Churches can sell products and remain tax-exempt, so long as selling doesn’t become what the church primarily does. Sales tied to the church’s religious, educational, or charitable mission generate tax-free income. Sales that are purely commercial can still be legal, but the profits may be subject to unrelated business income tax, and if the commercial side grows large enough to overshadow the ministry, the exemption itself is at risk.
Sales That Count as Mission-Related
Income from a sale is tax-free when the activity has a real causal connection to what the church exists to do. The IRS calls this being “substantially related,” and it looks at the activity itself, not at how the profits are spent.1Office of the Law Revision Counsel. 26 US Code 513 – Unrelated Trade or Business
Sales that typically clear this bar include Bibles, devotional books, Sunday school curricula, and worship music; baptism supplies, communion elements, and materials for vacation Bible school; and books, recordings, or course materials from the church’s own teaching programs. A small church bookstore stocked mostly with religious titles fits comfortably here. The analysis gets harder as the shelves fill with general merchandise — secular books, greeting cards, branded coffee mugs — because the tie to the mission thins out.
When Selling Triggers Unrelated Business Income Tax
Three conditions have to line up for UBIT to apply: the activity is a trade or business, it’s regularly carried on, and it isn’t substantially related to the church’s exempt purpose.2eCFR. 26 CFR 1.513-1 – Definition of Unrelated Trade or Business
The point that catches churches off guard: using the profits for ministry does not make the underlying activity “related.” The IRS explicitly disregards how the money is spent when deciding whether the business itself has a substantial connection to the exempt purpose.1Office of the Law Revision Counsel. 26 US Code 513 – Unrelated Trade or Business A church-run parking garage that serves downtown commuters is an unrelated business even when every dollar funds the youth ministry. The same goes for a fitness center marketed to non-members or a retail operation competing on non-religious products.
The “Regularly Carried On” Test
One-off and seasonal sales usually escape UBIT because they don’t meet the frequency and continuity of a comparable for-profit operation.3Internal Revenue Service. Regularly Carried On A weekend craft fair once a year isn’t “regularly carried on,” even if a gift shop down the street sells similar items every day. Turn that fair into a five-day-a-week storefront and the answer flips.
Exceptions That Cover Common Church Fundraisers
Even when an activity would otherwise be an unrelated business, several statutory exceptions can shield the income. These are what protect a lot of everyday church activity.
- Volunteer labor. Any business where substantially all the work is done by unpaid volunteers is excluded. The IRS points to volunteer-run bake sales as a typical example, and a thrift store staffed entirely by congregation volunteers fits the same rule.4Internal Revenue Service. Unrelated Business Income Tax Exceptions and Exclusions
- Donated merchandise. A business that sells goods substantially all of which were received as gifts or contributions is excluded. This covers the classic church thrift shop stocked with donated clothing, furniture, and household items.4Internal Revenue Service. Unrelated Business Income Tax Exceptions and Exclusions
- Convenience of members. A business carried on primarily for the convenience of members, students, patients, officers, or employees is excluded. A small cafeteria or snack counter serving congregants after services qualifies.4Internal Revenue Service. Unrelated Business Income Tax Exceptions and Exclusions
The exceptions can stack. A rummage sale staffed by volunteers and stocked with donated goods is protected twice. What matters is the character of the activity, not whether the church needs the money.
Sponsorships and Advertising
Payments from local businesses that support a church event or bulletin sit in their own category. A qualified sponsorship payment — where the sponsor gets nothing more than an acknowledgment of its name, logo, or product line — isn’t unrelated business income.5eCFR. 26 CFR 1.513-4 – Certain Sponsorship Not Unrelated Trade or Business
Acknowledgments can include the sponsor’s name, logo, address, phone number, website, and neutral product descriptions. Language that promotes or compares crosses into taxable advertising: prices, savings claims, endorsements, or calls to action. If a single message mixes acknowledgment with advertising, the IRS treats the whole payment as advertising income.5eCFR. 26 CFR 1.513-4 – Certain Sponsorship Not Unrelated Trade or Business “Event sponsored by Smith’s Hardware, 123 Main Street” is fine. “Event sponsored by Smith’s Hardware, best prices in town” is not.
Filing and Paying UBIT
A church with $1,000 or more in gross income from an unrelated business must file IRS Form 990-T, even though churches are exempt from most IRS filings.6Internal Revenue Service. Instructions for Form 990-T The tax is computed at corporate rates, currently 21%, under Section 11.7Office of the Law Revision Counsel. 26 US Code 511 – Imposition of Tax on Unrelated Business Income
Expenses directly connected to the unrelated business are deductible, the same way a for-profit would deduct them. There’s also a flat $1,000 specific deduction against unrelated business taxable income, so small amounts of unrelated income often produce no actual tax.8Office of the Law Revision Counsel. 26 US Code 512 – Unrelated Business Taxable Income Paying UBIT on a side activity is normal and does not, by itself, threaten the exemption. Plenty of churches file Form 990-T year after year without any issue.
When Commercial Activity Puts the Exemption at Risk
UBIT lets exempt organizations do some commercial business without losing their exemption. The line moves when that business grows large enough to overshadow the religious purpose. The IRS operational test requires a 501(c)(3) to engage primarily in activities that accomplish its exempt purposes, and more than an insubstantial part of its activities cannot further non-exempt purposes.9Internal Revenue Service. Operational Test – Internal Revenue Code Section 501(c)(3)
There is no bright-line percentage in the tax code. A 20% figure circulates among advisors as a rough comfort zone, but the actual test is qualitative. A church that devotes most of its staff time, building space, and organizational attention to running a chain of car washes has a problem even if the revenue split looks manageable.
Churches with growing commercial operations sometimes house the unrelated business in a separate taxable subsidiary. That walls the commercial activity off from the church’s exempt operations, at the cost of more administration and regular corporate tax on the subsidiary’s income.
Private Inurement
Commercial activity creates a second exposure that’s easy to overlook. The tax code flatly prohibits arrangements where an insider — a pastor, board member, or anyone with a personal interest in the organization — receives an unreasonable financial benefit from the church’s earnings.10Office of the Law Revision Counsel. 26 US Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. A fair pastoral salary is fine. Letting a board member’s family business supply the church bookstore at inflated prices is not.
Private inurement in any amount can cost a church its exemption. The IRS can also impose excise taxes on the individual who received the excess benefit without revoking the exemption. The protection is simple: any transaction between the church and an insider should reflect fair market value, and the church should document how it decided the price was reasonable.
State Sales Tax Is a Separate Question
Federal income tax exemption does not carry over to state and local sales tax. Sales tax is governed entirely by state law, and the rules vary widely. Some states exempt churches from collecting sales tax on all sales; some exempt only items used directly for religious purposes; some offer exemptions only during limited fundraising events; and a few provide no religious exemption at all.
Where exemptions exist, churches usually have to register with the state revenue department and apply for them. When a church sells taxable products, it may need a seller’s permit and has to collect sales tax from buyers and remit it. Churches buying inventory for resale can often use a resale certificate to purchase that inventory without paying sales tax upfront, since the tax will be collected at the point of sale. Check the state’s department of revenue before starting a sales operation.