6.4.8 Taxes and Other Government-Required Reporting
6.4.8.1 Tax-Exempt Status of the Archdiocese and All Locations
The archdiocese and all locations are exempt from certain, but not all, taxes under Section 501(c)(3) of the Internal Revenue Code because the archdiocese and its schools, parishes, and other entities are operated exclusively for religious, charitable, or educational purposes. This exempt status is confirmed annually by the "IRS Group Ruling Determination Letter" ("Group Ruling") issued to the United States Conference of Catholic Bishops (USCCB). See the Tax and Group Ruling for the letter. All organizations listed in The Official Catholic Directory (OCD) are exempt from payment of federal income taxes as a group, except for those listed with an asterisk. The asterisked entities obtained their own tax-exempt status, without relying on the Group Ruling. Certain archdiocesan entities have an asterisked OCD listing.
The State of California makes a separate determination of tax-exempt status (see Entity Status Letter). As with the Internal Revenue Service's Group Ruling, most archdiocesan locations are covered as a group by the tax-exempt status provided to the archdiocese, while some entities have received their own exemption.
As a tax-exempt organization, the archdiocese and its locations are not required to pay taxes on donations received, and donations are generally tax deductible to donors, subject to income tax laws and regulations.
The archdiocese does not contribute to unemployment insurance, state disability tax, and some property taxes (except for employees of the Archdiocesan Catholic Center and archdiocesan Catholic Mortuaries and Cemeteries), although it has elected to contribute Social Security and Medicare taxes (FICA). The archdiocese is not exempt from paying sales or use taxes or import duties on purchases made in foreign countries.
The archdiocese may expend funds for religious, charitable, and educational purposes and may engage in certain advocacy efforts, subject to archdiocesan procedures, without jeopardizing its tax-exempt status. See the Guidelines for Lobbying and Electioneering.
6.4.8.2 Endorsement of Commercial Enterprises
Internal Revenue Service regulations governing 501(c)(3) organizations strictly prohibit endorsement of commercial enterprises. Persons in charge may not write testimonial letters endorsing any product or service in the name of their location, the Department of Catholic Schools, or the Archdiocese of Los Angeles.
Commercial entities may wish to sponsor activities at a school or parish, such as providing athletic or audiovisual equipment. Certain sponsorship arrangements may incur tax reporting and payment obligations for the location. Locations must submit sponsorship proposals or agreements to the Office of the Legal Counsel for review and approval before signing.
6.4.8.3 Federal and State Reporting
Withholding and paying the required federal and state taxes and filing the required federal and state tax exemption forms on time is critically important. Every pay period, the ADP Vantage payroll service will automatically debit the location's withholding and quarterly taxes (Form 941); therefore, locations must ensure that sufficient funds are available for these payments. The taxing authorities are not very forgiving of failure to comply with their requirements and delinquencies incur penalties, interest, and possibly fees. Lack of funds is not an excuse for failure to comply with requirements.
6.4.8.4 Request for Taxpayer Identification Number and Certification
All employees must complete a Form W-4 as part of the initial employment process.
Before payment of the first invoice from any vendor or contractor, all locations must obtain an executed Form W-9. This requirement applies to all vendors, regardless of whether the vendor is an individual or a corporate entity or is exempt from or subject to withholding of taxes.
6.4.8.5 Unrelated Business Income Tax
Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income derives from regularly conducted activities that are not substantially related to the organization's charitable, educational, or other purpose (e.g., sales from a parish souvenir shop open to the general public; regular, repeated rental of location facilties to third parties such as film companies).
The Internal Revenue Code contains a number of exceptions to unrelated business income. For example, dividends, interest, certain other investment income, royalties, certain rental income, and gains or losses from the disposition of property are excluded when computing unrelated business income.
The following do not give rise to unrelated business income and therefore the revenue generated is not subject to taxation:
Activities in which substantially all the work is performed by volunteer labor (e.g., bake sales)
Activities conducted primarily for the convenience of members, students, or employees (a typical example of this is a school cafeteria)
Resale of donated merchandise (e.g., volunteer-operated thrift shops or fund-raising auctions)
An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. Locations should contact the Financial Services Help Desk (call 213-637-7500 or email fshelpdesk@la-archdiocese.org) at the archdiocese for additional guidance on unrelated business income.
6.4.8.6 Wage and Employee Tax Forms
Form W-2 (Wage and Tax Statement) is prepared by the payroll service and distributed to each employee before January 31 for the calendar year just ended. The payroll service should also timely file the location's W-3 statement with the appropriate government agencies by February 28 and confirm the filing of the W-3 with the location.
