Does an internal show committee of a tax-exempt nonprofit society count as its own "bona fide chapter" — entitled to its own separate two-one-day tax-free sale allowance — when the committee's event profits are transferred back to fund the parent organization's own operating expenses?

Plain-English summary

A Texas nonprofit educational society (exempt since 1981) runs a committee responsible for its annual three-day gem and mineral show, where vendors rent booths and sell minerals, rocks, and gems alongside educational exhibits. The show committee has its own bank account, holds its own meetings, and sets its own agenda — but its surplus revenue gets transferred into the parent society's general account to help cover the society's own operating costs (utilities, property taxes), because the society's membership dues and workshop fees don't cover those expenses on their own. Texas law lets an exempt organization and each of its bona fide chapters each hold up to two one-day tax-free sales or auctions per year (transactions capped at $5,000). The society asked whether its show committee counts as its own separate "bona fide chapter," entitled to its own two-day allowance on top of the society's.

The Comptroller ruled no. Neither "bona fide" nor "chapter" is defined in the Tax Code or rules, so the Comptroller applied plain dictionary meanings: "bona fide" means in good faith, and a "chapter" is a local branch of an organization conducting business for itself. The dispositive fact was where the money goes: because the show's surplus flows back to fund the parent society's obligations rather than staying with the committee for its own benefit, the committee is conducting the society's business, not its own — reinforced by the fact that its leaders are appointed by the society's president rather than independently elected. The Comptroller contrasted this with examples from prior letters that DID qualify as bona fide chapters — a school's Debate Club, National Honor Society, or individual grade-level classes — because those groups keep their own tax-free sale proceeds for their own group's benefit rather than remitting the surplus up to a parent entity. Because exempt-organization provisions are, by rule, strictly construed against the taxpayer, the show committee doesn't get its own separate two-one-day allowance; only the society's own allowance applies.

What this means for you

Nonprofits and exempt organizations with internal committees, clubs, or auxiliary groups

If you're hoping an internal committee or auxiliary can run its own separate tax-free fundraising events (on top of your organization's own two-per-year allowance), check exactly where the event's surplus revenue ends up. If it's swept back to the parent organization's general operating account, the committee is not a "bona fide chapter" and gets no separate allowance — even if it has its own bank account, meetings, and agenda.

Schools, churches, and other institutions with internal student/member groups

The distinguishing line from this ruling: genuine chapters (a debate club, honor society, individual class) keep and use their own tax-free sale proceeds for their own group's benefit. A committee that exists to raise money for the parent organization itself — even with real operational independence day-to-day — doesn't qualify as a separate chapter.

Accountants and tax professionals

The controlling authority is Rule 3.316(l)(1) (the two-one-day, $5,000-per-transaction occasional sales exemption) combined with Rule 3.322(a)(1)'s directive that exempt-organization provisions are strictly construed against the taxpayer. STAR Accession Nos. 9908642L (1999) and 9809865L (1998) supply the "genuine chapter" examples, while 2009097875L (2009) and 9411L1327G13 (1994) supply the mechanics of the exemption and the plain-meaning approach to undefined terms.

Common questions

Q: Does having its own bank account and meetings automatically make a committee a "bona fide chapter"?
A: No. The key question is whether the committee's tax-free sale proceeds stay with and benefit the committee itself, or get transferred back to fund the parent organization — here, the latter defeated bona fide chapter status despite the committee's day-to-day operational independence.

Q: What are examples of groups that DO qualify as bona fide chapters?
A: Prior Comptroller guidance recognizes groups like a school's Debate Club, National Honor Society, or individual grade-level classes — because they keep their own tax-free sale proceeds for their own group's benefit rather than remitting funds up to a parent entity.

Q: If the committee isn't a bona fide chapter, can it still hold tax-free sales?
A: Only under the parent organization's own two-one-day allowance, not as an additional separate allowance.

