When a 501(c)(7) social/country club merges into an IRC Section 528 nonprofit homeowners association (with the homeowners association as the surviving entity), does the surviving entity have to collect sales tax on green fees, swimming pool fees, dues, and similar amusement charges?

Plain-English summary

A social club that qualified as a nonprofit under IRC § 501(c)(7) was planning to merge with a homeowners association that qualified under IRC § 528 as a Texas Homeowners Association. After the merger, the surviving entity would no longer qualify under § 501(c)(7) for federal income tax purposes but would continue meeting the federal guidelines as a homeowners association. The taxpayer asked whether the surviving homeowners association would continue to enjoy the sales tax exemption typically available to homeowners associations, specifically on dues, green fees, swimming pool fees, entertainment fees, initiation fees, and similar assorted charges.

The Comptroller's answer was yes, but the reasoning matters: if, after the merger, only the IRC § 528 nonprofit homeowners association exists (i.e., the 501(c)(7) social club entity is gone), its billing to residents for fees and dues covering the use, benefit, and enjoyment of amenities it provides exclusively will NOT be subject to sales tax as the sale of an amusement service. That's under Rule 3.298(g)(1)(A), which exempts amusement services provided exclusively by a nonprofit organization, corporation, or association — with proceeds not benefiting an individual — except organizations described in IRC § 501(c)(7). The rule specifically calls out that § 501(c)(7) organizations providing amusements do NOT qualify for this exemption even though they're organized as nonprofits.

In other words, the merger's structural outcome is what saves the exemption: because the surviving entity is the § 528 homeowners association (not the § 501(c)(7) social club), it falls on the exempt side of the line. Had the § 501(c)(7) entity survived instead, its amusement charges would have remained taxable regardless of its nonprofit status.

What this means for you

Homeowners associations merging with or absorbing country clubs/social clubs

The tax outcome for your amenity fees (green fees, pool fees, entertainment fees) depends heavily on WHICH entity survives the merger. A surviving IRC § 528 homeowners association exclusively providing amenities to residents can qualify for the amusement-services exemption; a surviving IRC § 501(c)(7) social club cannot, even though both are "nonprofit" in a general sense.

Country clubs and social clubs (IRC 501(c)(7))

Don't assume nonprofit status alone exempts your amusement-service charges from Texas sales tax. Rule 3.298(g)(1)(A) specifically excludes § 501(c)(7) organizations from this exemption — your dues, green fees, and similar charges remain taxable regardless of your federal tax-exempt status.

Accountants and tax professionals structuring nonprofit mergers

When merging entities with different federal tax classifications, map out which classification survives before assuming sales tax treatment carries over. This letter shows the Comptroller analyzing the POST-merger entity's classification, not either predecessor's, in determining amusement-service tax treatment.

Common questions

Q: Are all nonprofit organizations exempt from collecting sales tax on amusement services like green fees or pool fees?
A: No — Rule 3.298(g)(1)(A) specifically excludes organizations described under IRC § 501(c)(7) (like typical country clubs) from this exemption, even though they're nonprofits.

Q: Does a homeowners association (IRC § 528) get this exemption on its amenity fees?
A: Yes, according to this letter, as long as it exclusively provides the amenities and proceeds don't benefit an individual.

Q: What happens to the exemption in a merger between a country club and a homeowners association?
A: It depends which entity survives. If the surviving entity is the § 528 homeowners association (not the § 501(c)(7) club), the exemption applies to its amenity billing going forward.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.298(g)(1)(A) (amusement services provided exclusively by qualifying nonprofits, IRC 501(c)(7) carve-out)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005316L

Original ruling text

May 17, 2000

Dear **:

This is in response to your request for a sales tax ruling on the following
fact situation and questions. Your franchise tax questions will be addressed
under separate cover by our franchise tax section.
We have a client who is a social club that qualifies under IRC section
501(c)(7) that is planning to merge with another client that qualifies under
IRC section 528 as a Texas Homeowners Association. The surviving entity, will
no longer qualify under 501(c)(7) for federal income tax purposes, but will
continue to meet the federal guidelines as a homeowners association. Since the
surviving entity will be a homeowners association, we need for you to answer
the following questions:
(1) Will the surviving entity be exempt from franchise taxes?
Response: To be addressed under separate cover.

(2) Will the surviving entity continue to enjoy the sales tax exemption that is
allowed to homeowners associations?

Response: If after the merger, only the IRC Section 528 non-profit homeowners
association will be in existence, its billing to residents, of fees and dues
for the use, benefit and enjoyment of the amenities provided exclusively by the
nonprofit organization, will not be subject to sales tax as the sale of
amusement services. This is pursuant to the language provided in subsection (g)
(1) (A) of Rule 3.298 - Amusement Services, which provides that sales tax is
not due on the sale of an amusement service if the service is provided
exclusively:

(a) by a nonprofit organization, corporation, or association, other than
organizations described by the Internal Revenue Code of 1986, sec. 501(c)(7),
if the proceeds do not go to the benefit of an individual, except as a part of
the services of a purely public charity. Initiation and membership fees and
other assorted fees charged by such a nonprofit organization, corporation, or
association are not taxable. Examples would include: organizations,
corporations, or associations recognized as nonprofit organizations under the
Internal Revenue Code, sec. 501(c), Kiwanis clubs, labor unions, and
ex-students organizations. Organizations described by the Internal Revenue Code
of 1986, sec. 501(c)(7), that provide amusements, do not qualify for this
exemption even though organized as nonprofit organizations; Emphasis added

(3) It is our understanding that currently homeowners' dues, amusement services
(such as green fees, swimming pool fees, entertainment fees, and such),
initiation fees and other assorted fees are not subject to sales tax under Rule
3.298, if the proceeds of such fees do not go to the benefit of an individual.
Will the surviving entity be exempt from collecting sales tax on such dues,
services and fees?
Response: Yes, see response to question (2).

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

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division