Does a religious charity's thrift store have to charge Missouri sales tax on the new (non-donated) merchandise it buys and marks up for resale?

Subject

Taxability of Items Sold by a Religious Owned Thrift Store

Plain-English summary

The Missouri Department of Revenue ruled that a religious charity's thrift stores do not have to charge Missouri sales tax on the new, purchased merchandise they buy and mark up for resale -- even though that part of the business looks like an ordinary retail operation.

Applicant is part of an international religious lay organization dedicated to helping people grow spiritually and helping those in need. It operates multiple Missouri thrift store locations, and all profits from those stores go back into the organization to fund its charitable mission. About 70% of the stores' sales are donated goods, but the remaining 30% are new tangible personal property (things like mattresses, pillows, and bedding) that Applicant purchases wholesale and marks up before selling to customers. Separately, roughly 9% of sales involve vouchers ($100-$800) that volunteers give to community members in need, redeemable as store credit.

Applicant is a 501(c)(3) organization and already holds a Missouri sales and use tax exemption letter covering sales made in furtherance of its functions and activities. The issue was whether the 30% of sales involving purchased, marked-up goods -- which puts the thrift stores in competition with regular retailers -- falls outside that exemption.

The Department concluded it does not. Citing Section 144.030.2(19), RSMo, which exempts "[a]ll sales made by or to religious and charitable organizations and institutions in their religious, charitable or educational functions and activities," and the Missouri Supreme Court's decision in Director of Health v. St. John's Regional Health Center, the Department reasoned that the purpose of the organization in conducting an activity -- not whether that activity happens to compete with other retail businesses -- controls whether the exemption applies. Because the purpose of the thrift stores is not to generate profit but to fund the Applicant's charitable functions, sales of purchased goods at the stores are exempt from Missouri sales tax, just like the sales of donated goods.

What this means for you

Religious and charitable organizations operating thrift stores

If your organization runs a thrift store and some portion of what you sell is new merchandise purchased wholesale and marked up (rather than donated items), this ruling indicates that fact alone does not forfeit your Section 144.030.2(19), RSMo exemption. What matters is whether the store's overriding purpose is charitable -- with profits directed back into the organization's religious, charitable, or educational mission -- rather than whether the activity happens to resemble, or compete with, ordinary retail. Organizations relying on this reasoning should still hold (or apply for) a Missouri sales/use tax exemption letter from the Department, as Applicant did here.

Accountants and tax professionals advising nonprofits

When a religious or charitable client operates a retail-like activity (thrift store, gift shop, snack bar, etc.), don't assume that purchasing and marking up new goods automatically converts those sales into taxable retail sales. Under the reasoning in this ruling and in St. John's Regional Health Center, the analysis turns on the organization's purpose in conducting the activity, not on competitive overlap with for-profit retailers. Confirm the client's exemption letter is current and that profits are, in fact, directed toward the organization's stated charitable or religious functions, since any change in those facts would take the activity outside this ruling's reasoning.

Limits of this ruling

This letter ruling is binding only on the Department with respect to this specific Applicant, only for three years from its date, and only so long as the facts described (organizational purpose, use of profits, mix of donated versus purchased goods) don't change. Other thrift store operators -- even other religious or charitable ones -- cannot rely on it directly and should seek their own ruling or professional advice if their facts differ.

Common questions

Q: Does this thrift store have to charge Missouri sales tax on the new goods it buys wholesale and resells with a markup?
A: No. The Department ruled that these sales, like the store's sales of donated goods, are exempt from Missouri sales tax under Section 144.030.2(19), RSMo.

Q: Doesn't selling purchased, marked-up merchandise put the thrift store in competition with ordinary retail stores?
A: The ruling acknowledges that it does -- about 30% of sales are new goods sold in a manner "similar in operation to any retail store." But citing Director of Health v. St. John's Regional Health Center, the Department found that the organization's charitable purpose in conducting the activity takes precedence over any competition with other retailers.

Q: Why does the organization's purpose matter more than what it's actually selling?
A: Because Section 144.030.2(19), RSMo, exempts sales made by religious and charitable organizations "in their religious, charitable or educational functions and activities." Since all profits from both the donated-goods sales and the purchased-goods sales go back into funding Applicant's charitable mission, the Department treated the entire thrift store operation as within that exempt purpose.

