When does a homeowners association's Texas franchise-tax exemption take effect, and what must it still file to reinstate its charter?

Plain-English summary

A homeowners association asked the Comptroller for a franchise-tax exemption letter to help reinstate its charter, and supplied its articles, bylaws, declaration, plat, and an owner list. The Comptroller granted the exemption but with a specific effective date and remaining filing obligations.

• The voting-control test. Tax Code Sec. 171.082 exempts homeowners, residential property owners, and residential condominium associations, but among other requirements the voting control of the organization must be vested in the owners of the individual lots or residential units - not in a developer, declarant, bank, investor, an individual, or other party.
• When the test was met. From the association's documents, the individual resident owners gained voting control on June 15, 1999.
• Effective date is prospective. The exemption took effect January 1, 2000 - the beginning of the franchise tax year immediately following the date the requirement was met. Under Rule 3.541(b)(1), if the first date of eligibility is not the beginning of a privilege period, the corporation must pay through the end of that privilege period.
• What it still owed. To get a tax clearance certificate for reinstatement through the Secretary of State, the association had to file the appropriate public information reports and franchise tax reports and pay the amounts due for Report Years 1997 and 1999, and (per Sec. 171.0011) pay an additional tax and file a final report.
• Sales tax is separate. Homeowners associations and similar groups do not get a sales tax exemption automatically. Only an organization that obtains a federal exemption under IRC 501(c)(3), (4), (8), (10), or (19) can be exempt from sales and use tax under Sec. 151.310(a)(2); the association would need to send its IRS determination letter to be reconsidered for that.

Currency note: This letter describes the pre-2008 franchise tax (House Bills 3 and 3928 replaced it with the margin tax effective January 1, 2008). The homeowners-association exemption continues under current law, but confirm the present terms and how effective dates work now.

What this means for you

Homeowners associations seeking (or reinstating) an exemption

Qualification hinges on who holds voting control. The exemption starts at the beginning of the franchise tax year after owners take control - not retroactively - so periods before that remain taxable. If your charter was forfeited, expect to clear the pre-exemption report years (and an additional-tax final report) before the Secretary of State will reinstate you.

Boards and managing agents

Document the exact date individual owners gained majority voting control; that date drives the exemption's effective date and which report years you still must file and pay.

Common questions

Q: What is the key requirement for the Sec. 171.082 HOA exemption?
A: Voting control must be vested in the owners of the individual lots or residential units - not a developer, declarant, bank, investor, individual, or other party.

Q: Why was the exemption effective January 1, 2000 rather than back to 1999?
A: The effective date is prospective to the beginning of the franchise tax year immediately following the date the association met the requirement (owners gained control June 15, 1999).

Q: Does the franchise-tax exemption also exempt the HOA from sales tax?
A: No. Sales tax exemption requires a federal exemption under IRC 501(c)(3), (4), (8), (10), or (19) and a separate determination under Sec. 151.310.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.082 - franchise-tax exemption for homeowners/residential property owners/condominium associations; voting-control requirement
• 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
• Texas Tax Code Sec. 151.310(a)(2) - 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/200206200L

Original ruling text

June 13, 2002

Dear Mr. **:

Thank you for your letter. You ask for a franchise tax exemption letter for
NAME Homeowners Association for reinstatement of its charter. As documentation
to support the request for a franchise tax exemption effective date of May 11,
1994, you provided copies of the corporation's Articles of Incorporation,
Bylaws, Declaration, plat, and a list of all the owners and the date each
acquired their lot or unit.

Tax Code Section 171.082 outlines the requirements for a franchise tax
exemption for homeowners, residential property owners, and residential
condominium associations. Among other requirements, the voting control of the
organization must be vested in the owners of individual lots, or residential
units. The voting control cannot be vested in a developer, declarant, bank,
investor, an individual, or other party.

Based on the above information that you provided our office, the individual
resident owners gained voting control on June 15, 1999.

Accordingly, NAME Homeowners Association, Taxpayer Number ****, qualifies
for exemption from state franchise tax under Section 171.082 as a homeowners'
association effective January 1, 2000.

The effective date is prospective to the beginning of the franchise tax year
immediately following the date the corporation met the requirements for
exemption under Section 171.082 as a homeowners' association. 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. The corporation must, therefore, file the
appropriate public information reports, the franchise tax reports, and pay the
amount due for Report Years 1997 and 1999 before it can receive a tax clearance
certificate for reinstatement of its charter through the Secretary of State.
Also, Section 171.0011 of the Tax Code requires corporations to pay an
additional tax and file a final report, which is enclosed. Please call our Tax
Assistance Section at 1-800-252-1381 or directly 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
the franchise tax reports.

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

It may interest you to know that professional and social groups, 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. However, Tax Code Section 151.310
(a)(2) provides for an exemption from the Texas sales and use tax to any
organization that has qualified under the provisions of the Internal Revenue
Code (IRC) 501(c)(3), (4), (8), (10), or (19). If the corporation subsequently
requests and is granted a federal exemption under one of the qualifying
sections of the IRC, please send a copy of the entire determination letter to
the Exempt Organizations Section, Post Office Box 13528, Austin, Texas
78711-3528. Once this is done, we will be happy to reconsider an exemption
from sales tax for this corporation.

If your organization sells taxable items or services, call our Tax Assistance
Section at 1-800-252-5555 or 512/463-4600 to determine if a sales tax permit is
needed.

We will notify the registered agent that the exempt status is under review if
we have reason to believe the organization no longer qualifies for exemption.
Also, the organization must notify the Secretary of State 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 receive franchise tax notices for periods covered by the exemption or
you have any questions, you may e-mail us at or call
me toll free at 1-800-531-5441, extension 5-9704 or 512/305-9704.

Sincerely,

Janice Womack
Exempt Organizations Section