I think I’m close to being done with my response to the IRS.  I did manage to come up with several “revenue rulings” where the IRS deemed retail enterprises to be eligible as tax exempt.  As far as I can tell, the key things that the IRS wants to see are limited scope (this is my terminology, not theirs) and scale (i.e., don’t open a Borders and say I’m doing tax exempt educational activities), substantial relationship to the charitable purpose, and causal relationship is good, too.  I did some research on tax exempt retail rulings and some on “unrelated business” income taxation.  Here’s just a taste of the kind of stuff I’ve been writing for the last two days (the following is a draft version):

That said, we believe that our narrow scope – limited to the topics of Islam and Muslims and limited to customers in the Houston area – prevents us from an operation broader than our charitable purpose, as occurred in Revenue Ruling 73-127, in which an organization operated a reduced-price retail grocery store, employing their disadvantaged clients as staff in order to provide them with training; the IRS determined that the retail operation in that case was an independent objective of the organization that went beyond their charitable purpose. 

Well, hopefully this is what the IRS examiner wants.  I’ve given it my best shot.  And I wrote incredibly detailed descriptions of 15 different educational activities we plan to engage in.  An example:

Activity (includes how and when) Prayer class.  This will be a weekly instruction session for new Muslims in how to perform ritual Islamic prayer.  It will include printed material explaining and demonstrating the movements and speech comprising formal prayer as well as tapes and CDs providing a visual demonstration. 
Target audience (for whom) New Muslims who don’t yet know how to perform ritual prayer or want to make sure they have complete understanding of prayer. 
Leader (by whom) A Muslim from the community.  For some sessions, we may have a male Muslim teacher lead male students in demonstrating prayer and a female Muslim teacher lead female students. 
Purpose/goals (why) Prayer is the second of the five “pillars” of Islam and is a requirement for practicing the faith.  Performing it correctly is a must.

I also included with every activity whether it will use books or tapes to further demonstrate that the retail and the educational both serve our charitable purpose.

As of now I’m maybe a couple edits away from completion.  It’s 12 pages long, 4000 words, and cites four separate IRS revenue rulings.  The best thing about writing it has been how it’s clarified in my mind the types of things we’ll be doing and how they’ll all pull together.  Well, that will be the second best thing if it helps us gain 501c3 exempt status.

*****
Light of Islam is a nonprofit bookstore whose mission is to provide the Houston-area community with accurate and accessible information about Islam and Muslims. Find out more at http://www.light-of-islam.org/.