Is a 501(c)(3) charity's thrift store (selling donated items and consigned goods, run almost entirely by volunteers with only two part-time paid staff) exempt from collecting Utah sales tax on its sales, given that operating the store is a regular activity described in the charity's own constitution and by-laws?

Plain-English summary

A 501(c)(3) tax-exempt charitable organization asked the Utah State Tax Commission to rule that sales made through its thrift store — which sold both donated items and goods left on consignment by authorized personnel, with proceeds going to welfare and charitable programs — were exempt from Utah sales tax. The organization ran almost entirely on volunteer labor: 46 volunteers contributing an average of 839 hours per month handling receiving, tagging, cash registers, and customer service, versus only two part-time paid positions (a bookkeeper and a manager working roughly 40 and 60 hours per month respectively) who had little direct customer contact.

The organization's own legal argument leaned on IRC § 513(a)(1), which says an activity isn't an "unrelated trade or business" (and so doesn't lose 501(c)(3) tax treatment or, as incorporated into Utah Admin. Rule R865-19S-43(B), doesn't require sales tax collection) if substantially all the work is performed by uncompensated volunteers. The Commission, however, resolved the case on simpler grounds: since the organization's own constitution and by-laws described operating a consignment thrift store as one of its regular charitable functions, the sales were exempt under Utah Code Ann. § 59-12-104(8)(a) and § 59-12-104.1(1) as sales made "in the conduct of" a Section 501(c)(3) entity's regular activities — full stop. The Commission explicitly said there was no need to even reach the volunteer-labor/unrelated-business analysis, because that inquiry only matters when a charity's activity falls OUTSIDE its regular stated functions.

What this means for you

Nonprofits running a thrift store, gift shop, or similar retail operation as part of their charitable mission

If your organization's constitution or by-laws describe the store (or similar sales activity) as one of your regular functions, this ruling suggests you may qualify for Utah's charitable-organization sales tax exemption on that basis alone — you may not need to separately prove the operation meets the IRC § 513(a)(1) volunteer-labor exception. Make sure your founding documents actually describe the sales activity as a core function, since that's what did the legal work here.

Nonprofits relying heavily on volunteer labor for a borderline "unrelated business" activity

This ruling is a reminder that the volunteer-labor exception under IRC § 513(a)(1) (incorporated via Utah Admin. Rule R865-19S-43(B)) is a fallback analysis for activities that AREN'T part of an organization's regular stated functions. If your activity already is a described regular function, you likely don't need to reach that analysis — but if it's a newer or more tangential activity not described in your governing documents, the volunteer-labor test becomes the relevant question.

Accountants advising nonprofit clients on Utah sales tax exemption

When evaluating whether a 501(c)(3) client's sales activity is exempt, check the organization's constitution/by-laws first for whether the activity is described as a regular function — that's the threshold question this ruling resolves the case on. Only dig into the unrelated-trade-or-business/volunteer-labor exception analysis if the activity isn't already a described regular function.

Common questions

Q: Does our thrift store need to prove it's staffed "substantially" by volunteers to qualify for Utah's charitable sales tax exemption?
A: Not necessarily, per this ruling — if operating the store is already a regular function described in your organization's constitution/by-laws, the sales are exempt on that basis, without needing to separately satisfy the IRC § 513(a)(1) volunteer-labor test.

Q: When does the volunteer-labor exception actually matter, then?
A: This ruling frames it as relevant only when a Section 501(c)(3) organization engages in a trade or business that is NOT part of its regular functions and activities as described in its own governing documents — in that scenario, you'd need to show the activity meets one of the unrelated-trade-or-business exceptions (like substantially-all-volunteer-labor) to avoid losing the exemption.

Q: Does selling both donated items and consigned goods change the analysis?
A: Not in this ruling — the Commission treated the combined donated-and-consignment thrift store operation as a single regular charitable function based on the organization's constitution and by-laws, without distinguishing between the two categories of merchandise.

Citations and references

Statutes (Utah Code Ann.):

• § 59-12-104(8)(a) — exempts sales made by a charitable or religious organization in the conduct of its regular religious or charitable functions and activities
• § 59-12-104.1(1) — governs exemption administration/certification for charitable organizations

Rules:

• Utah Administrative Rule R865-19S-43(B) — incorporates IRC § 513's unrelated-trade-or-business exceptions by reference for Utah sales tax purposes; applies only when a 501(c)(3) entity's activity falls outside its regular functions

Federal law incorporated by reference:

• 26 U.S.C.A. § 513(a)(1) — an activity isn't an "unrelated trade or business" if substantially all the work in carrying it on is performed by uncompensated volunteers

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/03-005.html

Original ruling text

REQUEST LETTER

03-005

NAME

ADDRESS

I am writing to you on behalf of my client, COMPANY. We are requesting a Letter Ruling that the activities of COMPANY, Inc. meet the requirements of Rule R85-19S-43 and Utah Code Ann. Sections 59-12-104 and 59-12-104.1, making their sales exempt from collection of sales taxes.

