Does a 501(c)(3) charity have to collect and remit Missouri sales tax on donated clothing it sells at its resale/thrift store?

Subject

Taxability of Sales by Charitable Organization

Plain-English summary

The Missouri Department of Revenue ruled that a 501(c)(3) charitable organization does not have to collect and remit sales tax on the clothing and fashion accessories it sells at its resale/thrift store, because Missouri's sales tax exemption for charitable organizations covers sales made in the course of their charitable functions and activities, not just their purchases.

Applicant is a nonprofit corporation recognized as a 501(c)(3) charity whose mission is to create permanency in foster children's lives by recruiting and supporting foster and adoptive families. It already held a continuing charitable exemption letter from the Department (issued in 2014) covering its purchases and sales. As part of its mission, Applicant operates a resale/thrift store selling clothing and accessories at a steep discount -- with an additional 90% discount for foster and adoptive families. All the merchandise is donated by the public, all proceeds go toward the store's operating costs and the charity's broader mission, and 60% of the store is staffed by volunteers.

The Department applied 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." Because Applicant's store sales directly and indirectly serve its charitable mission -- providing low-cost clothing to the foster/adoptive families it supports -- and because the store runs on donated inventory rather than purchased retail stock, with all profits recycled into the charity's activities, the Department found Applicant is not competing with ordinary retail stores. Citing St. John's Medical Center, Inc. v. Spradling, 510 S.W.2d 417 (Mo. 1974), the Department concluded Applicant is not required to collect or remit sales tax on its thrift-store sales.

What this means for you

Charities and nonprofits running thrift stores or resale shops

If your 501(c)(3) organization sells donated merchandise through a thrift or resale store, and the proceeds fund your charitable mission, this ruling suggests those sales can qualify for Missouri's charitable-sales exemption under Section 144.030.2(19), RSMo -- separate from any exemption you already hold on your own purchases. Key facts the Department leaned on here: the inventory was entirely donated (not purchased for resale), all profits supported the charity's mission, and the store served the charity's own beneficiaries (foster/adoptive families) at a further discount. If your store instead buys inventory wholesale and competes head-to-head with commercial retailers, the analysis could come out differently.

Accountants and tax professionals advising nonprofit clients

Note that this ruling addresses a different question than the sales-tax exemption a charity typically holds for its own purchases under Section 144.030.2(20), RSMo -- here the issue was whether the charity's sales to the public were taxable, resolved instead under Section 144.030.2(19), RSMo, and the St. John's Medical Center "not in competition with retail" reasoning. When a nonprofit client asks whether it must collect sales tax on store or fundraising sales, confirm the sales themselves further the organization's charitable functions and are not just incidental commercial activity, and don't assume a purchase exemption letter automatically covers sales tax collection obligations.

Foster/adoptive-family support organizations specifically

The Department noted this Applicant's mission -- supporting foster and adoptive families -- was directly furthered by the thrift store, since it gave those very families an affordable way to clothe children at an extra discount. Organizations with a similarly tight link between the store's operation and their charitable purpose have a stronger case for this exemption than a general resale operation with a more attenuated connection to the charity's mission.

Common questions

Q: Does a charity ever have to collect Missouri sales tax on things it sells?
A: It depends on the facts. This ruling turned on Section 144.030.2(19), RSMo, which exempts sales made by charitable organizations "in their religious, charitable or educational functions and activities." Here, the store's donated inventory, its funding of the charity's mission, and its direct service to the charity's foster/adoptive-family beneficiaries all supported treating the sales as exempt. A charity selling unrelated merchandise for pure profit, or competing directly with commercial retailers, might not get the same result.

Q: Does having a purchases exemption letter also cover a charity's own sales?
A: Not automatically -- they are analyzed separately. Applicant already held a continuing exemption letter covering its purchases and sales "conducted with Applicant's exempt charitable functions and activities," but the Department still walked through the separate statutory exemption for charitable sales (Section 144.030.2(19), RSMo) and the "not in competition with retail" case law before concluding no collection obligation applied.

Q: Why does it matter that the store's inventory was donated rather than purchased?
A: The Department specifically distinguished Applicant's store from "a typical retail store" because it "does not purchase its own inventory, but receives it in the form of donations." Combined with the fact that all profits support the charity's mission, this meant Applicant was not competing with other retail stores under the reasoning of St. John's Medical Center, Inc. v. Spradling.

Q: Can another Missouri charity rely on this ruling for its own thrift store?
A: Not automatically. This is a letter ruling binding on the Department only with respect to the requesting Applicant, only for three years from its date, and only so long as the facts and law don't change. A different charity should confirm its own facts -- donated inventory, use of proceeds, and connection to its charitable mission -- match closely and consult a tax professional before relying on this result.

Q: What happens if the charity's facts change after this ruling?
A: The ruling itself warns that "any change in or deviation from the facts as presented will render this ruling inapplicable," and that relying on an outdated interpretation after a change in law could expose a taxpayer to additional taxes, interest, and penalties imposed prospectively.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8243

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 March 27, 2023.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is a nonprofit corporation recognized by the Internal Revenue Service as a charitable organization under section 501(c)(3) of the Internal Revenue Code. Applicant also possesses a continuing charitable exemption letter issued by the Department of Revenue for all purchases and sales conducted with Applicant's exempt charitable functions and activities. The Department issued Applicant the exemption letter on December 1, 2014.

Applicant's mission is to create permanency in foster children's lives by recruiting and supporting foster and adoptive families in a metropolitan region. Applicant's charitable functions and activities include finding permanent homes for children in foster care and to support foster/adoptive families in the area. Applicant operates a resale/thrift store where it sells clothing and fashion accessories at a significant discount from retail pricing.

Foster and adoptive families can purchase clothing items throughout the year at an additional 90% discount. All items sold by Applicant at its store are donated by the public through charitable donations. All proceeds pay the operating costs of the store and generate additional revenue to support the charitable activities of Applicant. Sixty percent of the store is operated by volunteers.

ISSUE :

Is Applicant required to collect and remit sales tax on the items sold at its resale/thrift store?

RESPONSE :

No. Applicant is not required to collect and remit sales tax on the items sold at its resale/thrift store.

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 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 within Applicant's functions and activities. Applicant's sales at its store directly and indirectly serve its charitable functions and activities. Part of Applicant's mission is to help support and serve adoptive and foster families within the area. One of the ways Applicant accomplishes this mission is to provide a place where those families can purchase clothing for their children at a minimal cost.

Unlike a typical retail store, Applicant's store does not purchase its own inventory, but receives it in the form of donations made to serve Applicant's charitable purpose. Additionally, all profits will be used to support Applicant's charitable functions. In other words, Applicant is not in competition with other retail stores. See St. John's Medical Center, Inc. v. Spradling , 510 S.W.2d 417 (Mo. 1974). Therefore, Applicant is not required to collect and remit sales tax on the items sold at its stores.

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