Can a nonprofit like a Friends of the Library group get a Texas franchise-tax exemption, and does that also exempt its purchases from sales tax?

Plain-English summary

A nonprofit library-support group had requested a franchise-tax exemption under Tax Code Sec. 171.057 (nonprofit corporation organized to promote a county or city). The Comptroller granted a franchise exemption - but drew a clear line on sales tax.

• Franchise tax: exempt. The organization qualifies for exemption from the state franchise tax as a public interest organization, effective February 6, 2001. (If the Comptroller later has reason to believe it no longer qualifies, it will notify the registered agent that the status is under review.)
• Sales tax: not exempt. The organization does not qualify for a sales-tax exemption on its purchases. Professional and social groups, cemeteries, homeowners associations, and similar organizations do not meet the sales-tax exemption requirements.
• A path to sales-tax exemption. If the organization later obtains a federal income tax exemption under IRC Sec. 501(c)(3), (4), (8), (10), or (19), it can send the IRS determination letter and the Comptroller will reconsider the sales-tax exemption.

Currency note: The exemption was granted under the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). Exemption categories largely carried over, but confirm current law and continued qualification.

What this means for you

Nonprofit and community-support organizations

A franchise-tax exemption does not automatically make your purchases sales-tax free. This group cleared the franchise-tax bar as a public interest organization but still owed sales tax on what it bought - the sales-tax exemption is a separate test, generally met by holding a qualifying federal 501(c) exemption.

Tax professionals

Keep the two exemptions distinct: the state franchise exemption here rested on the organization's public-interest character, while a sales-tax exemption would require a federal 501(c)(3)/(4)/(8)/(10)/(19) determination letter. Advise clients to pursue the federal exemption if they want relief on purchases.

Common questions

Q: Did the library-support group get a franchise-tax exemption?
A: Yes - it qualified as a public interest organization, effective February 6, 2001.

Q: Are its purchases exempt from sales tax too?
A: No. It did not meet the sales-tax exemption requirements; that exemption is separate.

Q: How could it become sales-tax exempt?
A: By obtaining a federal exemption under IRC 501(c)(3), (4), (8), (10), or (19) and submitting the IRS determination letter for reconsideration.

Citations and references

Statute and federal reference:

• Texas Tax Code Sec. 171.057 - franchise-tax exemption for a nonprofit corporation organized to promote a county, city, or another area (the basis requested)
• Internal Revenue Code Sec. 501(c) - subsections (3), (4), (8), (10), (19) support a later sales-tax exemption request

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200105269L

Original ruling text

May 29, 2001

Dear **:

I am pleased to report COMPANY, Taxpayer Number **, qualifies for
exemption from state franchise tax as a public interest organization effective
February 6, 2001. If we have reason to believe the organization no longer
qualifies for exemption, we will notify the registered agent that the exempt
status is under review.

Although the corporation is now exempt from the payment of the franchise tax,
it does not qualify for sales tax exemption on its purchases. Professional and
social groups, cemeteries, homeowners associations and other like organizations
do not meet the requirements for sales tax exemption. If the corporation
subsequently requests and is granted a federal exemption under Section
501(c)(3), (4), (8), (10), or (19) of the Internal Revenue Code, please provide
us with a photocopy of the entire Internal Revenue Service (IRS) determination
letter, and we will reconsider exempting it from sales tax.

Information on these federal income tax exemptions can be obtained by calling
the IRS at 1-877-829-5500. Forms to apply for the federal income tax exemption
can be obtained by calling the IRS at 1-800-829-3676.

If your organization makes any sales of taxable items or services, please
contact our Tax Assistance Section at 1-800-252-5555 to determine if a sales
tax permit is needed. The direct number is 512/463-4600.

The organization must notify the Secretary of State if it changes its name,
registered agent, or registered office address.

I will be glad to help you if you have further questions. You may e-mail me at
, or you may call me toll free at 1-800-531-5441,
extension 3-4622.

Sincerely,

Stefanie B. Medack
Exempt Organizations Section

April 20, 2001

Controller of Public Accounts
Exempt Organizations Section
PO Box 13528
Austin, Texas 78711-3528

Gentlemen:

The COMPANY respectfully request an exemption from the Texas Franchise Tax
under Subsection B Sec. 171.057, Non-Profit Corporation Organized to Promote
County or City. A copy of the Articles of Incorporation are included as well
as a published bit of information on our principle objective i.e., an Outreach
Program for the shut-ins. This program which is now starting is an effort to
provide books, both paperback and hardbound, to people in nursing homes,
clients of Wheels-On-Wheels and those homebound in their own homes. We are an
all-volunteer organizations and our only source of income is in the form of
dues which start at $10 a year. We are planning book sales which we hope to
provide funds to purchase voice recorders so that our blind patrons can read
books by ear.

We do not have a budget and do not see such for the future. Our only reason
for being is to help the less fortunate of COUNTY. I will be the contact
person for any questions and my phone number is **.

Yours very truly,

COMPANY
**-Treasurer