If a tax-exempt nonprofit hires a for-profit company to produce a carnival-style amusement event on its behalf, does the for-profit company's ownership of the amusement rights and share of any profit make the event's admission charges subject to Texas sales tax?

Plain-English summary

A for-profit company owned the rights to a carnival-style amusement (similar to a children's fair) and contracted with a nonprofit organization to put on the event for the nonprofit's benefit. Under the contract, the for-profit company would absorb all losses, and any profit would be split according to a set schedule. All advertising and promotional materials described the nonprofit as the "provider of the event." The question: since the for-profit company owns the rights to the amusement, does that make the event's charges subject to Texas sales tax, even though the nonprofit is presented publicly as the provider?

The Comptroller said no. Rule 3.298(g)(3) allows a nonprofit (non-governmental) organization to hire a for-profit company to produce an event without losing its tax exemption, as long as the nonprofit holds itself out as the provider of the amusement service and the two aren't operating as joint venturers. The key test for a joint venture is whether both profit and loss are actually shared, equally or on a percentage basis. A contract where one party (here, the for-profit company) bears 100% of the losses while profits are simply divided by a schedule does not meet that test — so no joint venture existed, and the nonprofit's exemption held.

What this means for you

Nonprofits that outsource event production

You can hire a for-profit company to run an amusement event on your behalf and keep your sales tax exemption, as long as your organization is publicly presented as the provider of the amusement and your contract doesn't make you and the for-profit company joint venturers by sharing both profit and loss.

For-profit event producers working with nonprofits

Structure the deal so the nonprofit is clearly the public-facing "provider," and be careful about loss-sharing terms — if losses end up genuinely shared with the nonprofit rather than borne solely by your company, the arrangement risks being recharacterized as a joint venture, which would jeopardize the nonprofit's exemption.

Accountants and tax professionals

The joint-venture line here is precise: it takes sharing of both profit and loss (equally or proportionally) to create a joint venture under this rule. A contract that allocates all losses to one party while dividing only the profit does not cross that line, regardless of how the profit split is structured.

Common questions

Q: Does a for-profit company's ownership of amusement rights, by itself, make a nonprofit's event taxable?
A: No. Ownership of the rights isn't the test — what matters is who holds itself out as the "provider" and whether the arrangement is a joint venture (shared profit and loss).

Q: What makes an arrangement a "joint venture" for this purpose?
A: Both profit and loss must be shared, equally or on a percentage basis. A contract where one party bears all losses while profit is simply divided is not a joint venture.

Q: Who has to be shown as the "provider of the event" for the exemption to hold?
A: The nonprofit — the ruling specifically notes that advertising and promotional material identified the nonprofit as the provider of the event, which supported the exemption.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.298(g)(3) (exempt organization hiring a for-profit producer without loss of exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200006398L

Original ruling text

June 12, 2000

Dear **:

Thank you for your letter of May 30, 2000, concerning amusement services
provided by exempt organizations.

Your client, a for-profit corporation, has the rights to an amusement that is
similar to a carnival or children's fair. Your client has a contract with a
non-profit organization to put on this event for the benefit of the non-profit
organization. The contract provides that in the event of a loss the for-profit
corporation will be responsible for all losses. If there is a profit, the
contract has a schedule that shows how profits will be divided based upon the
amount of the profit. All advertising and promotional material shows the
non-profit organization as the "provider of the event". You ask the following:

If the contract shows the for-profit corporation is responsible for all losses
and the advertising and promotional material shows the non-profit as the
"provider of the event" will the fact that the for-profit organization owns the
rights to the event make the amusements subject to Texas sales tax?

Response. No. Rule 3.298 (g)(3) states that a non profit (non governmental)
group may hire a for-profit organization to produce an event without a loss of
exemption as long as the nonprofit organization holds itself out as a provider
of the amusement service and is not a joint venturer with the for-profit
entity.

In order for a joint venture to exist, there must be a sharing of both profit
and loss. The losses must be shared equally or on a percentage basis. A
contract that provides one party will bear all the losses and the profit will
be divided, does not create a joint venture.

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 Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division