Can a city cultural-grants administrator exclude grant money passed to awardees from Texas franchise tax revenue?

Plain-English summary

A nonprofit planned to assign its city cultural-funding administration contract to a taxable single-member company. The city would approve the administrator’s annual budget, fund awards and administration fees, receive spending reports, and recover unused funds. The Comptroller ruled that money the company receives and distributes to grant awardees is excluded from total revenue under Texas Tax Code § 171.1011(f). Section 351.101(c) supplies both a legal mandate and a fiduciary duty when the city approves the company’s budget for the delegated program. The ruling is prospective for the planned assignment and approved budget; it addresses the grant funds distributed to awardees, not a general exclusion for the administrator’s fees.

What this means for you

The company needs the statutory delegation, city budget approval, and actual flow of funds to awardees described in the letter. A contract obligation alone does not necessarily create the fiduciary duty required for this exclusion.

Common questions

Q: Does a service contract by itself create the required fiduciary duty?
A: No. The Comptroller tied the duty to the city’s budget approval under § 351.101(c), beyond the contract alone.

Q: Are grant payments to awardees included in the company’s total revenue?
A: No, after the stated statutory conditions are met and the funds are transferred to awardees.

Q: Did the letter exclude the company’s administration fees?
A: It ruled on funds distributed to grant awardees, not the fees paid for administration.

Citations and references

• Tex. Tax Code § 171.1011(f) — the letter summarizes the provision as excluding flow-through funds mandated by law or fiduciary duty to be distributed to other entities.
• Tex. Tax Code § 351.101(c) — cited for delegation, advance budget approval, separate-account duties, and reports.
• 34 Tex. Admin. Code § 3.587(e)(1) — cited for the flow-through funds rule.

Source

• Official Texas STAR letter
• Texas STAR letters search

Original ruling text

July 7, 2026

RE: Private Letter Ruling No. PLR20250702090939

Mr. **:

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 May 30, 2025. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether certain funds may be excluded from total revenue under Section 171.1011(f) (Determination of Total Revenue From Entire Business) as flow through funds mandated by law or fiduciary duty to be distributed to third parties.

Facts Presented

The relevant facts are based on information in the initial request, an email response on September 23, 2025, and the following documents:

Contract Between the City of CITY and COMPANY A dba COMPANY B For Third Party Administration of Cultural Funding Programs (Contract Number: ###########).

Amendment No. 1 to Contract No. ########### for Third Party Administration of Cultural Funding Programs Between COMPANY A dba COMPANY B and the City of CITY, Texas.

COMPANY A dba COMPANY B (Center) enters into contracts with the City of CITY (City) to administer the City’s cultural and preservation funding programs (Programs). Under the contract, the Center is responsible for facilitating the application processes and executing grant agreements between the Center and awardees. In exchange for these services, the Center is entitled to receive administration fees.

Chapter 351 (Municipal Hotel Occupancy Taxes) authorizes the City to collect taxes and use the funds to promote tourism and the convention and hotel industry. Accordingly, the City uses the Programs to achieve these ends.

In compliance with Chapter 351, the City sets and approves the annual budget for both the awards administered by the Center and the administration fees to be paid to the Center. Each month, the Center sends an invoice to the City. Included in the amount invoiced are grants awarded or to be awarded and the administration fees. Additionally, the Center provides a list of expenditures related to the funds to the City on a weekly basis and returns any unused funds to the City.

The Center is exempt from Texas franchise tax and sales and use tax as an Internal Revenue Code Section 501(c)(3) organization. The Center created COMPANY C (Company) intending to assign the contract to the Company to insulate the Center from potential tort and contract liabilities arising from executing the grant agreements with third parties. Company is a single member limited liability company with the Center as its single member. The Company is disregarded for federal tax purposes. However, the Company is not disregarded for Texas tax purposes and remains subject to the Texas franchise tax.

The Company contends that Section 351.101 creates both a mandate by law and fiduciary duty to distribute funds to a third party. Section 351.101(c) allows the City to delegate to another person the administration of programs funded by the tax collected under Chapter 351, and as incorporated in the agreement between the City and the Center, mandates that the funds flow through the Center to the awardees with any unused funds returned to the City. Further, Company contends that Section 351.101(c) explicitly creates a fiduciary duty when the City approves the annual budget of the Center.

