Goodwill Stores, Commerciality and Unrelated Business Income
I tell you what, the state courts are really putting in the work to figure out what it really means to be tax exempt. Even though they are talking about property taxes, they are still providing more instruction on tax exemption law than at the federal level right now. I summarized four state supreme court opinions last week, each of which provokes and stimulates deep thinking about tax exemption. When and how may a state define a “church” for tax exemption, can a tax exempt religious organization discriminate in the hiring of co-religionists, does a charity forfeit tax exemption by selling its products or services at market price, and is charity a term exclusively reserved for organizations that provide goods or services below cost?
This week, the Pennsylvania Commonwealth Court engaged in an interesting debate about the commerciality doctrine and unrelated business. The Court ruled that Goodwill Industries of North Central Pa, Inc. deserved 100% charitable property tax exemption for the building pictured above from which Goodwill sells second hand haberdashery. My wife and I like treasure hunting so you can find us in Goodwill stores occasionally. I have been in enough of them that I think they all look pretty much the same. The stores are neat but usually not crowded with isles containing all kinds of old junk or treasure, depending on your outlook. Don’t go there for the shopping amenities. There are no free cheese or fruit samples, no soft music wafting, nobody offering free samples of fragrances or anything like that. It’s just bare bones, buy here pay here. Here is the majority’s description of how the operation is run:
Goodwill accepts all donated goods regardless of source, does not attempt to match its inventory with what is sold by other retailers, and does not aim to sell items considered fashionable. Id. at 182a-83a. Mr. Glasl estimated that less than 10% of Goodwill’s inventory is made up of trendy name brands. As to Goodwill’s pricing method, items are uniformly priced by category; for example, all short-sleeved shirts are priced identically regardless of brand. Mr. Glasl averred that Goodwill takes no measures to compete with other area businesses, does not price match other stores, does not study local or seasonal market trends, and does not set any benchmarks targeted at increasing market share. Id. at 187a-88a. In Mr. Glasl’s view, Goodwill is “totally different” from other local stores, as it simply collects donations that come in and lacks control of the pace of the flow or the composition of the items. Id. at 187a. Mr. Glasl indicated that advertising expenses represent less than 1% of Goodwill’s overall budget and is spent primarily on mission-based radio commercials.
The County, College Township and State College School District wanted to tax the store just like all the other department stores in the strip mall where the Goodwill Store is located. The issue was whether the store “competed” with its neighbors in the strip mall, including Big Lots, Dollar Tree, and Ross Dress for Less. The majority took the position that just because a nonprofit organization sells items to customers who might otherwise purchase the same items from for-profit entities doesn’t mean the organization is competing. The majority looked at how Goodwill Stores are operated, relative to for-profit neighbors. Merely offering the same items as a for profit store does not constitute competition. In doing so, the majority interweaved the commerciality doctrine” into the UBIT question. To be a taxable unrelated business activity, according to the court, the retail operation must be conducted in the manner of a for-profit entity selling the same goods and services.
The dissent’s counter-argument boils down to an assertion that Goodwill Stores offer customers optional prices with respect to the same goods and services they would obtain from a for profit-retailer, though the quality may not be as good. Goodwill necessarily takes customers from for-profit retailers and that is enough. The dissent doesn’t care how Goodwill is operated. If it takes customers from its for-profit neighbors, it is competing unfairly and should not be tax exempt. This is not a bad argument if you believe that all nonprofit commercial business activities should be taxed anyway. Here is what the dissent said:
Goodwill’s principal purpose is to provide “vocational services and employment opportunities for all people, who because of disabilities, disadvantages, or employment displacement, face barriers to competitive employment.” Further, per its bylaws, the “selling of articles new, reconditioned, assembled, or made by such persons and the performance of work related services by such persons as a part of their vocational rehabilitation shall be a necessary part of the rehabilitative, training, and educational service program of” Goodwill.
Here, it is unclear to me how Goodwill’s bylaws provide for the sale of used goods not “reconditioned, assembled, or made by” disadvantaged persons. Indeed, roughly half of the Property’s workers are not disabled or disadvantaged. Like the YMCA Court, which doubted whether the operation of its boardinghouse was “clearly necessary” to YMCA’s “work of charity or benevolence,” I also doubt whether Goodwill’s entire Property was “clearly necessary” to its defined charitable, principal purpose. Second, on this record, I question whether Goodwill’s Property does not compete with other area stores. The Property sells used clothing and other goods. The Property is located in a shopping mall along with other stores, including Big Lots, Dollar Tree, and Ross Dress for Less. In the “Centre Region” of the “State College area,” are stores that also sell used clothing and other goods: Plato’s Closet, Kid to Kid, Uptown Cheapskate, and Love-it.
Instantly, like YMCA, I would hold that Goodwill’s Property is “avowedly commercial in character.” It is commercial in character because Goodwill competes with other commercial, for-profit stores in the vicinity that also sell used clothing and other goods. In other words, like the nonprofit organizations in YMCA, Latrobe, and Jameson, Goodwill is competing for the same class of customers that would also shop at Plato’s Closet, Kid to Kid, Uptown Cheapskate, and other similar stores in the vicinity. See, e.g., Jameson, 753 A.2d at 904-05. . . . Because Goodwill sells used clothing and other goods in the same vicinity as commercial enterprises that also sell used clothing and other goods, it appears to me that Goodwill is using the Property “in such a manner as to compete with commercial enterprise.”
Goodwill would certainly never make it as a for-profit operation given its lack of inventory control, flat pricing, and complete absence of advertising or other activities designed to stimulate demand. Unless competition is proven by lost for-profit opportunities. Because if I find a good used pair of jeans or a Steeler jersey in a Goodwill Store, I will buy it. At a good price too, and I will not buy either of those items from Ross or Big Lots next door. Even if I can get better quality. The dissent takes a broader, not unreasonably policy-oriented approach. It concludes that a nonprofit retail activity competes with for-profit retail activity if the former offers the same goods and services as the latter. It can’t be denied that if I had not found some jeans at Goodwill, I probably would have purchased a pair from Big Lots or Ross.
Here is the thing, though. The commerciality doctrine is not logically related to unfair competition. So I think the dissent has the better doctrinal argument, though perhaps I don’t think the argument leads to the best outcome. C’mon. Are Ross and Big Lots somehow in danger of going out of business because of the tax advantage granted to Goodwill? That’s very unlikely. At the federal level, the “commerciality doctrine” is applied to determine fiduciaries’ true subjective intent. Are they out to make a profit or do good works? We can tell by looking at how they operate. We would expect them to operate just like profit-makers if they are just in it for the profit. As the dissent notes, the lack of commerciality indicia does not preclude competition. The real question is whether that competition is unfair. I don’t think so.
darryll k. jones