Can a wholly-owned LLC subsidiary of a tax-exempt charter school issue sales tax exemption certificates in the school's name when making purchases on the school's behalf?

Plain-English summary

The Texas Comptroller ruled that the charter school's wholly owned, federally disregarded LLC may issue sales tax exemption certificates in the school's name when it acts as the school's authorized agent. The ruling limits that result to purchases related to the school's exempt purpose and not for anyone's private benefit.

The ruling discusses the agency test and the authorized-agent rule, but it does not find that the LLC satisfies every element of the agency test as a general matter. Its conclusion is that the LLC may issue certificates when acting as the school's authorized agent. The LLC's separate legal form, wholly owned status, and federal disregarded-entity treatment do not by themselves prevent that use of the certificates on the described facts.

What this means for you

Tax-exempt organizations using subsidiary LLCs for purchases

A subsidiary's separate legal form does not by itself answer whether it may issue an exemption certificate for its parent. Under this ruling, the certificate may be issued in the exempt school's name when the subsidiary is acting as the school's authorized agent and the purchase relates to the school's exempt purpose.

Charter schools and nonprofits with affiliated entities

The certificate does not make every purchase exempt. The purchase must relate to the exempt organization's purpose and may not be for a private person's benefit.

Accountants and tax professionals

The ruling applies Section 151.310 and Rule 3.322's authorized-agent provisions to the facts presented. It also discusses the agency principles in the cited Comptroller decision and earlier STAR guidance.

Common questions

Q: Does a subsidiary LLC have to be the same legal entity as the exempt organization to issue an exemption certificate for it?
A: No. This ruling says the subsidiary may issue a certificate in the school's name when acting as the school's authorized agent. The ruling is limited to the taxpayer and facts presented.

Q: Does federal disregarded-entity status decide the Texas sales tax result?
A: No. The ruling says that status does not change its analysis of the described agency and exemption-certificate arrangement.

Q: Are all purchases made by the subsidiary automatically exempt?
A: No. The purchase must relate to the exempt organization's purpose and not provide a private benefit.

Q: Can another exempt organization with a similar subsidiary structure rely on this ruling?
A: No. It is binding on the Comptroller only for the requesting taxpayer and facts presented, and another taxpayer cannot rely on it.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.310(a)(2) (Religious, Educational, and Public Service Organizations)
• 34 Tex. Admin. Code § 3.322(b)(5) (application requirement for federal 501(c)(3) exempt entities); (e) (exempt-status determination); (g)(1) (authorized-agent exemption certificates)
• Comptroller's Decision No. 47,797 (2008) (three-element agency relationship test)
• STAR Accession No. 9805512L (May 13, 1998) (authorized agent, definition)
• STAR Accession No. 201209603L (Tax Policy News, September 2012) (authorized agent as employee or authorized purchaser)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201710014L

Original ruling text

October 19, 2017

RE: Private Letter Ruling No. 2017010137

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your initial request dated March 30, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You are requesting guidance on when an entity that is disregarded for federal income tax purposes may act as the authorized agent of its sole member and issue a sales and use tax exemption certificate in the sole member’s name.

Facts Presented

The relevant facts are based on information contained in your private letter ruling request and the following documents, which you submitted with your private letter ruling request: (1) Internal Revenue Service’s June 27, 2000 determination letter for COMPANY A; (2) COMPANY A’s Contract for Charter dated June 21, 2000 between COMPANY A and the Texas State Board of Education; and (3) COMPANY B’s Certificate of Formation, dated October 20, 2016.

COMPANY A is an exempt 501(c)(3) organization and Texas open-enrollment charter school. COMPANY A is part of the Texas public school system. COMPANY A also has a charter contract with the Texas State Board of Education.

Based on its federal exempt status as a 501(c)(3) organization, COMPANY A applied for and was informed by the Comptroller in writing that it qualified for tax exempt status in accordance with Rule 3.322(e) (Exempt Organizations).

COMPANY B is a Texas limited liability company. COMPANY B’s Certificate of Formation lists COMPANY A as its sole member. For federal tax purposes, COMPANY B elects to be treated as a disregarded entity.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: May COMPANY B issue a sales tax exemption certificate in the name of COMPANY A when acting as an agent of COMPANY A, provided that the purchases relate to COMPANY A’s exempt purpose and are not used for the personal benefit of an individual or private party?

Ruling: COMPANY B may issue a sales tax exemption certificate in the name of COMPANY A when acting as COMPANY A’s authorized agent. To qualify for the exemption from sales tax, the purchases must relate to the exempt purpose of COMPANY A and must not be used for the personal benefit of a private stockholder or individual.

Analysis:

Section 151.310(a)(2) (Religious, Educational, and Public Service Organizations) provides that a taxable item sold, leased, rented, stored, used, or consumed by an organization qualifying for an exemption under Internal Revenue Code Section 501(c)(3) is exempt from sales tax if the item relates to the purpose of the exempted organization and is not used for the personal benefit of a private stockholder or individual.

Rule 3.322(b)(5) (Exempt Organizations) requires an entity that qualifies for an exemption from federal income tax as a 501(c)(3) organization to apply to the Comptroller for exempt status for sales tax purposes. Under Rule 3.322(g)(1), the purchase of a taxable item which relates to the purpose of a 501(c)(3) organization is exempt from tax when the organization, or an authorized agent of the organization, pays for the item and provides an exemption certificate in the form prescribed by the Comptroller.

The three elements of an agency relationship are: (1) the agent is acting for the principal; (2) both parties consent to the arrangement; and (3) the agent is under the control of the principal. Comptroller’s Decision No. 47,797 (2008). The Tax Code does not define the term “authorized agent,” and there is no definition in the Comptroller's administrative rules. Prior agency guidance has provided that the term refers to a person “who is legally empowered to act on behalf of a corporation.” See STAR Accession No. 9805512L (May 13, 1998); see also Tax Policy News, September 2012 (STAR Accession No. 201209603L) (“An authorized agent is an employee or other person authorized by the organization to make purchases on behalf of the organization.”)

The Comptroller has previously determined that COMPANY A qualifies for an exemption from Texas sales and use tax under Section 151.310. Pursuant to Rule 3.322(g)(1), COMPANY B may issue sales tax exemption certificates when acting as an authorized agent of COMPANY A if the taxable items it purchases relate to COMPANY A’s exempt purpose of operating a public school. The fact COMPANY B is a wholly-owned subsidiary of COMPANY A does not change this conclusion.

Comptroller’s Decisions and STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010137.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.