Business Sales and Use Tax License

(This article was written for the purpose of informing the Board of Directors of the ACCSD of my understanding of the SD sales and use tax and of implications of the compliance efforts of the Department of Revenue.  The Board has approved it as a working document from which the Association will begin to seek solutions to the tax issues.  The opinions and perceptions expressed are mine. -gary nesdahl)

     Minnesota does not have a sales tax on clothes and North Dakota does not have a sales tax on groceries.  If a South Dakota citizen buys  a suit in Minnesota or groceries in North Dakota and brings them back to South Dakota and uses them here, they must pay a "use" tax on what they purchased out of State.  If the other State has a tax, but it isn't as much as our tax, we are required to pay the difference between their sales tax and ours.  This law applies to businesses, organizations and to citizens.  It applies to churches.  In fact, the State has developed an administrative rule that specifically says churches are not exempt from the sales and use tax.  This rule came about because most people thought that churches didn't have to pay sales tax, and so businesses often didn't collect it from the churches.  The Department of Revenue also believes that churches buy a lot out of State - mostly through catalogues and over the Internet - from businesses that don't collect the SD sales tax.  In order to more effectively collect the sales and use tax from churches the Department of Revenue has instructed all churches to file for business licenses.

     An agent of the Department of Revenue said in an email to one of our members that he had requests from two churches that wished to cancel their licenses.  He said he visited these two churches and found many thousand of dollars worth of tax liability.  He implied that because of the visits to these two churches he determined that all churches should be required to have tax licenses.  "Since we don't have personnel to visit each church, we have determined all of them should hold a license."

     It is my understanding that when Churches sign up for the tax license the Department is requiring they are expected to look at all purchases, identify whether sales tax was paid on each purchase, and download a form from the Department's web site to fill out and send in with their payment.  They are requiring that churches be able to demonstrate that sales tax was paid on all items purchased, and to set up some kind of tracking system to ensure that they can demonstrate that sales tax is paid on all items in the future.  Each year they will be asked to pay any taxes not sent in during the year.  It is my further understanding that obtaining a license will allow the state to audit the churches when they consider it necessary and will obligate individuals on the church board to accept financial responsibility for any tax liability incurred.

     Churches should be, and usually are, run with sound stewardship practices in mind, to the extent that they keep track of income and expenses in such a way that will satisfy the people who support them, and will enable them to fulfill their mission.  Since the sales and use tax is a  burden that the state has given churches, it is their responsibility to learn how to pay this tax, and to pay it - or attempt to change the law so that either they are legally exempt or the tax is eliminated.

 The fact that the State is classifying churches as businesses bothers me.  It brings the State into an arena that it has been traditionally, and constitutionally, kept away from.  Calling a church a business implies that it can be regulated by the State.  If the church owes the State money, the State has the right to audit it to make sure it complies, and to set up an accounting system that ensures compliance.  Punishing "it" for non-compliance means punishing church leaders.  In a recent email to a pastor the Department said that a member of the Church council takes on this responsibility (to ensure compliance) when he or she agrees to serve on the Council.  Few members of church council believe that they take on a personal liability for taxes paid when they agree to serve on Church Council.  This is going to have an impact on the church's ability to find leaders.  I don't believe that this is really the State's business.

     Our religion is very personal for most of us.  We often don't "feel quite right" about people who seem to be very different from us.  Sometimes our feelings grow out of not understanding their religious beliefs and practices.  There are divisions among us as a people and some of these divisions are created by how we interpret our religious traditions, or the fact that others have tradition we find strange.  Small, newer religions are most likely to be distrusted.  We aren't comfortable with these feelings, but many of us recognize that we, and others, have them.

     In some cases the Church itself is suspect by those who don't have a church affiliation or consider themselves non-religious.  I think that the feelings and tendencies to sometimes distrust people whose religious practices we don't know very well is why there is a separation of Church and State written into our national constitution.  People working for the state should not have the power to interfere in the practice of someone else's religion, unless the religious practice has been determined to be harmful by a Court.  I'm not suggesting that this is the intention of the Department of Revenue, but they are requiring that we fit into a category that doesn't seem appropriate for us and it bothers me.  They are asking that we change who we are in order fit into their job of tax collection.

     Is your church a business?  I read in an e-mail from a Revenue Agent that "Churches are classified as a business in the Standard Industrial Classification Manual under SIC code 8661", so I went there.  I couldn't find churches classified as business so I went to State law.  I found business defined: "10-45-1 (02) (Retail Sales and Service tax) law, definitions: Business, "any activity engaged in by any person or caused to be engaged in by such person with the object of gain, benefit, or advantage, either direct or indirect."  That doesn't sound like a church.
The object of church is not to gain but to worship, not to benefit but to educate, not to advantage but to minister.  All of the money we receive has been a gift, and we use that money to give to others.  This does not sound like a business. 
 

     Here's what we have to look forward to:  "If an applicant is a corporation, the corporate officers must agree that they are personally liable for the taxes incurred by the corporation, unless security is filed in lieu of such liability (SDCL 10-45-55, 10-46-47.1, 10-46A-13).  If the applicant is a limited liability company or trust, they must agree that they are personally liable for filing returns and payment of taxes resulting from the operation of the company or trust."  (from the application letter for the business tax license.)

     We are being instructed to make application for a process that will require our Church Council members to become personally liable for unpaid taxes.   When we take into account that the requirements for filing were designed for business and may pose difficult questions for churches, the risk of mistakes increases and the likelihood of people staying away from church leadership because of the fear of legal or financial risks is going to be affected.

     I've spoken to a couple of Lutheran pastors about the use tax and how it might affect their churches.  They reported that they buy most of their office and other supplies locally because it supports their community businesses and that they buy most of their religious supplies from Augsburg Publishing House, which is a business, has nexus in the state, and collects sales tax to be sent to Pierre.  This probably won't have much of a financial impact on them but they will still have to have an accounting procedure that will test for the exceptional purchase, and they will have to do this in a way that can be audited by the State to whom they will have to routinely report.  The authority the Department is asking the church to submit to invites the State Dept of Revenue to come and look at the books whenever they see fit.  This is a set up for selective enforcement because they don't have to have a strong indication that the laws are not being followed.  One of the stated expectations of holding a license is that we can expect audits.  This is very different than audits performed because a suspicion of wrongdoing.

So what's the harm?  We have a tax on the books.  We owe the money.  Why not just sign up for the license and pay the tax?  Why put up a big fuss?  I guess that's up to you to answer.  I believe that the Department of Revenue has overstepped its authority in requiring that churches apply for a business tax license, and that this requirement sets a dangerous precedent in the relationship between the Church and the State.

Thank you for your attention.

Sincerely,

Gary Nesdahl, Executive Director, ACC/SD
June 15, 2005, revised July 3, 2005

 The Department of Revenue has changed this requirement.  (Click here)