Selling donated goods at a charity-operated store may be an attractive option for nonprofits that believe they can attract a regular stream of quality merchandise, and that want to take on the complicated task of managing a retail store. In the course of evaluating the merits of opening a thrift store, there is a wide range of topics the nonprofit will need to consider. These are just a few examples:
- Sales tax. Even though a nonprofit doesn’t pay state or federal income taxes it probably still is required to pay state and local sales taxes. Sales of almost every kind of tangible property are subject to sales tax unless they qualify under the state’s list of exemptions and exclusions. Note that nonprofit thrifts are granted an exemption, but only for organizations raising funds for specific purposes, such as to support veterans or health care for people with HIV/AIDS.
- Inventory management. Thrift stores can suffer from an embarrassment of riches, with such an influx of donations that staff simply can’t handle it all. Just like every retailer, a thrift store has to devote significant resources to planning for how to manage inventory, including where it will be stored and how it will be priced.
- Employment and volunteer complications. By opening a thrift shop a nonprofit will need to hire employees and probably recruit volunteers to help out as well. Federal, state, and local employment laws can be a significant source of risk for nonprofits that don’t fully account for all their obligations. For example, employees will need to be covered by workers’ compensation insurance.
- Legal form. Due to the variety of ways that operating a storefront increases a nonprofit’s legal risks it is important that the store itself be operated under a legal entity that can “own” the liability risks. There are several options to choose from when it comes to forming a special purpose legal entity. An attorney can explain how these differ and which one may be the right fit for a given organization.
The Church Law Center of California provides legal counsel to churches and other nonprofits. We can help managers of nonprofits sort through the pros and cons of opening a thrift store and help them comply with the necessary legal requirements. Call us at (949) 689-0437 or reach out to us through our contact page.