Did a volunteer hospital auxiliary's thrift store qualify for charitable-sales relief because it sold donated goods cheaply to needy customers?

Plain-English summary

The hospital auxiliary's thrift-store sales remained taxable even though volunteers prepared donated goods and most customers were needy people buying at a fraction of value.

Historical Regulation 1570 required the organization to qualify for the property-tax welfare exemption. The letter said a thrift store met that condition only when an ongoing rehabilitation program occurred on the premises, employing disadvantaged people throughout the operation toward establishing them in society.

This store instead used volunteers and generated proceeds for local hospitals, medical scholarships, and another charitable operation. Because its activity raised revenue for separate charitable purposes rather than conducting rehabilitation, it failed the welfare-exemption condition.

Common questions

Did low prices for needy customers establish the exemption?

No. The organization also had to satisfy the welfare-exemption requirement.

What rehabilitation did the letter describe?

An ongoing program employing disadvantaged people in the whole operation with a goal of establishing them in society at large.

Did donating proceeds to hospitals change the result?

No. The letter characterized the store as revenue generation for disconnected charitable purposes.

Citations and references

• California Code of Regulations, title 18, section 1570 and 1570(a) — four charitable-sales conditions quoted and applied; a copy was enclosed
• California Revenue and Taxation Code section 214 — welfare property-tax exemption requirement applied
• Cedars of Lebanon Hospital v. County of Los Angeles (1950) 35 Cal.2d 729 — revenue-producing thrift-store property did not qualify absent qualifying rehabilitation use

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/165-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/165-0600.pdf

Original ruling text

165.0600

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
916-445-3237

August 26, 1980
REDACTED TEXT
REDACTED TEXT:
This is in response to your letter of June 24, 1980. Your inquiry concerns the correct application of tax to the sales of donated used clothing and articles at your organization’s thrift shop, the REDACTED TEXT. We understand that the REDACTED TEXT is a rented facility where donated items are prepared (cleaned, mended, etc.) and sold. The majority of your customers are needy persons who are able to purchase goods at a fraction of their value. The store is staffed by volunteers who are members of the REDACTED TEXT. The REDACTED TEXT is a nonprofit organization. It acts as a hospital auxiliary for the various hospitals in your vicinity. Proceeds from fundraising events (including REDACTED TEXT’s sales) are donated to local hospitals, provide medical scholarships, and operate the REDACTED TEXT. The organization has no paid staff but is composed entirely of volunteers. Sales and Use Tax Regulation 1570 provides that: “Sales by charitable organizations are exempt from the sales tax, and the purchaser is exempt from the use tax provided all of the following conditions are met: “(1) The organization must be formed and operated for charitable purposes, and must qualify for the ‘welfare exemption’ from property taxation provided by Section 214 of the Revenue and Taxation Code. “(2)

The organization must be engaged in the relief of poverty and distress.

“(3) The organization’s sales must be made principally as a matter of assistance to purchasers in distressed financial condition. “(4) The property sold must have been made, prepared, assembled or manufactured by the organization.” You will note that the first requirement of Regulation 1570 is that an organization must qualify for the “welfare exemption” from property taxation provided by Section 214 of the Revenue and Taxation Code. In discussing this matter with our Property Tax staff, we have determined that the REDACTED TEXT would not be exempt from the payment of property taxes (or personal property taxes on equipment in the case of an organization which rents property). A thrift store

[A]REDACTED TEXT

-2-

August 26, 1980
165.0600

qualifies under Section 214 only if it shows that it is a rehabilitating persons in an on-going rehabilitation program. This rule was established by the Supreme Court of California in Cedars of Lebanon Hospital v. County of Los Angeles 35 Cal. 2d 729 when the court decided that such stores are not exempt when they are used for revenue generating operations. As a result of the Cedars of Lebanon case, thrift store operations can only qualify for the exemption from property taxation when there is rehabilitation taking place on the premises. Rehabilitation in this instance means an on-going program of taking disadvantaged persons and employing them in the whole process of the operation with a view toward a goal of establishing that person in society at large. From the information supplied in your letter it appears that the function of the REDACTED TEXT is to generate revenue for disconnected charitable purposes rather than for rehabilitation. Because your organization does not qualify for the “welfare exemption” from property tax it fails to meet the requirements of Sales and Use Tax Regulation 1570 (a). As such, tax will continue to apply to your sales of used clothing at the REDACTED TEXT. We are enclosing a copy of Regulation 1570 for your future reference. If you have further questions concerning this matter, please write this office again. Very truly yours, Mary C. Armstrong Staff Counsel MCA:ba bc:

Santa Barbara – Sierra – District Administrator