Do sales/use tax exemptions for services performed between affiliated corporations still apply when some of the corporations in the group are non-profit entities that would otherwise be excluded from the federal definition of an affiliated group?

Subject

Intercorporate Services Between Affiliated Corporations — Non-Profit Entities Still Qualify Despite Federal Exclusion

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9305334L

Plain-English Summary

This May 26, 1993 letter responds to a taxpayer inquiry about whether services performed between affiliated corporations remain exempt from sales/use tax when non-profit entities are part of the corporate family.

The taxpayer's client (COMPANY) is a non-profit corporation organized under Internal Revenue Code Sec. 501(c)(3). COMPANY wholly owns (100%) a number of separate corporations that provide healthcare-related services, including one subsidiary (SUBSIDIARY), also a non-profit, that was planning to begin providing data processing, security services, real property repairs, and other taxable services to the non-profit parent and to both for-profit and non-profit sister corporations.

The Comptroller explained that under 34 Tex. Admin. Code Rule 3.331(d), sales or use tax is not due on charges for services that became taxable on or after September 2, 1987, when those services are performed between affiliated corporations. Corporations are "affiliated" for this purpose when they would be classified as members of an affiliated group under 26 U.S.C. Sec. 1504, but for the exclusion in that federal statute (which generally excludes tax-exempt organizations from the federal "affiliated group" definition).

The taxpayer had pointed out that the corporations in question would otherwise qualify as an affiliated group but for the presence of non-profit entities, which triggers that federal exclusion. The Comptroller ruled that this federal income tax exclusion does NOT prevent the corporations from being treated as "affiliated corporations" for Texas sales/use tax purposes under Texas Tax Code Sec. 151.346 and Rule 3.331 — meaning the intercorporate services exemption still applies.

The letter also flags two important limits on the exemption: (1) under Rule 3.331(d)(4) and (5), the service-providing corporation cannot issue resale certificates for tangible personal property or services it purchases and uses (or transfers) in performing an otherwise-taxable service that is exempt as an "intercorporate service"; and (2) because the parent is a Sec. 501(c)(3) exempt organization, it may only issue exemption certificates for items and services that relate to its own exempt purpose. Tax must still be paid on tangible personal property and services used or consumed in providing data processing and other services to other entities.

What This Means For You

If you operate a non-profit corporate group

The presence of non-profit entities in a wholly-owned corporate family does not, by itself, disqualify the group from the intercorporate services sales/use tax exemption under Texas Tax Code Sec. 151.346 and Rule 3.331 — even though that same non-profit status might exclude the group from being an "affiliated group" for federal income tax purposes under 26 U.S.C. Sec. 1504.

If your affiliated corporations exchange taxable services

Services performed between corporations that are 100%-owned affiliates (as defined by reference to 26 U.S.C. Sec. 1504) and that became taxable on or after September 2, 1987, are exempt from Texas sales/use tax as "intercorporate services" under Rule 3.331(d).

If your entity provides the services

A subsidiary providing exempt intercorporate services cannot use a resale certificate to buy tax-free the tangible personal property or services it consumes in performing those services — per Rule 3.331(d)(4) and (5), tax must be paid on those inputs.

If your entity is a 501(c)(3) exempt organization in the group

A tax-exempt parent may only use an exemption certificate for purchases related to its own exempt purpose. Tax is still owed on property and services used or consumed to provide data processing or other services to other (including sister) entities.

Q&A

Q: Does having non-profit corporations in an affiliated group destroy the sales tax exemption for intercorporate services?
A: No. The Comptroller ruled that the federal income tax exclusion of non-profit entities from the "affiliated group" definition under 26 U.S.C. Sec. 1504 does not prevent the corporations from being treated as affiliated corporations for Texas sales/use tax purposes under Tax Code Sec. 151.346 and Rule 3.331.

Q: What is the general rule for taxing services between affiliated corporations?
A: Under Rule 3.331(d), sales or use tax is not due on charges for services that became taxable on or after September 2, 1987, when performed between affiliated corporations — corporations that would be classified as members of an affiliated group under 26 U.S.C. Sec. 1504, but for the federal exclusion of tax-exempt entities.

Q: Can the subsidiary providing the services buy its supplies tax-free with a resale certificate?
A: No. Rule 3.331(d)(4) and (5) prohibit the service provider from issuing resale certificates for tangible personal property or services purchased and used or transferred in performing an otherwise-taxable service that is exempt as an intercorporate service.

Q: Can the non-profit parent use its exemption certificate for all of its purchases?
A: No. As a Sec. 501(c)(3) exempt organization, the parent should only issue exemption certificates for items and services purchased that relate to the purpose of the exempt organization; tax should be paid on property and services used or consumed in providing services to other entities.

Q: Is this ruling limited to the specific facts described in the letter?
A: Yes. The letter states the opinion is based on the facts presented, and that the opinion may change if there are additional or different facts.

Original ruling text

May 26, 1993

Dear **:

Thank you for your letter of May 13,1993, concerning the taxability of services
performed between affiliated corporations.

Your client, ** (COMPANY), is a non-profit corporation pursuant to
Sec. 501 (c)(3) of the Internal Revenue Code. COMPANY controls a number of
separate corporations (100% ownership) that provide healthcare related
services. One of the subsidiaries is ** (SUBSIDIARY), also a
non-profit organization. SUBSIDIARY may begin providing data processing,
security services, real property repairs, and other taxable services for the
non-profit parent and for profit and non-profit sister corporations.

Enclosed Rule 3.331 (d) discusses inter corporate services. Sales or use tax is
not due on charges for services that became taxable on or after September 2,
1987 when performed between affiliated corporations. Corporations are
considered affiliated when they would be classified as a member of an
affiliated group under 26 United States Code, Section 1504, but for the
exclusion provided by that rule.

You stated that the corporations in question would qualify for treatment as an
affiliated group were it not for the presence of non-profit entities. This
exclusion for federal income tax purposes will not exclude your clients from
treatment as affiliated corporations under the Texas Tax Code Section 151.346
and Rule 3.331.

I should note that Rule 3.331 (d)(4) and (5) stipulate that the service
provider cannot issue resale certificates for tangible personal property or
services purchased and used or transferred in the performance of an otherwise
taxable service that is exempt as an "inter corporate service." In addition, as
an exempt organization pursuant to Sec. 501 (c)(3) of the Internal Revenue
Code, your client should only issue exemption certificates for items and
services purchased that relate to the purpose of the exempt organization. Tax
should be paid on tangible personal property and services used or consumed in
providing data processing and other services for other entities.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division