6.4.8.7 Form 1099 (Miscellaneous Income) and Transmittal Forms
Form 1099 (Miscellaneous Income) must be prepared and distributed to noncorporate vendors or independent contractors who provide services to the location and to whom $600 or more is paid in any calendar year. The reports are due by January 31 for the calendar year just ended. Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) and copies of the Form 1099 must be filed with the Social Security Administration by February 28 for the calendar year just ended.
6.4.8.8 Tax Reporting and Withholding for Prizes from Raffles and Games of Chance
Specific rules apply for tax reporting and withholding for raffle and other prize winnings. Under "Development and Fund-Raising," see the section on Raffles.
6.4.8.9 Release of Employer Identification Numbers
Locations may release their Employer Identification Number (EIN) to organizations when the locations apply for donations or grants. Parents/guardians who wish to take federal income tax Child and Dependent Care Credit may request the school's EIN; however, as tax-exempt organizations, schools are not required to provide their EIN. Parents/guardians should type "tax exempt" in the space on the Form W-10 that requests the provider's taxpayer identification number.
If requested, the organization to which the EIN is released may be provided with:
The Franchise Tax Board website can provide locations with an Entity Status Letter that confirms the location's tax-exempt status under state law.
6.4.8.10 Sales and Use Tax
Archdiocesan locations are required to pay California sales or use taxes on sales and purchases and on leases of tangible personal property, except in very limited circumstances (e.g., no sales tax on meals or food sold for profit for fund-raising purposes at a social or other gathering).
Sellers, which include locations operating coffee shops, bookstores, and gift shops that are open to the public, conducting auctions or engaging in other sales transactions, are required to report and remit sales tax to the California Department of Tax and Fee Administration (CDTFA). Sellers have the option of collecting sales tax from their customers. Almost all sellers choose this option. Whether or not a seller collects the sales tax, it is liable to remit the sales tax due.
The California use tax is imposed on consumers of tangible personal property that is used, consumed, or stored in this state. Use tax generally applies to purchases from an out-of-state vendor who does not charge sales tax on sales to California buyers, but it also applies to buyers in California who are not charged sales tax by the seller. For example, when a parish purchases liturgical publications from an out-of-state vendor who is located in a state that does not have sales tax, or if the vendor fails to collect a sales tax, a use tax is due to California; the parish is obliged to pay the tax. Use tax also applies to most leases of tangible personal property.
The CDTFA is charged with collecting sales and use taxes. Increased computerization among government agencies and information provided from online sales and other sources enable the agency to track purchases made outside of California or from foreign countries. Based on the information received, the CDTFA sends notices to locations seeking payments of unpaid sales or use taxes; the tax payment period may be retroactive for up to eight years. Publication 18 for nonprofit organizations, issued by the CDTFA, provides helpful guidance on this topic. Entities that have a separate tax identification number have to report use taxes by January 31 of each year, regardless of whether they file income tax returns. Locations that receive the CDTFA notice must provide the information requested and pay the use tax if applicable. See Sales and Use Tax Guidance for Parishes and Schools.
6.4.8.11 Resale of Merchandise
If a location sells merchandise, it must obtain a seller's permit, even if the sales are not taxable to the ultimate purchaser. Most but not all sales by locations are taxable (see Sales & Use Tax in California). Locations may obtain a seller's permit from the CDTFA, registering online or in person at the nearest local office.
There are two types of seller's permits: regular and temporary. Generally, temporary permits are issued to locations that sell fewer than three times per year or for fewer than 90 days.
In addition, if a location intends to purchase items for the purpose of reselling them, the location must issue a California resale certificate to the location's supplier to avoid paying sales tax to the supplier. The resale certificate does not need to be in any particular form, but it must contain:
The name and address of the location
The seller's permit number of the location
A description of the items to be purchased by the location
A statement that the items "will be resold" or are "for resale"; using terms like "non-taxable" or "exempt" is not acceptable
The date of the certificate and the signature of the purchaser
The resale certificate is restricted to items specified on the certificate and can be used only for those items. For further information, see Publication 103, Sales for Resale.
Accurate records of inventory and sales must be kept and an annual tax return with payment of taxes on items sold must be filed with the CDTFA (see Sales and Use Tax).
Before a school applies for a seller's permit or issues a resale certificate, it must consult with the Department of Catholic Schools. Permission of the pastor is required for parishes and parish schools.
If a school Parent-Teacher Organization (PTO) purchases merchandise for fund-raisers (e.g., candy sales) the PTO is regarded as a consumer and sales tax is paid on the purchase price. The PTO does not charge an additional sales tax to the ultimate purchaser. A PTO does not need a seller's permit if the proceeds of all its sales go to the PTO.
6-17-21, 5-29-2023