Does an unincorporated nonprofit association have to file or pay Texas franchise tax, and must it send proof of its nonprofit status?

Plain-English summary

An unincorporated nonprofit association asked whether it must file and pay the annual franchise tax, and whether it must send proof of its nonprofit status. The Comptroller's answer: the franchise tax does not reach it at all.

• Not imposed on unincorporated entities. The Texas franchise tax is not imposed on unincorporated entities or associations. It is a privilege tax on corporations (including banking corporations and LLCs) chartered in Texas, and on non-Texas corporations that hold a Certificate of Authority or do business in Texas without one.
• No proof needed. Because the tax does not apply, the association need not send nonprofit-status proof to the Comptroller for franchise-tax purposes.
• If it were incorporated. An incorporated entity could claim a franchise-tax exemption if it received a federal income tax exemption under IRC Sec. 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25), and a sales-tax exemption under 501(c)(3), (4), (8), (10), or (19) - by sending the Comptroller a copy of the entire current IRS determination letter.

Currency note: This letter was issued under the pre-2008 franchise tax, replaced by the margin tax effective January 1, 2008 (House Bills 3 and 3928). The margin tax reaches a broader set of entities, including many partnerships and other unincorporated entities; confirm current law before relying on the "unincorporated = not taxed" point.

What this means for you

Unincorporated nonprofits and associations (pre-2008)

If your group was unincorporated, the old franchise tax did not apply - there was nothing to file or exempt. This is an important trap today: the margin tax that replaced it does reach many unincorporated entities, so do not assume an unincorporated group is automatically outside the tax now.

Tax professionals

The letter distinguishes taxability (unincorporated entities are outside the pre-2008 franchise tax entirely) from exemption (which matters only once an entity is a corporation). For a current client, re-run the analysis under the margin tax, whose taxable-entity definition is far broader.

Common questions

Q: Does an unincorporated nonprofit association pay the (pre-2008) Texas franchise tax?
A: No. The franchise tax was not imposed on unincorporated entities or associations.

Q: Did it need to send proof of nonprofit status?
A: No - because the tax did not apply, no exemption filing was needed.

Q: What if the group incorporates?
A: Then it could seek a franchise-tax exemption based on a federal 501(c) determination letter in the listed subsections.

Citations and references

Federal reference:

• Internal Revenue Code Sec. 501(c) - federal exemption categories: (2), (3), (4), (5), (6), (7), (8), (10), (16), (19), (25) for franchise tax; (3), (4), (8), (10), (19) for sales tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200108438L

Original ruling text

August 24, 2001

TO: **

Dear **:

Thank you for your recent email. You ask if an unincorporated nonprofit
association is required to file an annual corporation franchise tax and pay any
taxes if applicable. You also ask if the organization must send proof of its
nonprofit status to the comptroller's office.

Texas franchise tax is not imposed on unincorporated entities or associations.
The franchise tax is a privilege tax assessed against corporations, including
banking corporations and limited liability companies, that are chartered in
Texas, and against non-Texas corporations that have a Certificate of Authority
to do business in Texas or that do business in Texas without a Certificate of
Authority.

However, if the association was incorporated, there is an exemption provided in
the Tax Code for a corporation that has applied for and received a federal
income tax exemption from the Internal Revenue Service (IRS) under the Internal
Revenue Code (IRC) Section 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16),
(19), or (25).

Additionally, exemption from the payment of the Texas sales and use tax is
possible for a nonprofit organization that has applied for and received a
federal income tax exemption under IRC Section 501(c)(3), (4), (8), (10), or
(19).

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 unincorporated nonprofit association obtains one of the appropriate
federal exemptions, you may request exemption from the sales tax. You must
provide us with a photocopy of the entire, current IRS determination letter
that granted the federal exemption.

Please send your request to the following address:

Texas Comptroller
Exempt Organizations Section
Post Office Box 13528
Austin, Texas 78711-3528

If you have any questions, please do not hesitate to call. My phone number is
1-800-531-5441, extension 3-2995. The local number is 512/463-2995.

Sincerely,

Irene Cage
Exempt Organizations Section

Is an unincorporated nonprofit association required to file and/or pay
franchise taxes? Does the association have to send proof of its nonprofit
status to the office of the comptroller?