Q: Does the voucher program (giving store credit to people in need) affect the analysis?
A: The ruling describes the voucher program as part of the facts (about 9% of fiscal year 2022 sales) but does not separately analyze its tax treatment; the Department's conclusion addresses the taxability of Applicant's sales of purchased goods generally.

Q: Does Applicant need any special documentation to sell tax-free?
A: The ruling notes Applicant has already applied for and received a sales and use tax exemption letter from the Department covering sales made in connection with its functions and activities -- that existing exemption letter is part of the factual basis for this ruling.

Q: Can another nonprofit thrift store rely on this ruling?
A: Not directly. This is a Missouri letter ruling, binding on the Department only as to the requesting Applicant, only for three years, and only while the facts and law remain unchanged. Other organizations should confirm their own facts match (organizational purpose, use of profits, existing exemption status) and consult a tax professional.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8218

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated September 26, 2022.

The facts as presented in your letter ruling request, phone conversation, and additional materials, are summarized as follows:

Applicant is part of an international religious lay organization with a purpose of helping people grow spiritually by forming friendships and helping those in need, regardless of race, religion, gender or other factors.

Applicant has multiple thrift store locations in the state of Missouri. All profits from the thrift stores are returned into the organization for use towards the stated goals of their mission statement and in furtherance of their charitable functions. The thrift store primarily makes sales of donated goods to customers. The sales of donated goods account for approximately 70% of Applicant's total thrift store sales. The Applicant also makes purchase of new tangible personal property such as mattresses, pillows, bedding, etc. for sale to customers. These new goods sold to customers often have a price markup from the wholesale price. Approximately 30% of total sales are new goods purchased by Applicant to ultimately be sold to customers. All profits from the sales of new, non-donated goods also go back into the organization to further the Applicant's charitable functions.

Additionally, while conducting the outreach described in Applicant's mission statement, volunteers will often identify people in need within the community. In these instances, Applicant's volunteers will give vouchers to the identified community members which act as a credit at the Applicant's thrift stores. These vouchers often range from $100-$800 depending on the needs of the community member. The vouchers account for approximately 9% of their total sales for fiscal year 2022. Staff at Applicant's thrift stores include a combination of paid full or part-time employees and volunteer workers.

ISSUE :

Are Applicant's sales of purchased goods to customers at their thrift store subject to Missouri sales tax?

RESPONSE :

No, Applicant's sales of purchased goods sold to customers at their thrift stores are not subject to Missouri sales tax.

Section 144.020.1, RSMo, imposes a sales tax upon sales of tangible personal property and certain listed taxable services. Section 144.021.1, RSMo, requires sellers of tangible personal property to collect and remit sales tax on the seller's gross receipts, defined as the aggregate amount of the sales price of all sales at retail. Section 144.030.2(19), RSMo, provides an exemption from sales tax for "[a]ll sales made by or to religious and charitable organizations and institutions in their religious, charitable or educational functions and activities[.]"

Applicant is recognized by the Internal Revenue Service as a 501(c)(3) charitable organization. Applicant has also applied for and received a sales and use tax exemption letter from the Department of Revenue that exempts from tax all sales made by Applicant that are conducted with Applicant's functions and activities.

30% of Applicant's thrift stores sell items that they purchase themselves and then mark-up for sale. This is similar in operation to any retail store, therefore putting them in competition with other retail stores. However, in Director of Health v. St. John's Regional Health Center , 779 S.W.2d 588 (Mo. Banc 1989), the Missouri Supreme Court "...[l]ooked beyond consideration of whether competition existed and found that the purpose of the organization in conducting the activity took precedence over any purported competition in determining whether the activity met the requirements of the broadly worded sales and use tax exemption."

Looking beyond Applicant's competition with other retail stores, the purpose of selling items in the thrift store is not to make profits, but to use any income from operation to further the Applicant's charitable functions. Since the primary purpose of the thrift stores is charitable, sales of purchased goods sold at their thrift stores are exempt from Missouri sales tax.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford