Did a thrift store operated as part of a state residential rehabilitation program owe South Carolina income tax or property tax on its inventory?

Plain-English summary

South Carolina Private Letter Ruling 87-8 held that a thrift store operated as part of a state residential rehabilitation program was not subject to state income tax, and its inventory was not subject to property tax.

The Commission treated the store as a satellite operation of the Department of ABC rather than as a separate taxable business. State-paid staff managed it, all funds in its zero-balance account belonged to the state, and the store existed as an extension of a state rehabilitation program.

The ruling answered only income and property tax questions; it did not decide sales-tax treatment of thrift-store sales.

The rehabilitation program

The Department of ABC operated a sheltered residence called the Place for Private Living.

Its Living Skills program sought to rehabilitate mentally ill individuals so they could function as independently as possible.

In October 1986, the center leased retail space and opened a thrift store as an extension of that program. The lease was in the residence program's name.

How the store operated

The thrift store gave program participants experience with:

• keeping regular work hours;
• carrying out assigned tasks in a job-like setting; and
• dealing with members of the public who visited the store.

Patients working in the store received no wages.

The store kept a separate zero-balance composite account. Sales proceeds were used to pay expenses and sometimes to buy items benefiting residents.

At the time of the ruling, the store had not earned enough to cover its expenses and was subsidized by the center's budget.

Why the store had no income-tax obligation

The ruling stated that a state agency was not subject to federal or South Carolina income tax, citing Internal Revenue Code section 115 and a South Carolina Attorney General opinion.

The Department of ABC and its satellite operations therefore were tax-exempt entities.

The thrift store was managed by patients and staff from the residence program. Staff members were paid by the Department and classified under standard State Personnel pay grades.

The zero-balance account showed that all store funds belonged to the state. Those facts kept the store within the state agency for income-tax purposes.

Why the inventory was property-tax exempt

The Commission concluded that the thrift store's inventory was exempt from property tax under sections 12-37-220(1) and 12-37-450.

The ruling did not provide a separate extended analysis of those provisions; it applied them to the state-operated store's inventory on the stated facts.

What this means for you

State agencies

PLR 87-8 treated a program-related retail operation as part of the agency where state staff, state funds, and agency program purposes remained controlling.

Rehabilitation and mental-health programs

The store's work activities were designed as training and rehabilitation, and the store was subsidized rather than operated as an independent profit center.

Government accounting teams

The zero-balance account was important evidence that the receipts belonged to the state rather than to a separate organization.

Thrift-store operators

The favorable result followed state-agency status, not thrift-store activity by itself. A private or nonprofit thrift store would present different facts.

Readers applying the ruling today

PLR 87-8 applied 1987 agency and property-tax rules to a specific state program. Current organizational authority, account ownership, staffing, inventory, leased premises, income, property, and sales-tax provisions must be checked independently.

Common questions

Q: Did the thrift store have to file a South Carolina income-tax return?

A: No. The Commission treated it as a tax-exempt satellite operation of the state agency.

Q: Was the store's inventory subject to property tax?

A: No. The ruling applied sections 12-37-220(1) and 12-37-450 to exempt it.

Q: What showed that the store remained part of the state?

A: State-paid staff managed it, its account funds belonged to the state, and it operated as an extension of the state rehabilitation program.

Q: Did the store pay participants wages?

A: No. The ruling said patients working there were not paid.

Q: Was the store profitable?

A: No at the time described. It had not generated enough income to meet expenses and received subsidies from the center's budget.

Q: Did the ruling exempt the store from sales tax?

A: It did not decide that question. The ruling addressed income tax and property tax only.

Q: Can another thrift store or agency rely on PLR 87-8?

A: No. The ruling states that it applied only to the Department's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• Internal Revenue Code section 115 — state-agency income treatment cited in the ruling
• South Carolina Attorney General Opinion No. 3400 (1972) — state-agency tax status cited in the ruling
• S.C. Code sections 12-37-220(1) and 12-37-450 — property-tax exemption for the inventory
• S.C. Code section 12-3-170 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR87-8.pdf

Original ruling text

SC PRIVATE LETTER RULING #87-8

TO:

Department of ABC

SUBJECT:

Tax Status of XYZ's Thrift Store

REFERENCE:

Opinion of the Attorney General, No. 3400, Oct. 25, 1972,
S.C. Code Section 12-37-450

AUTHORITY:

S.C. Code Section 12-3-170

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
1)

Is the Thrift Shop operated by the XYZ required to file an income tax return?

2)

Is the inventory held by the thrift shop subject to property tax?

Facts:
The Department of ABC operates, among other things, a sheltered residence program known as
the Place for Private Living. The focus of the activities at the Center is on the Living Skills
program which is designed to rehabilitate mentally ill individuals so that they can function as
independently as possible.
In October, 1986, as an extension of the Living Skills Program, the center leased retail space on
Somewhere Street in Public, USA, and has opened a thrift store on the premises. The property
was leased in the name of the Place for Private Living.
The store is operated with the intention of providing a variety of experiences to those individuals
in the program who work there, including the keeping of regularly scheduled work hours,
carrying out assigned tasks in a job like setting and dealing with the public who patronize the
store. No wages are paid to patients who work in the store.

1

The store maintains a separate zero balance composite account. All proceeds from the sales of
merchandise have to date been used to defray expenses and, in some cases, to purchase items of
general benefit to the residents. To date, the store has not generated sufficient income to meet
expenses and is subsidized from the Center's budget.
Discussion:
1)

A state agency is not subject to income tax at the Federal or state level (IRC Section
115, Opinion of the Attorney General, No. 3400, October 15, 1972). The Department of
ABC and its satellite operations are therefore tax exempt entities. The thrift shop is
managed by patients and staff members from the Place for Private Living. The staff
members are paid by the Department of ABC and are classified according to the
standard pay grades established by State Personnel. The fact that the thrift shop has a
zero balance composite account indicates that all funds belong to the state. Therefore,
the thrift shop would not be subject to the state’s income tax.

2)

The inventory of the thrift shop will not be subject to property taxation pursuant to S.C.
Code of Laws Section 12-37-220(1) and 12-37-450.

Conclusion:
The thrift shop operated by the Place for Private Living would not be subject to income or
property taxation.

SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard, Jr.
S. Hunter Howard, Jr., Chairman
s/John M. Rucker
John M. Rucker, Commissioner
s/A. Crawford Clarkson, Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
, 1987
September 16

2