Question, Ruling, and Analysis

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

Question:

Are funds that the Company receives from the City and distributes to grant awardees as part of administering Programs under Section 351.101(c) excluded from total revenue under Section 171.1011(f)?

Ruling:

Yes. The specified funds are excluded from Company’s total revenue under Section 171.1011(f) by both a mandate by law and by fiduciary duty.

Analysis:

The franchise tax is imposed on each taxable entity that is organized in Texas or doing business in Texas. Section 171.001 (Tax Imposed). The calculation of a taxable entity’s taxable margin begins with determining its total revenue. Section 171.101 (Determination of Taxable Margin). Section 171.1011(f) provides, in relevant part, that a taxable entity shall exclude from its total revenue flow-through funds that are mandated by law or fiduciary duty to be distributed to other entities.

Analysis under Section 171.1011(f) requires determining whether the distribution of the flow-through funds is mandated by law, fiduciary duty, or merely contract. See Hearing No. 114,009 (2019); Section 171.1011(i). The exclusion for flow-through funds mandated by law includes, but is not limited to, taxes imposed by law on a third party but collected by the taxable entity and remitted by it to a taxing authority, such as state sales tax and the Texas hotel occupancy tax. Rule 3.587(e)(1) (Margin: Total Revenue).

A fiduciary duty can exist as a matter of law, such as attorney-client or trustee relationships. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193,199 (Tex. 2002). In a relationship where a fiduciary duty exists, the fiduciary is required to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person. See Hearing No. 114,009 (2019), quoting Black’s Law Dictionary, 10th ed. (2014).

In a transaction where the parties’ relationship is defined by a contract, the Comptroller has held that not every contractual obligation to make a payment rises to the level of a fiduciary duty. Hearing No. 114,009 (2019). To give full force to contracts, a fiduciary duty relationship is not regarded lightly. Id. (citing Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d at 177). To impose a fiduciary duty in a business transaction, the special relationship of trust and confidence must exist prior to, and apart from, the agreement made the basis of the suit. Id.

Qualifying flow-through funds mandated by contract to be distributed to other entities include: certain sales commissions; the tax basis as determined under the Internal Revenue Code of securities underwritten; and certain subcontracting payments in relation to real property projects. Rule 3.587(e)(2).

Section 351.101(c) provides that “The governing body of a municipality by contract may delegate to a person […] the management or supervision of programs and activities funded with revenue from the tax authorized by this chapter.” The governing body in writing shall approve in advance the annual budget of the delegee. Section 351.101(c). The approval by the governing body of the municipality of the annual budget of the delegee creates a fiduciary duty in the delegee with respect to the revenue. Id. A municipality solely contracting with a taxable entity to delegate its responsibilities under Section 351.101 is not enough to create a fiduciary duty. The delegee “must maintain revenue […] in a separate account […] and may not commingle that revenue with any other money.” Id. Furthermore, the delegee is required to make periodic reports to the governing body at least quarterly, listing the expenditures made by the delegee with the revenue. Id.

Center intends on assigning the contract to Company. Under Section 351.101, the City’s approval of the budget, with respect to the revenue, creates a fiduciary duty, requiring the Company to act in the best interest of the City. This relationship is one of trust and confidence and exists independently apart from their contracts. The contracts at issue further substantiate this relationship and require distribution of funds to awardees according to Section 351.101. Additionally, the authorization to delegate the fulfilment of the activities in Section 351.101(a) necessitates payment to a third party insofar as the governing body of a municipality would be required to pay another party – having a delegee automatically creates a three-party situation.

Similar to the treatment of sales tax, Section 351.101(c) mandates by law that an entity delegated the responsibility for fulfilling Section 351.101(a) must treat the funds used for that purpose with a fiduciary duty when the budget of the delegated entity is approved by the governmental entity. Therefore, once the City approves the Company’s budget related to the delegated fulfillment of Programs, the law mandates a fiduciary duty. Any funds that are transferred to an awardee of Programs are excluded from the Company’s total revenue under Section 171.1011(f).

The 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. 20250702090939.

Sincerely,

Tax Policy Division

Texas Comptroller of Public Accounts

ENDNOTE

_____________

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