Q) Why is database needed?

This registers the models to vuex store.

Q) Where is the data stored inside vuex?

entities inside vuex store.

Q) Where is the official docs?

https://vuex-orm.org/guide/model/database-registration.html

Q) What is this file structure based on?

https://github.com/vuex-orm/vuex-orm-examples-nuxt/tree/master/database