A single-member LLC is disregarded for federal tax and shares its tax-exempt owner's status - is it exempt from Texas franchise tax and sales tax too?

Plain-English summary

A single-member LLC that is a federally disregarded entity of a tax-exempt owner wanted to know whether it, too, is exempt from Texas taxes. The Comptroller drew a sharp line between the franchise tax (exempt) and the sales and use tax (not exempt).

• Franchise tax: exempt. The LLC qualifies for exemption from the Texas franchise tax as a public interest organization under Tax Code Sec. 171.057, effective February 7, 2001. The agency can review that status later if it has reason to believe the LLC no longer qualifies.
• Sales tax: no comparable exemption. The Texas sales tax statute provides no equivalent exemption, so the LLC does not qualify for exemption from sales and use tax.
• Why sharing the owner's status doesn't help. For federal purposes the LLC elected to be a disregarded entity and is treated by the IRS as an integral part (a "tax-exempt activity") of its sole member - not an organization with its own 501(c)(3) determination letter. Under Texas law, a separate exemption is not granted to an activity, department, branch, or integral part of an exempt organization, so a sales-tax exemption letter cannot be issued in the LLC's name.
• Two ways to still buy tax-free. (1) The LLC may buy as an agent of the sole member - the items/taxable services must relate to the member's exempt purpose (not personal benefit), and the LLC must issue the exemption certificate in the sole member's name. (2) The sole member may buy the items tax-free in its own name and then transfer them to the LLC.

Currency note: This applies the pre-2008 franchise tax. It was replaced by the margin tax (House Bills 3 and 3928, effective January 1, 2008), but the core point - that a franchise tax exemption does not carry a matching sales tax exemption - continues to matter. Confirm the current terms of Sec. 171.057 and the sales-tax rules.

What this means for you

Nonprofits using a single-member LLC

Do not assume that a disregarded LLC "inside" your exempt organization automatically buys tax-free. A Texas franchise tax exemption is not a sales tax exemption, and Texas will not issue a sales-tax exemption letter to the LLC itself. To purchase without tax, run the buy through the member's exemption - either the LLC acts as the member's agent (certificate in the member's name) or the member buys and transfers the goods.

Accountants advising exempt organizations

Separate the two taxes. Confirm the franchise exemption (here, Sec. 171.057), then handle sales tax through agency or member-purchase mechanics, keeping exemption certificates in the exempt member's name and tied to its exempt purpose.

Common questions

Q: If my LLC is exempt from Texas franchise tax, is it also exempt from sales tax?
A: No. There is no comparable sales-tax exemption, and Texas will not issue a sales-tax exemption letter in a disregarded LLC's own name.

Q: The IRS treats my LLC as part of my exempt organization - doesn't that exempt it?
A: Not for Texas sales tax. Texas does not grant a separate exemption to an integral part or activity of an exempt organization.

Q: How can the LLC buy taxable items without paying sales tax?
A: Either as the sole member's agent (certificate in the member's name) or by having the member buy tax-free and transfer the items to the LLC.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.057 - franchise tax exemption for a public interest organization
• Internal Revenue Code Sec. 501(c)(3) - federal tax-exempt determination (referenced to contrast the LLC's lack of its own determination letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200208385L

Original ruling text

August 22, 2002

Dear **:

** (LLC), Taxpayer Number **, qualifies for exemption
from the Texas franchise tax as a public interest organization under Tax Code
Section 171.057 effective February 7, 2001. 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.

Although the LLC qualifies for exemption from the franchise tax as a public
interest organization, the Texas Sales Tax Statute does not provide a
comparable exemption. Consequently, the LLC does not qualify for exemption
from the Texas sales and use tax.

For federal tax purposes, the LLC has elected to be treated as a disregarded
entity, and therefore, is recognized by the Internal Revenue Service (IRS) as
an integral part of the sole member and referred to as a tax-exempt activity of
its sole member. Although the LLC may be enjoying/sharing the exempt status of
the tax-exempt sole member for federal tax purposes, it is doing so as a
tax-exempt activity of the sole member and not as an organization that has
applied for and received its own letter of determination under Internal Revenue
Code Section 501(c)(3).

Under Texas law, a separate exemption is not granted to an activity,
department, branch, or integral part of an exempt organization. Consequently,
a letter of exemption from sales tax cannot be issued in the LLC's name.

There are two other options that allow the LLC to issue sales tax exemption
certificates when purchasing taxable items that relate to the purpose of the
exempt organization.

First option. The LLC may make tax-free purchases as an agent of the sole
member. When acting as an agent of the sole member, the items or taxable
services purchased by the LLC must relate to the exempt purpose of the sole
member and not be used for the personal benefit of an individual or private
party. And, the LLC must issue the sales tax exemption certificate in the name
of the sole member.

Second option. The tax-exempt sole member may issue a sales tax exemption
certificate in its own name, make tax-free purchases that relate to its exempt
purpose, and then transfer the items to the LLC.

Enclosed is an exemption certificate that may be issued when following either
of the above two options. You can make as many copies of the certificates as
you need. The form is available online at
.

If the organization sells taxable items or services, call Tax Assistance at
1-800-252-5555 or 512/463-4600 to determine if it needs a sales tax permit.

The corporation must notify the Texas Secretary of State if it changes its
name, registered agent, or registered office address. The number is
512/463-5582, and the Internet address is .

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

Sincerely,

Janice Womack
Exempt Organizations Section