Does a professional membership association get the Texas franchise-tax exemption, and does calling itself 'educational' qualify it - or exempt it from sales tax?

Plain-English summary

A professional membership association (supporting licensed psychologists) sought Texas tax exemptions. The Comptroller granted the franchise-tax exemption on one basis, rejected another, and denied a sales-tax exemption.

• Franchise tax: exempt as a 501(c)(6). The association qualifies for exemption from the franchise tax under Sec. 171.063 as a 501(c)(6) organization, effective January 1, 1998.
• Not an "educational" organization. The association argued its main purpose is educational, but it does not qualify under Sec. 171.061. That exemption is limited to organizations whose activities are devoted solely to systematic instruction (a regular curriculum, qualified faculty, an enrolled student body at a place where instruction is regularly conducted) or solely to presenting public discussion groups, forums, panels, or lectures. A membership organization supporting a profession does not meet that definition.
• No sales-tax exemption. Professional associations, 501(c)(6) organizations, cemeteries, homeowners associations, and similar groups do not qualify for a sales-tax exemption, because the sales tax statute does not allow one for these organizations.
• Effective-date / filing wrinkle. The IRS determination showed a federal exemption effective March 1997, mid-privilege-period. Under Rule 3.541(b)(1), the association must pay through the end of that period, so it had to file and pay for Report Years 1996 and 1997 (and, per Sec. 171.0011, an additional-tax final report) - unless it got the IRS to correct the date to March 31, 1994 - before it could reinstate its charter with the Secretary of State.

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

Trade and professional associations

Holding a federal 501(c)(6) determination is enough for the Texas franchise-tax exemption under Sec. 171.063, but do not expect it to double as an "educational" exemption or a sales-tax exemption. The educational exemption is reserved for genuine schools and lecture/forum programs, and Texas simply does not exempt professional associations from sales tax.

Handling a mid-period exemption date

If your IRS exemption date lands in the middle of a franchise privilege period, you still owe through the end of that period. Getting the IRS to correct an erroneous effective date can eliminate report-year liabilities, but absent that correction you must file and pay the pre-exemption years.

Common questions

Q: On what basis was the association exempt from franchise tax?
A: As a federal 501(c)(6) organization under Sec. 171.063, effective January 1, 1998.

Q: Did claiming to be "educational" help?
A: No. Sec. 171.061 requires solely systematic instruction (or solely public discussion/forum/lecture programs); a professional membership organization does not qualify.

Q: Is the association exempt from sales tax?
A: No. The sales tax statute does not allow an exemption for professional associations / 501(c)(6) organizations.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.063 - franchise-tax exemption for a federally exempt organization (here IRC 501(c)(6))
• Texas Tax Code Sec. 171.061 - franchise-tax exemption for educational organizations (systematic instruction / public discussion programs)
• Franchise Tax Rule 3.541(b)(1), 34 Tex. Admin. Code - pay through the end of the privilege period if first eligible mid-period
• Texas Tax Code Sec. 171.0011 - additional tax and final report

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200206140L

Original ruling text

June 4, 2002

Dear **:

I am pleased to report **, Taxpayer Number **,
qualifies for exemption from the state franchise tax under Tax Code Section
171.063 as a 501(c)(6) organization effective January 1, 1998. Since the
account is in the process of being updated, you may receive franchise tax
notices for periods covered by the exemption. 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.

Rule 3.541(b)(1) states that if the first date the corporation was eligible for
exemption was not the beginning of a privilege period, the corporation must pay
through the end of such privilege period. Your Internal Revenue Service (IRS)
determination letter shows the effective date of the federal exemption is March
1997, which is in the middle of a privilege period. If you feel this should
have been March 31, 1994, please have the IRS pull the microfiche and issue a
letter reflecting this date. Once this is done, please send us a photocopy of
your corrected determination letter to the Exempt Organizations Section, Post
Office Box 13528, Austin, Texas 78711-3528. Otherwise, the corporation is
required to file the appropriate public information report(s), the franchise
tax report(s), and pay the amount due for Report Years 1996 and 1997. Also,
Section 171.0011 of the Tax Code requires corporations to pay an additional tax
and file a final report, which is enclosed. The corrected IRS determination
letter or the reports must be filed before the corporation can reinstate its
charter through the Secretary of State (SOS). Please call our Tax Assistance
Section (TAS) at 1-800-252-1381or at 512/463-4600 if you need forms or have
questions about the filing requirements for the periods not covered by the
exemption; the final return; or need assistance in completing a franchise tax
report(s).

Your letter states that this organization is a professional association and the
main purpose is educational.

For a corporation to qualify under Section 171.061 as an educational
organization, its activities must be devoted solely to systematic instruction,
particularly in the commonly accepted arts, sciences, and vocations, and has a
regularly scheduled curriculum, using the commonly accepted methods of
teaching, a faculty of qualified instructors, and an enrolled student body or
students in attendance at a place where the educational activities are
regularly conducted; or consist solely of presenting public discussion groups,
forums, panels, lectures, or other similar programs, with the presentations
providing instruction in the commonly accepted arts, sciences, and vocations.

The information provided confirms that **, is a membership
organization supporting the profession of licensed psychologists. Professional
associations do not meet the state's definition of an educational organization.
Additionally, professional associations, Section 501(c)(6), cemeteries,
homeowners associations, and other like organizations do not meet the
requirements for sales tax exemption because the sales tax statute does not
allow an exemption for these organizations.

The Tax Code, a complete set of rules, and a wealth of other information are
online at .

If your organization makes any sales of taxable items or services, contact TAS
at 1-800-252-5555 or 512/463-4600 to determine if it needs a sales tax permit.

The organization must notify the SOS if it changes its name, registered agent,
or registered office address. You may call the SOS at 512/463-5582, and the
website address is .

If you have any questions, you may e-mail us 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