Indiana Enacts Updated Sales Tax Rules Exempting Churches and Some Nonprofits
Under the new statute, which is effective July 1, 2023, nonprofit organizations are divided into two classifications. The first classification includes:
- Public schools;
- Church and parochial schools regularly maintained by a recognized religious denomination; and
- Youth organizations focused on agriculture.
The second classification includes:
- Fraternities, sororities, and student cooperative housing organizations connected with postsecondary educational institutions;
- Institutions, trusts, groups, united funds, affiliated agencies of a united fund, nonprofit corporations, cemetery associations, or organizations that are organized and operated exclusively for religious, charitable, scientific, literary, educational, or civic purposes;
- Any group, organization, or nonprofit corporation organized and operated for fraternal or social purposes, or as a business league or association;
- Shared hospital services organizations exempt under IRC §§ 501(c)(3) or 501(e);
- Labor unions; and
- Pension trusts.
Effective July 1, 2023, organizations in the first classification now enjoy a blanket exemption from collecting sales tax on all sales of tangible personal property, regardless of the dollar amount of such sales and regardless of the number of days they make such sales during the year.
Organizations in the second classification are exempt from collecting sales tax on sales of tangible personal property so long as they meet the following criteria:
- The sales are to make money to carry on the organization’s nonprofit purpose; and
- The organization did not make more than $100,000 in sales during the current or preceding calendar year.
On the date an organization in the second classification meets or exceeds the $100,000 threshold, the organization will be required to register and collect sales tax for the balance of that year. Further, the organization will be required to collect sales tax for each successive calendar year until it makes less than $100,000 in taxable sales in two consecutive calendar years.
For organizations in the second classification, sales of property that is designed and intended primarily for either the organization’s educational, cultural, or religious purposes, or for improvement of the work skills or professional qualifications of the organization’s members, are not subject to sales tax so long as:
- The organization is not predominantly operated for social purposes; and
- The property sold is not designed or intended primarily for use in carrying on a private or proprietary business.
The Indiana Department of Revenue said it will publish an updated Sales Tax Information Bulletin #10 later this year, which will more fully address the new statute, including transition rules from prior law to the new statute.
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Does recognition as a church by the IRS meet the requirements of being a church in Indiana?
I have found no published definition of a church by the Indiana Department of Revenue (DOR). Therefore, it’s unclear whether the DOR would respect a determination by the IRS that an organization is classified as a church or an association or convention of churches. Absent a statute stating that the state is bound by an IRS determination, then the state is not bound by an IRS determination. I suspect that the DOR would only challenge whether an organization is a church for Indiana sales tax purposes if its status as a church or an association or convention of churches was marginal.