COMPANY collects and remits sales taxes under account number ######, and will continue to do so until determined to be exempt. This account is current on all required reports and payments. COMPANY also has an approved sales tax exemption number, ######, which it uses to make tax-exempt purchases and/or apply for refunds of sales taxes paid under the applicable Rules and Codes Sections.

I will use the attached description of the facts and circumstances surrounding the operation of the COMPANY to show how it meets the requirements of the Rules and Code Sections mentioned above. We ask that you review these facts and circumstances and issue a Letter Ruling that the COMPANY is exempt from collecting and remitting sales tax. When we receive your Letter Ruling, COMPANY will cease collection of sales tax and will report and remit any and all sales taxes collected prior to the receipt or effective date of your ruling, whichever is later.

You may contact me directly at the above address, email or phone numbers with any questions or requests for additional information. You may also contact the manager of the COMPANY, NAME at

COMPANY

ADDRESS

PHONE

Thank you for your assistance in this matter.

Attachment

Description of facts and circumstances of the operation of COMPANY.

COMPANY. is an IRS-recognized Section 501(c)(3) tax-exempt charitable organization. Its constitution calls for it to operate a STORE that sells items donated to it and left on consignment by authorized ORGANIZATION military and civilian personnel. All proceeds remaining after operating expenses are paid are given to welfare/charitable recipients and ORGANIZATION service and recreational activities as determined by the COMPANY Board of Trustees.

COMPANY relies on volunteers to maintain its operations. There are currently 46 volunteers who donate their time on a regular basis, which averages 839 hours per month. The COMPANY is open to receive donations/consignments on each Monday and is open for sales each Wednesday and Thursday. The volunteers do all of the necessary work to receive, inventory, tag, track and sell the items. Volunteers operate the cash registers and perform all customer support functions. The COMPANY has a part-time bookkeeper and a manager who are paid on a contract basis. These two paid positions provided support to the Board of Trustees through operations oversight and financial reporting, but they have very little direct customer interaction and do not take part in the day-to-day operation of the COMPANY. They work approximately 40 and 60 hours per month respectively.

Because the volunteer hours used to perform the exempt functions of the COMPANY. greatly exceed those of the part-time paid staff, I believe that their operation meets the criteria of 26 U.S.C.A Section 513(a) (1). This sections indicates that when "substantially all the work in carrying on such trade or business is performed for the organization without compensation", the operation is not considered an unrelated trade or business.

Under R865-19S-43B, a charitable organization is only required to collect and remit sales tax on sales income arising from unrelated trades or businesses. As the operation of COMPANY is not considered to be an unrelated trade or business per Sect. 513, their sales should be exempt from the collection of sales tax. Because the sales function of COMPANY, is made in the conduct of its regular charitable activities, COMPANY, also meets the requirements of Utah Code Ann. Sections 59-12-104(8)(a) and 59-12-104.1(1), making their sales exempt from the collection of sales tax.

RESPONSE LETTER

DATE

NAME

ADDRESS

Dear NAME,

We have received your request for a private letter ruling concerning the taxability of sales made by COMPANY. COMPANY is recognized by the Internal Revenue Service ("IRS") as a Section 501(c)(3) tax-exempt organization. You state that, in accordance with its constitution and by-laws, COMPANY operates a thrift store that sells not only donated items, but items left on consignment by authorized ORGANIZATION military and civilian personnel. On this basis, COMPANY has already applied for and received a sales tax exemption number from the Utah State Tax Commission. You ask whether, under these circumstances, sales made by COMPANY are exempt from taxation under the charitable and religious exemption provided in Utah Code Ann. §59-12-104(8)(a).

Because COMPANY is recognized by the IRS to have qualified as a Section 501(c)(3) entity, any sales it makes in the conduct of its regular functions and activities, as described in COMPANY'S constitution and by-laws, are considered exempt from Utah sales and use tax. The exceptions provided in Section 513(a) of the Internal Revenue Code and incorporated by reference in Utah Admin. Rule R865-19S-43(B) need only be examined should a Section 501(c)(3) entity engage in a trade and business unrelated to its regular functions and activities as evidenced by its constitution and by-laws.

You have provided the COMPANY by-laws that indicate that operating a thrift shop that sells consignment items is a regular function and activity of COMPANY. For this reason and based on the information provided, COMPANY'S sales are exempt from taxation because they are made in the conduct of an activity that is a regular function and activity of a Section 501(c)(3) entity. There is no need to examine whether the operation of the thrift store is an "unrelated" activity that meets one of the listed exceptions.

Should you have any other questions, please contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

03-005