How does a corporation obtain an exemption from the Texas franchise tax, and what does it have to submit?

Plain-English summary

A taxpayer asked for the correct method to get a franchise-tax exemption. The Comptroller explained that Texas has no separate application form - you apply by filing evidence that you qualify.

• The mechanism. Under Tax Code Sec. 171.051, a corporation applies for exemption by filing evidence of its qualification, and Franchise Tax Rule 3.541 provides the guidelines.
• Documents depend on the basis. The specific exemption a corporation qualifies for determines what documentation must accompany the request.
• Example (federal 501(c) organizations). A corporation exempt under IRC Sec. 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25) submits a copy of its IRS determination letter plus a request that includes the taxpayer number, charter number, and a daytime phone number of a contact person.
• Where to send it. Mail to the Texas Comptroller, Exempt Organizations Section, P.O. Box 13528, Austin, Texas 78711-3528.

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 exemption categories carried over, but the procedure and forms have changed; confirm current requirements with the Comptroller.

What this means for you

Nonprofits and other exemption-eligible corporations

There is no single "exemption application." You establish exemption by proving qualification - most commonly, for a federally exempt 501(c) organization, by sending in your IRS determination letter with your identifying numbers and a contact. The paperwork varies with the exemption you rely on.

Tax professionals

Match the client's exemption basis to the documentation Rule 3.541 requires; a federal 501(c) determination letter is the typical proof for the listed subsections. Because the letter predates the margin tax, verify the current filing channel and any updated forms before submitting.

Common questions

Q: Is there a franchise-tax exemption application form?
A: No. Under Sec. 171.051 you apply by filing evidence of your qualification, following Rule 3.541.

Q: What does a 501(c) organization send?
A: A copy of its IRS determination letter plus a request listing the taxpayer number, charter number, and a daytime contact phone number.

Q: Where does the request go?
A: The Texas Comptroller, Exempt Organizations Section, P.O. Box 13528, Austin, Texas 78711-3528.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.051 - a corporation applies for exemption by filing evidence of its qualification
• Franchise Tax Rule 3.541, 34 Tex. Admin. Code - guidelines for the exemption application process
• Internal Revenue Code Sec. 501(c) - federal exemption categories whose IRS determination letter supports a Texas 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/200109469L

Original ruling text

September 18, 2001

TO: <**>

Dear Sir:

Thank you for your recent e-mail. Your question concerns the correct method to
obtain exemption from franchise tax.

Texas does not have an application per se to exempt a corporation from
franchise tax. Section 171.051 of the Texas Tax Code allows for a corporation
to apply for exemption by filing evidence of the corporation's qualification.
Franchise Tax Rule 3.541 Exemptions, provides guidelines for the application
process. The provision for exemption that your corporation qualifies for will
determine the documentation that must be submitted with your request for
exemption.

The Texas Tax Code and rule 3.541 are available on-line at
.

For example, if the corporation has qualified under Section 501(c)(2), (3),
(4), (5), (6), (7), (8), (10), (16), (19), or (25) of the Internal Revenue Code
(IRC), you must provide a copy of the determination letter that was issued by
the Internal Revenue Service along with a request for exemption that includes
the taxpayer number; charter number and a daytime telephone number of a person
that can be contacted. The information should be mailed to the following
address:

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

This opinion is based on the information presented. If there are additional or
different facts, the opinion could change.

If you have any questions, please do not hesitate to call me toll free at
1-800-531-5441, extension 3-2995. The direct number is 512/463-2995.

Sincerely,

Irene Cage
Tax Policy Division