Are admissions to a nonprofit university's basketball games, held at a rented venue, exempt from Connecticut admissions tax?

Plain-English summary

A 501(c)(3) university presents its basketball games at a venue it licenses from a third party. Under the agreement, the university — at its own cost — presents the games, carries workers' compensation insurance, pays taxes on athletes/entertainers and the municipality's admissions fee, and runs the advertising. Tickets are sold through the venue's ticketing agent; box-office receipts are held by the venue and applied first to what the university owes the venue (rent and other charges), and if receipts fall short, the university must pay the venue the deficiency. In practice, attendance is low enough that the games don't cover the rent and expenses. The university asked whether admissions to the games are exempt from Connecticut's admissions tax.

DRS ruled the admissions are exempt under Conn. Gen. Stat. § 12-541(a)(3). The admissions tax normally applies to charges to any place of amusement, entertainment, or recreation, but there's an exemption when all of the event's proceeds inure exclusively to a federally income-tax-exempt entity, provided that entity actively engages in and assumes the financial risk of presenting the event.

The university met every part: it's a 501(c)(3); it presents the games at its sole cost and expense (active engagement); and it bears the financial risk — it must cover any shortfall to the venue. And the "proceeds inure to the university" requirement was satisfied even though the university made no profit: inurement of proceeds doesn't require actually netting money, so low attendance and a loss didn't defeat the exemption.

This is a useful contrast to arrangements where a separate taxable entity (not the exempt organization itself) runs the event — there, the exemption can fail. Here the exempt university itself both presented and shouldered the risk, so the exemption applied.

What this means for you

Nonprofits, colleges, and universities presenting events

If your tax-exempt organization is the one putting on the event and taking the financial risk — and all the proceeds run to it — admissions can be exempt from Connecticut admissions tax, even at a rented venue and even if you lose money. The exemption looks at active engagement and risk, not profitability. Keep your agreements structured so the exempt entity is unmistakably the presenter and risk-bearer.

Event venues and promoters

Whether admissions are taxable turns on who presents the event and bears the risk, not merely on whose name is on the marquee. If a venue or a for-profit promoter is the true presenter/risk-bearer, the nonprofit exemption may not apply. Document the roles clearly.

Accountants and tax professionals

The controlling provision is Conn. Gen. Stat. § 12-541(a)(3): exemption requires (1) all proceeds inuring exclusively to a federally income-tax-exempt entity, (2) that entity actively engaging in presenting the event, and (3) that entity assuming the financial risk. DRS confirmed that "proceeds inure" does not require an actual profit — the loss here was irrelevant. Compare fact patterns where a separate entity presents the event.

Common questions

Q: Are a nonprofit's ticketed events exempt from Connecticut admissions tax?
A: They can be, under Conn. Gen. Stat. § 12-541(a)(3), if all the proceeds inure exclusively to the federally tax-exempt entity and that entity actively presents the event and assumes the financial risk.

Q: Does renting an outside venue defeat the exemption?
A: No. Here the university presented its games at a licensed venue and still qualified, because the university itself presented the games and bore the financial risk.

Q: What if the event loses money?
A: It still qualifies. DRS held the "proceeds inure" requirement is met even when the organization realizes no profit — the university's losses due to low attendance did not defeat the exemption.

Q: Does this ruling apply to my event?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. If a different entity presents the event or bears the risk, the analysis could change.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-541(a)(3) (admissions-tax exemption where all proceeds inure exclusively to a federally income-tax-exempt entity that actively presents and assumes the financial risk of the event)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2013-1

Original ruling text

Ruling 2013-1, Admissions Tax

FACTS:

The University is an entity that is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. The University has entered into a license agreement with a venue (the “Venue”) to use the Venue for games of the University’s basketball teams (the “Agreement”).

Under the Agreement, the University at its own cost and expense is responsible for presenting the basketball games, maintaining and paying for worker’s compensation insurance, paying any taxes on athletes or entertainers and the municipality’s fee on admissions charges, and conducting the advertising and publicity campaign for the games. Tickets to the games are sold through the Venue’s ticketing sales agency.  Box office receipts are held by the Venue and are applied first to sums of money due it from the University.   The Agreement provides that the Venue will retain from the box office settlement the rent and any additional charges described in the Agreement. If the funds of the box office settlement are insufficient to cover the amounts due the Venue, the University must pay the deficiency to the Venue.

While the University would be entitled under the Agreement to receive all of the proceeds from the games, net of the payments due the Venue, in actuality the games do not have enough attendance to generate sufficient income to cover the amount needed to pay the rent and other expenses.

ISSUES:

Whether admissions to the University’s basketball games held at the Venue are exempt from the admissions tax under Conn. Gen. Stat. § 12-541(a)(3).

RULING:

Admissions to the University’s basketball games held at the Venue are exempt from the admissions tax under Conn. Gen. Stat. § 12-541(a)(3).

DISCUSSION:

Admissions tax is imposed on admission charges to any place of amusement, entertainment or recreation, except that there is an exemption for admissions to an event if all of the proceeds from the event inure exclusively to an entity which is exempt from federal income tax under the Internal Revenue Code, provided such entity actively engages in and assumes the financial risk associated with the presentation of such event. Conn. Gen. Stat. § 12-541(a)(3).   The admissions charges as described in the Agreement between the University and the Venue qualify for this exemption. The University is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, and it clearly both actively engages in presenting the games and assumes the financial risk because the University must present the events at its sole cost and expense.  The proceeds inure to the University under the Agreement, even though it has not realized a profit due to insufficient attendance to raise the proceeds beyond the amount of the expenses it incurs under the Agreement.

LEGAL DIVISION

September 5, 2013