Revenue Service as well as a copy of XXXXXXXXX Articles of Incorporation and Bylaws.

XXXXXXXXX in Kansas. The XXXXXXXXX is a district within the State of Kansas composed of XXXXXXXXX. Each of these Churches conducts religious worship services on a regular basis. XXXXXXXXX exists solely to reflect gospel values, that is to implement those tenants of the XXXXXXXXX faith that speak to caring for the poor, hungry, disabled, sick, troubled, etc. XXXXXXXXX mission and service are faith-based. XXXXXXXXX allows the XXXXXXXXX to carry out this mission in a more organized fashion than if left to each individual parish or group of worshipers.

XXXXXXXXX

XXXXXXXXX

Kansas sales tax 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. . .” K.S.A. 79-3606(aaa).

For purposes of the Kansas retailers’ sales tax act, the term “religious organization” means 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. Notice 98-05; See K.S.A. 79-4701(e); K.S.A. 8-1730a. 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). Notice 98-05; See Trustees of The United Methodist Church v. Cogswell, 205 Kan. 847 (1970). Charitable organizations that are composed of churches, businesses, and lay persons are separately incorporated organizations that are not composed exclusively of churches or other religious organizations, but include lay people and businesses. Therefore, these groups do not qualify as a religious organization for purposes of the exemption extended at K.S.A. 1998 Supp.79-3606(aaa).

Your organization’s Amended Bylaws state in XXXXXXXXX., regarding membership “Any other eligible person may become of a member of the corporation. . .”

It is the opinion of the Kansas Department of Revenue that your organization does not meet the necessary criteria to be a religious organization exempt pursuant to K.S.A. 79-3606(aaa).

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 affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 07/15/1999 Date Modified: 10/11/2001

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