Nonprofit Resources
How to Ensure Your Church Bookstore Is Tax-Exempt
Church bookstores can serve as valuable resources for both congregants and the church itself. These stores can provide convenient access to study guides for small groups, books referenced in sermons, inspirational gifts, and other items that support spiritual growth. They also allow churches to offer convenient access to curated worship and study resources aligned with the congregation’s interests and needs.
However, it is essential to understand that a church bookstore may generate what the IRS classifies as unrelated business income (UBI), which is subject to taxation. This article outlines how to operate a bookstore in a tax-exempt manner and remain compliant with IRS regulations. It also discusses state sales tax and local property tax issues that may arise when operating a church bookstore.
Defining the Purpose of Your Bookstore
Whether your church is considering opening a bookstore or you already have one, we recommend that you work with your church leadership to document the following:
- Why your church wants to operate its own bookstore
- How operating a bookstore helps accomplish your church’s exempt purpose
- What you want to sell in the store
- What hours you want the store to be open
- How the store will be staffed (volunteers or paid staff)
- Whether the location of your store is the right one
This exercise will help your church determine whether you can operate a bookstore in a tax-exempt manner while also meeting your objectives for the store. If you want and are able to do this, the remainder of this article will help you ensure compliance.
Understanding UBI
A church bookstore generates UBI if it meets all three of the following tests:
- It is a trade or business;
- It is regularly carried on; and
- It is not substantially related to the church’s exempt purpose.
Most church bookstores meet the first and second parts of this three-part test. Making sure all bookstore sales are related to your exempt purpose (your religious mission) will help you avoid meeting the third.
Churches employ several strategies to avoid paying income tax on bookstore revenue. The three primary approaches are:
- Ensuring all bookstore sales are related to the church’s religious mission
- Operating the store for the convenience of the members and attendees
- Using volunteers for substantially all of the work related to the store
We discuss each strategy below.
Strategy 1: Ensure All Bookstore Sales Are Related to Your Religious Mission
You can demonstrate that your bookstore is substantially related to your church’s tax-exempt purpose by ensuring that the inventory is relevant to the church’s ministry and that operations are conducted in a non-commercial manner.
The following factors will help classify the store as non-commercial:
- The store is not advertised in a commercial manner, such as in ads and flyers.
- The store is not located where it is highly visible to general (non-church) traffic.
- Merchandise pricing shows a goal of carrying out your ministry rather than making a profit.
Demonstrating that store inventory is relevant to your exempt purpose can be harder. We recommend that you keep a record of how major product lines and specific items in your inventory are substantially related to your religious mission.
If you can demonstrate that all the sales made at your church bookstore are substantially related to your church’s religious mission, those sales will not be considered an unrelated activity. However, many church bookstores also carry items that encourage or demonstrate Christian values or behavior but are not explicitly religious. While your church leaders may feel that the store sales are substantially related to the church’s religious mission, the IRS can have a narrow perspective. As a result, you may want to consider the additional strategies below to help avoid unrelated business income tax (UBIT).
Strategy 2: Operate for the Convenience of Members and Attendees
This strategy focuses on operating the bookstore primarily for the convenience of church members and attendees, rather than the general public. There are several ways you can demonstrate this, such as by showing that:
- The hours of operation (and the majority of sales) occur around church services or when members are present on the church campus
- Sales to the general public are minimal
To remain tax-exempt under this strategy, two additional conditions must be met:
- The bookstore must be located on church grounds; and
- It must not be advertised to the general public.
Strategy 3: Use Volunteers for Substantially All the Work
To meet this strategy, at least 85% of the work done for the bookstore must be carried out by unpaid volunteers.
Income Tax on the Unrelated Activity
If your church bookstore does generate UBI, keep in mind that typically only a portion of the store’s sales will be considered unrelated and therefore subject to income tax.
When your bookstore’s UBI reaches $1,000 annually before deducting expenses, your church must file Form 990-T, Exempt Organization Business Income Tax Return, to report the income and pay income tax on the net profit after expenses. Be sure to track exempt sales separately from UBI to ensure accurate reporting. Note that churches must file Form 990-T to report UBI even though they are generally exempt from filing the annual Form 990, Return of Organization Exempt from Income Tax.
Sales Tax and Property Tax
In addition to UBI, be aware of potential sales and property tax obligations. The requirements vary by state and may include restrictions that are different from the income rules outlined above. For example:
- Sales of religious products are subject to sales tax in many states, while others offer exemptions.
- Tax-exempt bookstores are exempt from property tax in many states, while having any UBI at all could jeopardize that exemption in other states.
It’s important to check the specific rules for sales and property tax exemptions in your state.
While navigating these rules and restrictions may seem complex, carefully monitoring for compliance can help you preserve your bookstore’s tax-exempt status while also maintaining the original purpose for operating the store. Be sure to document your bookstore’s purpose clearly, using the questions outlined at the beginning of this article as a guide.
More information on UBI for tax-exempt organizations is provided in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. Please contact us with questions or if you’d like to discuss your church’s specific situation.
This article has been updated.
Chris Purnell
Chris serves as Partner and Tax Counsel at CapinCrouse. A licensed attorney, he advises exempt organizations of all sizes on a wide range of issues, including tax and employee benefit related matters, representation before state and federal tax authorities, and assistance with firm audit* or advisory engagements to formulate advice and counsel on important operating and tax issues. Chris also assists clients with general tax issues, unrelated business income, charitable solicitation, and missionary employment structures. Prior to joining CapinCrouse in 2019, Chris served as the Executive Director of the Neighborhood Christian Legal Clinic, the nation’s largest Christian legal aid organization. Note: Although licensed to practice law in Indiana, Chris’s services through CapinCrouse do not involve the practice of law and consequently do not result in the creation of an attorney-client relationship.