Q: Can another nonprofit's committee rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer and facts presented; a committee whose event proceeds stay with the committee itself could be analyzed differently.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code § 3.316(l)(1) (occasional sales — two-one-day tax-free sale exemption, $5,000 transaction cap)
• 34 Tex. Admin. Code § 3.322(a)(1) (exempt organizations strictly construed against taxpayer); § 3.322(h) (exempt organizations — occasional sale mechanics)

Cited prior guidance:

• STAR Accession No. 2009097875L (July 1, 2009) — one-day/calendar-year mechanics of the exemption
• STAR Accession No. 9411L1327G13 (Nov. 21, 1994) — plain meaning of "bona fide"
• STAR Accession No. 9908642L (Aug. 23, 1999) and STAR Accession No. 9809865L (Sept. 9, 1998) — examples of genuine bona fide chapters

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201904016L

Original ruling text

April 30, 2019

RE: Private Letter Ruling No. 20180830135013

**, Taxpayer No. ****

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: (1)] We are responding to your request dated Aug. 27, 2018 and supplemental submission received Oct. 2, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance about whether your ** is a bona fide chapter of your IRS Section 501(c)(3) exempt educational organization.

Facts Presented

** “The Society” is a federally recognized 501(c)(3) educational organization. The Comptroller granted The Society exempt status for sales and use tax on June 17, 1981.

The Society has various committees, including the **, which is responsible for ****, The Society’s annual gem and mineral show “Show,” a three-day event. The Show includes numerous educational exhibits and sales of minerals, rocks, gems, and other tangible personal property by various vendors who rent booths at the show venue.

The Society’s elected President appoints the Show Chairperson and the Show Treasurer. The ** has a separate bank account, which is combined with The Society’s financials when The Society files their annual non-profit tax returns. The Society’s consolidated financials indicate that their membership dues and workshop fees are insufficient to cover their operating expenses such as utilities and property taxes. The Show generates an account surplus and these funds are transferred to The Society’s account to help pay The Society’s obligations instead of being used for the general benefit of the **** members.

The ** operates independently of The Society as it holds its own meetings, sets its agendas and keeps separate meeting minutes.

Question, Ruling, and Analysis

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

Question One: Is The Society’s ** a qualified bona fide chapter of The Society as it relates to the Texas Sales and Use Tax regulations?

Ruling: The Society’s ** is not a bona fide chapter of The Society.

Analysis: A religious, educational, charitable, eleemosynary organization, or an organization exempt under Internal Revenue Code section 501(c)(3), (4), (8), (10), or (19) that has been granted exempt status by the Comptroller, and each bona fide chapter of the exempt organization, is not required to collect sales tax on the sales price of taxable items sold for $5000 or less at a sale or auction held by the organization or chapter only twice a calendar year and each sale or auction lasting only one day. Rule 3.316(l)(1) (Occasional Sales). For the purposes of this exemption, one day is counted as 24 consecutive hours and a calendar year is the 12-month period from January through December. See Rule 3.322(h) (Exempt Organizations) and STAR Accession No. 2009097875L (July 1, 2009).

The Society’s section 501(c)(3) status allows it to hold two, one-day tax exempt sales. A bona fide chapter of The Society would also be allowed to have two, one-day tax exempt sales.

Neither the Texas Tax Code nor the Texas Administrative Rules define the terms “bona fide” and “chapter.” “When the statue and rules are silent on the meaning of a specific word or phrase, the word or phrase takes the commonly understood meaning. Bona means good, fide means faith.” STAR Accession No. 9411L1327G13 (Nov. 21, 1994). The term “chapter” is defined as “a local branch of an organization.” See www.merriamwebster.com/dictionary/chapter.

The Merriam-Webster online dictionary defines a committee as “a body of persons delegated to consider, investigate, take action on, or report on some matter.” See https://www.merriam-webster.com/dictionary/committee. The ** is comprised of members of the Society who are delegated to handle the management and execution of the Show. The appointment, and not election, of the Show Chairperson and the Show Treasurer indicate the * is operating for The Society and not on its own. Additionally, the revenue from the Show flows back to The Society to assist in paying for operating expenses. The *** is conducting the business of The Society, not business for itself, and is therefore not a bona fide chapter of The Society.

Rule 3.322(a)(1) provides that Exempt Organizations are not favored under the laws of the State of Texas, and the Comptroller shall strictly interpret provisions of the Rule. In contrast to the financial relationship between The Society and the Show, examples of bona fide chapters in previous Comptroller letters include groups within public schools such as the Debate Club, National Honor Society, the kindergarten class, and the first grade. These are all groups who are conducting business for themselves. They hold taxfree sales and use the resulting funds for the benefit of their own group, instead of remitting the funds to another entity (such as the school administration) after they have paid their expenses. STAR Accession 9908642L (Aug. 23, 1999). See also STAR Accession No. 9809865L (Sept. 9, 1998). The Show is conducting business for The Society and is not a bona fide chapter.

STAR documents cited can be found 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. 20180830135013.

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.