Are Church Franchisors Really Tax Exempt?

 

Storefront churches should be tax exempt, no question about it.  We don’t reserve tax exemption just for big fancy churches in big fancy buildings.  But last Sunday, the Wall Street Journal published an article entitled God Inc. – Church Startups Spread Franchise Model Across U.S.  It describes a new way of worship sweeping the country.  The storefront church. A place of organized worship usually licensed or commissioned by a national organization that essentially sells franchises.  I have regularly attended one or two such franchise style churches over the years.  They are nontraditional, geared towards young folk, and often credited with leading the disillusioned back to Jesus.  Dress is always casual, there is usually a rock band on stage – or up front if there is no stage – and the pastor normally delivers the sermon in jeans and sneakers.  It’s an entirely informal affair that usually takes no more than 90 minutes. 

It is definitely a church service, though.  Granted, the music is not often great.  You won’t find a future Aretha Franklin or Whitney Houston because they tend to sing in traditional churches with traditional choirs.  Sometimes the music is downright bad, as a matter of fact.  But I have sometimes despaired of the longer services common to traditional African American churches even when the music was ten times better than Beyonce could sing or John Lee Hooker could play on the guitar.  There are seriously good musicians in traditional churches, good enough to make you weep and want to confess everything, I’m telling you.  That's what draws me back to traditional church.

Storefront churches services are usually held in a rented venue.  A movie theatre or high school auditorium that would otherwise be vacant on Sunday morning.  Or even a vacant store in a strip mall.  I'm told that Jesus doesn’t care.  The church rents the space in most instances.  The only thing that is typical is the doctrine.  It’s conservative to one degree or another. But the order of service is as identifiable to religious activities as McDonalds is to selling hamburgers.  There is a recognizable menu. Singing, prayer, sermon, alter call, invitation. All in jeans and T-shirts, that’s the best part for most congregants. The WSJ article concerns the Association of Related Churches, a tax-exempt organization that essentially sells church franchises:

ARC functions as a startup accelerator, providing money and mentoring in exchange for a continuing cut of church revenues that it invests in opening new churches. Similar entrepreneurial networks are sprouting new, largely nondenominational places of worship at a time when many traditional church congregations are shrinking. The new churches are opening across the U.S., from urban centers to suburbs, red states and blue, as well as abroad. The “church-planting” networks, established as nonprofit organizations, deploy marketing, branding and social-media strategies akin to other franchise businesses.   

According to Guidestar, ARC is not required to file 990s because it’s a church.  If it is a church, of course that is correct.  I am just not so sure that it, and others like it, are churches. They start churches, but it doesn't sound like the franchisors do church themselves. WSJ article continues: 

ARC has started 1,114 churches in the U.S. and abroad since 2001, including 40 last year. Average attendance on launch day was about 500 people in the first quarter this year, the organization said. Another church-startup network, Acts 29, currently has 644 churches, mostly in the U.S., as well as in Italy, Mexico and Thailand.

The article reports that one successful franchisee, Radiant Church in Tampa, netted $8.4 million after expenses, including a $250,000 fee to ARC.  The article doesn’t mention whether that’s a fixed fee or a percentage of tithes and offerings. But the fee is just like that paid by a hamburger franchisee to McDonalds, I imagine.  I am not begrudging Radiant Church’s $8.4 million.  It’s a real church and that amount is appropriately tax exempt.  But the franchise fee to ARC makes me wonder.  If all 1,114 franchisees pay that fee to ARC, ARC earns nearly $300,000,000 a year.  We don’t know because it apparently claims church status and files no 990.  Not a bad business model if you ask me.  The article notes that ARC is licensing about 50 new churches a year, investing as much as $100,000 “in matching funds as no-interest loans.”  There is a 90% success rate for new start-up churches after five years and ARC scrutinizes and conducts background checks of potential franchisees just like McDonalds or Pizza Hut.  They don't allow just anybody to start an associated church.  

You see where I am going with this by now.  Should church franchisors even be tax exempt? If so, should any part of their revenues be unrelated business income?  ARC conducts all sorts of fee generating training and associated services for its franchisees just like McDonalds does for its franchisees.  And if the franchisor is an exempt religious organization, is it a “church,” itself, exempt from filing forms 1023 and 990?  Only houses of organized worship (churches) are treated as churches, exempt from filing.  Plain old vanilla “religious organizations” are not.  There is no evidence that ARC conducts its own church services.  On the other hand, the Southern Baptist Convention might not conduct religious services regularly either.  I haven’t delved that deeply into it, but there must be plenty of established national organizations doing the same thing with traditional churches as ARC is doing with the storefronts.  I’m not casting tax exemption aspersions, it’s just an interesting line of thought.

Does a franchisee become tax exempt because it licenses and collects fees from church franchises? Rather than hamburger places.  Is it even a religious organization?  I need to pray on this awhile.

darryll k. jones