Enforcing a 66-year-old tax law to strong arm Christians, South Dakota Department of Revenue tells churches to pay up
Looking to collect on anything that's not nailed down
Armed with a 66-year-old law, the state revenue department is pushing churches to pay taxes on candles, Bibles, song books and other liturgical items purchased outside South Dakota.
The crackdown, which was announced to churches earlier this month in a letter from the South Dakota Department of Revenue and Regulation, has alarmed church leaders who see the collection effort as a threat to their independence.
"It's corroding the separation between the church and the state, frankly," said Gary Nesdahl, executive director of the Association of Christian Churches of South Dakota, which represents about 1,000 churches in the state.
Church leaders from about a dozen denominations are sharing their concerns today with an official from the state revenue department.
At issue is whether churches are exempt from the payment of use taxes on items such as candles, sacramental wine, bread and prayer and song books. When those items are bought out of state, the department of revenue says, a use tax must be paid. The letter orders the churches to obtain a tax license. And if a church is found to owe back taxes, the state wants to collect the amount owed from the past three years. Penalties and interest would be waived.
While an individual church may owe a few hundred dollars or less, when added together, the revenue from the more than 2,000 churches in the state adds up.
South Dakota's use tax is not new - it's been in existence since 1939 - and churches have never been exempt. Neither are individuals, who, according to the law, should be paying tax on clothes or other items bought out of state. In reality, few actually do.
Jane Page, assistant director of the Department of Revenue's Business Tax Division said "quite a few" churches have applied for the tax licenses.
But the state's push to make individual churches monitor their purchases strikes some as excessive.
"When people put money in the offering plate, they're hoping it's going for the working of the church," says Kermit Staggers, a former state legislator who contends the Department of Revenue's action is a "gross violation" of the principle of the separation of church and state.
"I think it's opening up a whole can of worms," Nesdahl said. "If you identify a church as a business and they have to fall under all regulations, we're looking at a different church. We're sort of flying in the face of tradition."
But a state official said the state merely is trying to make sure churches and other nonprofits are meeting their tax obligations.
"We're not looking at churches as businesses," Page said. "(But) churches have never been exempt from sales or use tax, when they purchase items like a business."
LifeLight, radio station might have to pay
The Department of Revenue and Regulation's actions are affecting more than churches. The LifeLight Christian music festival is in the middle of an appeals process, trying to work out an agreement with the state.
Organizer Alan Greene didn't want to say much about the issue, because of the appeal, but he did say sales tax is paid on everything sold at LifeLight events.
"For the use tax, there's some misunderstanding on what we have to pay," Greene said. That involves honorariums and donations given to speakers.
KNWC, a Christian radio station with an affiliate in Sioux Falls, also has been affected by the use tax. Effective last February, the Department of Revenue and Regulation changed KNWC's state from exempt to nonexempt, and the radio station now will pay about $24,000 in sales and use tax on concerts each year. A sales tax will be put on tickets.
"Outside of listener revenue, that's our biggest source of income," said Bryon Kruger, controller for Northwestern College in St. Paul.
KNWC decided against pursuing the matter further with the Department of Revenue and Regulation.
"Our station is almost 100 percent listener-supported," Krueger said. "Whatever we pay into the tax, we have to raise that much more in listeners to cover the cost of our station."
In e-mail exchanges with a Department of Revenue and Regulation agent, the Rev. Chris Franklin of First Christian Church was told the state would require licenses for all congregations. In addition, he was told that churches should keep records for the past three years and church boards accept the responsibility for accuracy in tax payments.
Items have nothing to do with profits, pastor says
A senior revenue agent told Franklin that two churches had in the past year asked for their licenses to be canceled.
"When reviewing their records I found many thousands of dollars in tax liability," the agent wrote. "Since we do not have the personnel to visit each church, we have determined all of them should hold a license."
When a church buys items such as communion wine and Bibles, it is not buying something for a profit, Franklin said.
"You're buying it and giving it to someone else," he said. "You're using it for someone's spiritual benefit."
Franklin said he is concerned because the state's action requires the pastor or a church official to collect the user tax.
"That's the difference of being an active collector of taxes and passively paying what you pay when you go to the store," he said.
Some nonprofits such as the Salvation Army and Red Cross have applied for special exemptions from user tax since they provide goods or services, Page said.
Page said individually churches probably do not owe a lot in unpaid user taxes.
"When you add it all up, it could be substantial," she said. "One church might only owe $100 in tax, another might owe $2,000, (or) $3,000 in tax. Add them all up, it might come out to be quite a bit."
Tax on individuals called unenforceable
Nesdahl estimated there are more than 2,000 churches in South Dakota. His organization, the Association of Christian Churches in South Dakota, which includes 11 denominations, has more than 1,000 churches in its membership.
"There may be some churches that will be financially more affected," he said.
Jerry Klein, chancellor for the Catholic Diocese of Sioux Falls, said his staff is working on the state's request with its parishes but hasn't done a full assessment of what it means and how it will play out.
"At the diocesan level, we've been doing this for quite a number of years," he said, "but it is something new for our parishes, and it does require a little examination."
The use tax also requires individuals to pay South Dakota's tax rate on items purchased at out-of-state tax rates. However, it's unenforceable at that level, Nesdahl said.
That leads him to question whether it should even exist.
"If they can't enforce it uniformly, should it even be on the books?," he said. "(But) our biggest problem is not with the (use) tax, the biggest problem is with the Department of Revenue trying to bring us under their purview."
Page acknowledged the state does not have the resources to find individuals who owe use taxes. What it can do is pursue larger groups.
"We're trying to maximize the revenues in the existing system," she said.
Staggers said the thought of state auditors going into a church and looking at its revenue is extremely disturbing, and he called the state's decision to go after churches unprecedented.
"Auditors are not going to go after institutions where there's no money to be gotten," he said. "Somebody in the Department of Revenue thinks churches provide an opportunity."
Staggers said he thinks legislation or a constitutional amendment should be passed to exempt churches from the use tax.
Nesdahl said the Association of Christian Churches has yet to decide how far to pursue its contention that the state is wrongly viewing churches as businesses.
Franklin hopes today's meeting is a start.
"We really have to have a discussion in the state about the difference between a nonprofit entity, and especially churches, and for-profit businesses and the fact that we're not the same, so don't dare treat us like we're the same," Franklin said.
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Posted by Editor at June 29, 2005 09:48 AM
