With churches embracing the Internet as a medium for spreading their message and growing their communities, many have started to offer items for sale on their websites. Everything from books about religious topics to t-shirts and tote bags bearing the church’s logo might be offered on a church website. Before launching a web store, churches need to ensure that they understand the potential consequences.
The unrelated business income test
Probably the most important issue with selling products on a church website is that the IRS might classify the income from those sales as unrelated business income, which will be subject to federal income tax. The IRS has three requirements for whether revenue is treated as unrelated business income:
- It is a trade or business. The terms “trade or business” broadly captures activities conducted with the intent of making a profit. The IRS has explained that a revenue-generating activity that occurs within a larger organization doesn’t lose its for-profit character simply because the larger organization has an exempt purpose. For example, selling commercial ads in a nonprofit’s periodical is a trade or business, even though the periodical itself is dedicated to an exempt purpose.
- It is regularly carried on. Because websites are always available, they are considerably more problematic than, for example, the sale of items during church services. One way the IRS looks at this question is to ask whether the activity is conducted like similar activities by comparable businesses.
- It is not substantially related to furthering the exempt purpose of the organization. This is where many churches can get into trouble. The IRS has explained that an activity isn’t substantially related to an exempt purpose “if it doesn’t contribute importantly to accomplishing that purpose (other than through the production of funds).” In other words, it isn’t enough that selling products on the website is solely to benefit the church’s exempt activities. There must be something more.
There are practical questions that a church will need to answer before it launches a web store, like these:
- How will inventory be managed?
- Is the church’s website secure enough to handle financial transactions?
- Does the church have the authority to sell each of the items it will offer from the perspective of trademark, copyright, and so on?
Before launching a web store, churches should consult with an attorney to examine the risks. The Church Law Center of California counsels religious and secular nonprofits. We can help your church sort through the potential issues with opening a web store. Call us today at (949) 689-0437 or reach out to us through our contact page.