Helen Beaton, manager of the Barnardo's shop in Selkirk, Scotland, wanted to sell explicit DVDs and videos in a boutique called Moist in neighbouring Galashiels.
But the charity reacted by ordering an internal investigation. Gerard Cousins, head of retail at Barnardo's, said: "We take seriously any action in relation to this that could impact on the organisation's reputation."
Moist already sold erotic clothing and sex aids, but it needed a licence for the DVDs. Beaton told a local council sub-committee her customers were "normal, respectable people" who wanted pleasure.
But the licence was refused because the location of the shop was deemed "unsuitable for such use".
"I am disappointed but, given the repressed attitude to sex that so many older people seem to have in the Borders, not totally surprised," said Beaton.