How could a Section 501(c)(7) club recover Texas tax it mistakenly collected on pre-October 1991 member charges?

Plain-English summary

A Section 501(c)(7) nonprofit club had collected and remitted Texas sales tax on member dues beginning January 1, 1988. The Comptroller said such clubs were not required to collect tax on membership fees, dues, and special assessments for periods before October 1, 1991.

To recover tax collected in error, the club first had to refund the members or, with each member's written permission, credit the member's account. Only after making those customers whole could the club request reimbursement from the state or take a credit on a later return under Rule 3.325(a).

The limitations period was four years from when the tax was due and payable. A bare written request without supporting documentation did not stop the clock. Once the supporting documentation was submitted, the period was tolled as of the postmark date.

What this means for you

Nonprofit clubs

This ruling concerns historical pre-October 1991 charges. Its durable procedural point is that a seller cannot keep or recover tax collected from customers without first refunding or properly crediting those customers.

Accountants and tax professionals

Prepare the refund evidence before filing. The letter expressly said an unsupported request would not toll the four-year limitations period.

Common questions

Were Section 501(c)(7) member charges taxable before October 1, 1991? No, according to this letter.

Could the club claim a state refund before paying members? No.

Could the club credit a member instead of paying cash? Yes, with the member's written permission.

Did a written refund request alone stop the limitations period? No. Supporting documentation was required.

Citations and references

• Internal Revenue Code § 501(c)(7) (nonprofit social club classification)
• 34 Tex. Admin. Code Rule 3.325(a) (sales-tax refund procedure)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1157D06

Original ruling text

February 13, 1992

Dear **:

Your letter regarding a refund of sales taxes collected from members
has been referred to me by Ms. Stefanie Medack for review and response.
I appreciate your patience and apologize for the delay in responding.

** has a Section 501(c)(7) exemption from the Internal
Revenue Code and has been collecting and remitting sales taxes on
membership dues since January 1, 1988. *** is currently
researching its records and will submit a refund to this office
with-in a short period of time.

An organization classified as a Section 501(c)(7) nonprofit club was
not required to collect sales tax on membership fees, dues, and special
assessments charged to its members prior to October 1, 1991. A Section
501(c)(7) organization that collected and reported sales tax on these
charges for periods prior to October 1, 1991, may refund or, with the
member's written permission, credit the member's account for the sales
tax collected and reported in error.

Only after this is done is the organization entitled to seek
reimbursement from the state or take a credit on a subsequent return
in accordance with the procedures outlined in subsection (a) of the
enclosed Rule 3.325 concerning refunds.

The statute of limitations is four years from the date on which
the tax was due and payable to this office. A request in writing
without supporting documentation will not toll the statute.
Once this documentation is submitted to our office, the statute
of limitations is tolled as of the postmark date.

Upon compiling the data to support this refund request, you
should submit the request to our Credits Verification Section, in
our Revenue Accounting Division.

This opinion is based on the facts presented. Other facts though
similar may provide a different result.

If you have other questions or need more information, you may
call 512/463-4600, or 1-800-252-5555 from outside Austin. You
may write to Tax Administration Division.

Sincerely,

Gilbert Zamora
Tax Administration Division