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:

1. It is a trade or business;
2. It is regularly carried on; and
3. 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:

1. Ensuring all bookstore sales are related to the church’s religious mission
2. Operating the store for the convenience of the members and attendees
3. 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:

1. The bookstore must be located on church grounds; and
2. 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.