Money is not the issue

   July 19, 2005

  (On July 1 the Argus Leader wrote an editorial indicating that the churches were expressing "shock and dismay" over the Department of Revenue's informing them that they must pay use taxes.   Following is my response to that editorial.)

Editor, Argus Leader:

I'm writing in response to your July 1 editorial about the sales and use taxes as they relate to churches.  Your editorial reflects what I'm afraid is a common misunderstanding of the church's problems with the recent intention to maximize revenues within the sales tax structure by having churches apply for a business tax license.

Let me say first that the church leaders I work for in the Association of Christian Churches of South Dakota and I are not objecting to the church's paying a fair share of taxes.  We realize that we must render unto Caesar what is his.  If we believe we should be exempted from the tax, or that the use tax should be repealed because of enforcement difficulties, we will take that up with the legislature.

The Department of Revenue has required that we apply for a license designed as a part of a tax collection system for business.  It is, in effect, requiring that we be classified as businesses and apply for a collection license. 

We are not businesses.  We do not qualify as businesses in State law, which says that business, by definition, is "any activity engaged with the object of gain, benefit, or advantage." The object of Church is not to gain but to worship, not to benefit but to educate, not to advantage but to minister. Placing us into a classification in which we don't belong and making us live up to the expectations imposed on organizations in that classification will create difficulties for us and may have an effect on who we are. It's obvious that the regulations surrounding this application system were written with businesses, not churches, in mind. 

I'm not sure how a vigorous enforcement of use tax laws will affect churches, financially, although most purchases are made locally or through major publishing houses, which often do collect SD sales tax. 

There are a lot of gray areas that will need to be interpreted.  One of the examples of an item that requires a use tax, for instance, is "donated items for a contest or fund raiser", which seems to imply the churches have to pay use tax on items donated for a church's "second hand sale", for instance.  A determination of the value of the donated item is made, and then the question has to be answered whether the church must collect taxes on the receipts from the second hand sale of the items donated.  Another part of the regulation, however, refers to "occasional sales" which uses a farmer, who sells an occasional piece of machinery and doesn't have to pay sales tax on the receipts, as an example.  Perhaps an annual, or occasional,  second hand sale fits in here.  I don't think this confusion was the intention of the people who wrote the tax laws.  It's a lot of work, a lot of interpretation, and a lot of questions to make an organization fit into a catagory it doesn't belong in.  This need for interpretation can affect the way the church operates.  It can create a dependency on the interpretation of tax regulations that were designed with businesses in mind. 

 Some implications of getting a business sales tax license:  the potential that "the department may require you to post a bond or security to guarantee payment of state and local taxes."  Corporate officers (church council) will be personally liable for taxes not paid if the Church gets a license.  If they don't want to be they either have to remove themselves from the Board or personally get a surety bond for the potential tax liability for a year, although they would still be liable for any amount not covered by the bond.  I wonder what they would do if they had a lot of assets that could be tied up in a tax dispute between the Department and the Church. 

Another issue is accounting techniques the church uses.  Smaller churches, in particular, use checkbook balancing and cash accounting systems because it's a lot simpler and does the job they need to do just fine.  It also makes more sense to non-accountants.  State statute defines the "accrual accounting method" as the standard for reporting and payment of sales tax.  It can accept cash accounting but this is at the discretion of the Department of Revenue, not the determination by the church as what is best for its operations. 

Part of the application process requires a statement of "gross receipts" of the business.  What are the "gross receipts" of a Church?  Is it really the business of the State to know how much a church takes in? 

One of the "taxpayer facts" indicates: "if you are in business for any length of time, you can expect a visit from an auditor of the South Dakota Department of Revenue and Regulation."  Record-keeping requirements include: sales and billing invoices, general ledger, cash register tapes, bank deposit slips and statements, sales and/or cash receipts journal, contracts.  This doesn't sound as if it was designed with churches in mind.

Regarding the use tax:  "Services and use taxable items which are stored, used or otherwise consumed should be identified by purchase invoices, cash disbursement journal or check register, fixed assets schedule, inventory withdrawal records, depreciation schedules."  (They) should be preserved for three years.  In addition to the above records, the business should keep copies of supporting information, worksheets, schedules, etc. showing how the sales and use tax amounts were determined.  Anyone who fails to keep these records could be found guilty of a Class 1 misdemeanor." Maintaining accurate records is important, but one size doesn't necessarily fit all circumstances.

I don't believe that the Department of Revenue intends to make life a lot more complicated for churches.  I'm sure it intends to be reasonable.  The problem is that the Department has been given an enormous amount of power and discretion in order to implement tax laws and if they are able to define churches as businesses in order to make churches more accountable to them, they create confusion that can function as intimidation, resulting in churches feeling like they have to constantly request information and defer to the Department to continue their routine activities.  This creates a control that the legislators who wrote the tax laws, and the people who wrote the constitution, never envisioned.  

 Money is not the issue.  It's an issue of the relationship between Church and a Department of the State.  The Department needs to develop appropriate protocols for the collection of taxes from churches, not try to fit us into a category we don't belong in.  

Gary Nesdahl, Executive Director
Association of Christian Churches of South Dakota

For another article on this same issue click here. 

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