Could a nonprofit business association's payroll processing and other taxable services for member corporations qualify for Texas's affiliated-entity exemption?

Plain-English summary

The Texas nonprofit association was exempt under Internal Revenue Code section 501(c)(6), had corporate members rather than shareholders, acted as their collective-bargaining representative, and performed services such as payroll processing.

Tax Code section 151.346 exempted services among affiliated entities when at least one was a corporation and the entities met the requirements for consolidated federal income-tax reporting. Choosing not to file consolidated returns did not disqualify otherwise eligible entities.

The Comptroller therefore ruled conditionally: if the association was an affiliated entity under 26 U.S.C. section 1504, its services to members were nontaxable even though the entities might be excluded from actually filing consolidated returns.

Common questions

Was the exemption automatic because the association was nonprofit? No.

What federal test had to be met? Affiliated-entity status under 26 U.S.C. section 1504.

Did the entities have to choose to file a consolidated return? No.

Citations and references

• Tex. Tax Code § 151.346.
• 26 U.S.C. §§ 1504 and 501(c)(6).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9005L1019D01

Original ruling text

May 11, 1990

Dear *****:

Thank you for your letter regarding sales tax exemption on data
processing and other services that became taxable in October,
1987, pursuant to the intercorporate services exemption in
Section 151.346 of the Texas Tax Code. Your specific situation is
restated below with response.

You stated that these services are provided by a Texas nonprofit
corporation (Association) to its members. The Association is a
tax exempt organization under Internal Revenue Code Section
501(c)(6). As a Texas nonprofit corporation, the Association does
not have shareholders, but has members. Virtually all of the
members of the Association are Texas business corporations. In a
nutshell, the Association is a collective bargaining representative
for its members. As such, the Association performs various
services for its members such as the processing of payroll.

Section 151.346 provides an exemption for services among affiliated
entities, at least one of which is a corporation, which meets all
requirements of the Internal Revenue Code for reporting its income
on a consolidated federal income tax return. The entities would
not be disqualified from the exemption if they choose not to file
consolidated returns.

If the association is an "affiliated entity" as defined under 26
U.S.C. Section 1504, the above services provided by the Association
for its members would not be taxable even though the entities
may be excluded from filing consolidated returns.

This opinion is based on the facts presented. If there are
additional or different facts, the opinion may change.

If you have any questions or need additional information, you may
call me toll free at 1-800-252-5555, extension 3-4666, or the
regular number 512/463-4666. You may write to Tax Correspondence,
Comptroller of Public Accounts.

Sincerely,

Jo Ann Dieck
Tax Correspondence