14 Comments
Hello, our church just began our bookstore. Our goal is to supply our members with christian literature. Our goal is to charge a little more for the books than we purchase them, so that we can sustain the bookstore with its own sales. Would that be considered taxable income? We are located in Texas.
The question of whether and to what extent a tax on unrelated business income exists for an organization can be a complicated matter. From what you’ve written, it appears that you could fall into one of the exceptions that exists to unrelated business taxable income. If the bookstore is open for the convenience of your members, then there would most likely not be any unrelated business taxable income from the sale of goods there. You can learn more from IRS Publication 598, located at https://www.irs.gov/publications/p598. CapinCrouse would also be happy to examine your situation in greater detail as you open your bookstore.
I am looking into increasing items offered in my church’ established bookstore located in Maryland. I would like to offer Sunday newspapers, candy, and perhaps small packages of healthy snacks and bottled water and juice. These items will most likely be donated since funds are limited. If there is a minimal amount of income made (less than a dollar – should profit be made) or just at cost (no profit), is there UBI.
The point of offering other items besides just literature is to create more foot traffic and more options for the congregation.
Veronica,
The question of whether and to what extent a tax on unrelated business income exists for an organization can be a complicated matter. From what you’ve written, it appears that you could fall into one or possibly two of the exceptions that exist to unrelated business taxable income. First, if all of the goods that are sold at a store are donated, then proceeds from the sale of those goods would not be considered unrelated business taxable income. Second, if the bookstore is open for the convenience of your members, then there would most likely not be any unrelated business taxable income from the sale of goods there. You can learn more from IRS Publication 598, located at https://www.irs.gov/publications/p598. CapinCrouse would also be happy to examine your situation in greater detail as you open your bookstore.
-Chris Purnell, Tax Counsel
CapinCrouse
Our church is tax-exempt. Can a member pay the church and we order them a Bible tax exempt?
Deborah,
The answer to this question depends on whether your church is exempt from the collection and remission of sales tax for its sales. This is different from the question of whether your church is exempt from paying sales tax on its purchases. The answer is a very state-specific inquiry, and you should find out the answer to this question if you do not already know. If your church is exempt from the collection of sales tax on its sales, then this arrangement would work. However, the member would not be entitled to a tax-deduction for the payment since the member is receiving goods and services equal to the value of the payment.
If the church has not been granted an exemption from the collection of sales tax on its sales, then it would need to collect sales tax from the member for this purchase. This is a sale that would be subject to the church collecting sales tax. That is true regardless of whether the member gives the church the funds to order the Bible or gives the church the funds for the Bible and receives it right away.
I have been trying to see what the tax law is for a church bookstore in Florida and I could not find the information. Could you point me in the right direction? Will we need to charge sales tax? Would it be best as a separate entity from the church if they want to ramp it up in our area as a local bookstore for the community? (Or is that not allowed under any circumstances?). I have a church member who wants to volunteer and really promote it to the community but I wanted to find out if that is even doable under the tax code. Thanks for the help.
Hi Jenni,
Thank you for your questions. First, the question regarding whether you will be required to collect and remit sales tax on the sales made in your bookstore is a state-specific inquiry. Therefore, you should go to the Florida Department of Revenue website (https://floridarevenue.com/taxes/taxesfees/pages/sales_tax.aspx) to see if you qualify for any exemptions that are available for collection and remission of sales tax. Second, tax exempt organizations, including churches, are allowed to have some unrelated business income activity as long as it is not substantial. However, it is very possible that the operation of a church bookstore may be so substantially related to your tax-exempt purposes that it is not considered an unrelated business whose income is subject to taxation. In this case, you could make the argument that operating the bookstore is substantially related to your exempt purpose as a church because you are disseminating Christian books and other articles that will draw people deeper in their relationship with God—a key and indispensable prong of a church’s mission. This is a fact-sensitive arena, so you will want to engage a competent tax attorney or related consultant before you make any significant decisions in this area.
Many thanks!
Thanks Chris. Besides books they would like to sell gift items as well. How do gift type items fit into this criteria?
Jenni,
You would need to assess whether those gift items help further your exempt purpose and, if they do not, whether those sales will rise to a level that they may result in unrelated business income. Again, this is a very fact-sensitive arena that would require more in-depth analysis from a tax advisor.
Would making our products available online, via our website, violate the first and second strategies?
Conner,
Making your products available online should not have an impact on whether they are considered related to your religious mission or not. However, it could potentially undercut your argument that they are provided for the convenience of your members if the products are available to the general audience. As noted in the article, the convenience of the member exception requires that the bookstore be on the church grounds, which would make the online sales not fit that definition. You should also keep in mind that with online sales, you will need to be aware of any requirements (if applicable) to collect and remit sales tax on the sales made.
We have a church bookstore, run exempt – – only offering products to the furtherance of our religious mission, only offered prior to and after services, etc. Question: From time to time, we have guest speakers who have authored books. If we were to handle their book sales, as a convenience to them, then pay them out according only to their sales for that event, may we do so? Are there any tax ramifications or other concerns with doing so?
Susan,
First, so long as the book sales are in furtherance of your exempt purposes as a church, there should not be any unrelated business taxable income (UBTI) implications from the sales. That analysis will be very similar to the analysis that you made regarding the sales at your bookstore: is the material such that you could make a good faith argument that it furthers your exempt purposes? Why or why not? Does the sale fall into another exception to UBTI? That is a question of fact that you should analyze for each potential author.
Then, there could be sales tax implications from the sales of the author’s books if they fall outside any sales tax exemption that you already have. Each state is different with regard to the provision of sales tax exemptions, so you should analyze your state’s laws before engaging in the activity.