Does a nonprofit providing housing and job-training services qualify for the Texas franchise-tax charitable exemption?

Plain-English summary

A nonprofit corporation requested a Texas franchise-tax exemption as a charitable organization. The Comptroller found its activities too broad to qualify under the state charitable exemption, while pointing to an alternative federal-exemption path.

• The narrow charitable test (Sec. 171.062). To qualify, a corporation must devote all or substantially all of its activities to the alleviation of disease, poverty, pain and suffering by providing food, clothing, drugs (prescription medication), treatment (medical treatment), psychological counseling, or shelter - directly to indigent or similarly deserving members of society for little or no charge.
• Why this organization did not fit. Its stated activities were broader: housing services for youth/women/elderly/homeless seeking to acquire and renovate existing structures; moderate/low-income housing units; and intake, assessment, training, and job placement. Based on that, it did not meet the Sec. 171.062 requirements.
• The alternative path. The franchise tax statute exempts organizations federally exempt under IRC 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25) (Sec. 171.063), and the sales tax statute exempts those under IRC 501(c)(3), (4), (8), (10), or (19) (Sec. 151.310). If the organization obtains such a federal determination and sends the IRS determination letter, the Comptroller will reconsider its exempt status.
• Meanwhile. If a franchise tax report is or becomes due before the exemption is granted, the organization should file and pay, and may request a refund if the exemption is later granted.

Currency note: This letter describes the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The exemptions continue under current law; confirm present terms.

What this means for you

Housing, community-development, and workforce nonprofits

Texas's state charitable exemption is deliberately narrow - it targets direct relief of disease, poverty, and suffering (food, clothing, medicine, treatment, counseling, shelter) given free or nearly free to the needy. A broad mission that includes housing development and job training generally will not fit, even when the work is plainly worthy.

Getting to exempt another way

The practical route for many such nonprofits is a federal 501(c) determination, which then opens the Texas franchise-tax exemption under Sec. 171.063 (and, for the narrower categories, the sales-tax exemption under Sec. 151.310). Keep filing and paying until the state confirms the exemption, then claim a refund.

Common questions

Q: What does the Sec. 171.062 charitable exemption require?
A: Devoting all or substantially all activities to relieving disease, poverty, pain, and suffering by directly providing food, clothing, drugs, treatment, counseling, or shelter to the indigent for little or no charge.

Q: Why didn't a housing and job-training nonprofit qualify?
A: Its purposes and activities were broader than that narrow charitable definition.

Q: Is there another way for it to become exempt?
A: Yes - obtain a federal 501(c) determination; that supports the franchise-tax exemption under Sec. 171.063 and, for certain categories, the sales-tax exemption under Sec. 151.310.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.062 - charitable-organization franchise-tax exemption (direct relief of disease, poverty, pain, and suffering)
• Texas Tax Code Sec. 171.063 - franchise-tax exemption for organizations federally exempt under the listed IRC 501(c) paragraphs
• Texas Tax Code Sec. 151.310 - sales/use tax exemption for organizations qualified under IRC 501(c)(3), (4), (8), (10), or (19)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200203048L

Original ruling text

March 19, 2002

Dear **:

Thank you for your letter requesting exemption for **.

Although the organization is fulfilling a very worthy cause, it appears the
overall purpose and activities of the corporation are broader than those of an
organization that would qualify for exemption under the state definition of a
charitable organization.

To qualify for exemption under Section 171.062, the corporation must be
devoting all or substantially all of its activities to the alleviation of
disease, poverty, pain and suffering by providing food, clothing, drugs
(prescription medication), treatment (medical treatment), psychological
counseling, or shelter directly to indigent or similarly deserving members of
society for little or no charge. According to the information submitted,
however, the corporation will provide the following:

• Housing services for youth, women, elderly, homeless, etc. seeking to
  acquire existing structures to renovate;

• Housing units for moderate/low income households; and

• Intake, assessment, training, and placement (skilled self professions or
  jobs).

Based on the information provided, the corporation does not meet the
requirements for exemption under Section 171.062 of the franchise tax statute.
However, the franchise tax statute provides for an exemption to an organization
that has qualified under Section 501(c)(2), (3), (4), (5), (6), (7), (8), (10),
(16), (19), or (25) of the Internal Revenue Code (IRC), and the sales tax
statute provides for an exemption to those that have qualified under IRC
Section 501(c)(3), (4), (8), (10), or (19). If in the future the corporation
applies for and obtains a federal exemption under one of these sections, please
send us a copy of the Internal Revenue Service determination letter to the
Exempt Organizations Section, Post Office Box 13528, Austin, Texas 78711-3528.
Once this is done, we will reconsider its exempt status on the basis of its
federal exemption.

If the franchise tax report is due or becomes due before the exemption has been
granted, you should file the report and pay the appropriate amount of tax. You
may request a refund if the franchise tax exemption is granted.

If you have any questions, you may e-mail me at or
call me toll free at 1-800-531-5441, extension 5-9704. My Austin number is
512/305-9704.

Sincerely,

Janice Womack
Exempt Organizations Section