What must a homeowners association show to get the Texas franchise tax exemption, and when has voting control passed to the owners?

Plain-English summary

A homeowners association (a 65-lot development) applied for the Texas franchise tax exemption. The Comptroller did not deny it, but said it needs more information first - centered on whether voting control has passed to the individual owners.

• The core test. Tax Code Sec. 171.082 requires that voting control of a homeowners, residential property owners, or residential condominium association be vested in the owners of the individual lots or units - not in a developer, declarant, bank, investor, an individual, or other party.
• What the association must submit. The Comptroller asked for copies of: a statement confirming the total lots (65); a list of all owners and the date each acquired their lot; if the "Election Date" has occurred (when Class B membership converts to Class A and the Class B member loses its five votes), the earliest of - (a) the last vacant lot being sold to an owner other than the Declarant, or (b) the Declarant notifying the board in writing of its election; and the date the individual resident owners gained voting control (over 50 percent of the votes).
• The alternative 501(c) route. A corporation holding a federal 501(c) exemption (e.g., 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), (25)) qualifies for the franchise tax exemption under Sec. 171.063, and a 501(c)(3), (4), (8), (10), or (19) organization qualifies for a sales tax exemption under Sec. 151.310 - in either case by submitting the IRS determination letter.
• Keep filing meanwhile. Until notified it is exempt, the association must file franchise tax reports and pay any amount due.

Currency note: This applies the pre-2008 franchise tax, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. The homeowners-association exemption continues under current law, but confirm its present terms.

What this means for you

Homeowners associations still under developer control

The exemption follows the transfer of voting control to the individual owners (more than 50% of the votes). Until the developer's or declarant's weighted "Class B" votes convert to ordinary "Class A" votes at the Election Date, the association is not yet exempt and must keep filing. Track your declaration's exact conversion trigger and document when owner control began.

Boards preparing an exemption request

Gather the records the Comptroller lists - total lots, an owner roster with acquisition dates, the Election Date facts, and the date owners crossed 50% control. Providing those up front avoids the back-and-forth this letter reflects.

Accountants advising associations

If the association already has (or can get) a federal 501(c) exemption, that is often the faster route - Sec. 171.063 (franchise) and Sec. 151.310 (sales tax) qualify it on the IRS determination letter alone, without proving the voting-control timeline.

Common questions

Q: What is the key requirement for a homeowners association franchise tax exemption?
A: Voting control must be vested in the individual lot or unit owners (over 50% of the votes), not in the developer or declarant (Sec. 171.082).

Q: What documents does the Comptroller want?
A: A statement of total lots, an owner list with acquisition dates, the Election Date facts (Class B five-vote conversion), and the date owners gained over 50% of the votes.

Q: Is there a faster path to exemption?
A: Yes. A federal 501(c) exemption qualifies the association under Sec. 171.063 (franchise) and Sec. 151.310 (sales tax) on the IRS determination letter alone.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.082 - franchise tax exemption for a homeowners/residential property owners/residential condominium association; voting control must be vested in the individual lot or unit owners
• Texas Tax Code Sec. 171.063 - franchise tax exemption for a corporation holding an IRS 501(c) exemption
• Texas Tax Code Sec. 151.310 - sales and use tax exemption for a qualifying IRS 501(c)(3),(4),(8),(10),(19) organization

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200208339L

Original ruling text

August 9, 2002

Dear **:

Thank you for your request for franchise tax exemption for OWNER'S ASSOCIATION,
Taxpayer Number **. As documentation to support your request for
exemption, you provided copies of the file stamped Articles Of Incorporation
that states the corporation's purpose, Declaration that reflects the
association is restricted for residential purposes only, and a plat that shows
a total number of lots or units within the development as 65. Before we can
proceed with your request, we will need additional information.

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. The request for exemption should
include the following (copies, not originals):

• A statement that confirms the total number of lots or units within the
  development as 65;

• A list of all owners and the date each acquired the lot or unit;

• If the Election Date has occurred (Class B membership is converted to Class
  A membership on the Election Date and the Class B member is no longer entitled
  to five votes), indicate the earliest of the dates:

• If the last vacant lot (identify the lot) was sold to an Owner, other than
  the Declarant; or

• If the Declarant notified the Board in writing of its election to cause the
  Election to occur (send a copy of the document); and

• The date the individual resident owners gained voting control (over 50
  percent of the votes).

Section 171.063 of the Tax Code provides for a franchise tax exemption to a
corporation that has applied and obtained a federal exemption under Section
501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25) of the
Internal Revenue Code (IRC). Also, Tax Code Section 151.310 allows for an
exemption to an organization that has qualified under IRC Section 501(c)(3),
(4), (8), (10), or (19). If the corporation has applied and obtained a federal
exemption under one of these IRC sections, the only documentation you need to
provide our office is a copy of the Internal Revenue Service (IRS)
determination letter. For information on how to apply for a federal exemption,
call the IRS at 1-877-829-5500 or 1-800-829-3676 to get the application forms.

Send the additional information along with a copy of this letter to the Exempt
Organizations Section, Post Office Box 13528, Austin, Texas 78711-3528. Until
you are notified the corporation is exempt from the franchise tax, you are
responsible for filing the appropriate franchise tax reports and paying the
amount due. For questions about the franchise tax filing requirements, please
contact our Tax Assistance Section at 1-800-252-1381, or directly at
512/463-4600.

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