Can a nonprofit that promotes a specific county, city, or area get the Texas franchise-tax exemption, and what must it show?

Plain-English summary

A nonprofit corporation asked for a Texas franchise-tax exemption. The Comptroller explained the applicable exemption and asked for more documentation before deciding.

• The local-promotion exemption. Tax Code Sec. 171.057 exempts a nonprofit corporation organized solely to promote the public interest of a specific county, city, town, or other area within the state. This exemption does not extend to the Texas sales and use tax.
• What the Comptroller needed. To proceed, the corporation had to provide a photocopy of the file-stamped articles of incorporation, a detailed description of its activities, and an explanation of how it is organized solely for that local-promotion purpose.
• If it doesn't fit Sec. 171.057. If the corporation's sole purpose is not local promotion, it will not qualify under Sec. 171.057. It may instead qualify:
  • for a franchise-tax exemption under Sec. 171.063 if it obtains a federal IRS determination under IRC 501(c)(2) through (8), (10), (16), (19), or (25); and
  • for a sales/use tax exemption under Sec. 151.310 if it obtains a federal determination under IRC 501(c)(3), (4), (8), (10), or (19).
• Keep filing meanwhile. Until notified it is exempt, the corporation remains responsible for filing the public information reports and franchise tax reports and paying any amount due.

Currency note: This letter describes the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The exemptions continue under current law; confirm present terms.

What this means for you

Local economic-development and community-promotion nonprofits

The Sec. 171.057 exemption is narrow: your corporation must be organized solely to promote the public interest of a defined locality. The Comptroller reads the articles of incorporation and your activity description closely, so the governing documents need to state that sole purpose clearly.

Nonprofits that may not fit the local-promotion box

There is a fallback: a qualifying federal 501(c) determination opens the Sec. 171.063 franchise-tax exemption (and, for the narrower 501(c) categories, the Sec. 151.310 sales-tax exemption). But no exemption is effective until the Comptroller confirms it - keep filing and paying until then.

Common questions

Q: What does Sec. 171.057 require?
A: The corporation must be a nonprofit organized solely to promote the public interest of a specific county, city, town, or other area within Texas.

Q: Does that exemption also cover sales tax?
A: No. Sec. 171.057 does not extend to the sales and use tax.

Q: What if the corporation isn't solely a local-promotion group?
A: It may still qualify for the franchise-tax exemption under Sec. 171.063 (federal 501(c)(2)-(8), (10), (16), (19), (25)) and, in narrower cases, the sales-tax exemption under Sec. 151.310 (federal 501(c)(3), (4), (8), (10), (19)).

Citations and references

Statutes:

• Texas Tax Code Sec. 171.057 - franchise-tax exemption for a nonprofit organized solely to promote a county, city, town, or other area; does not extend to sales/use tax
• Texas Tax Code Sec. 171.063 - franchise-tax exemption for a corporation federally exempt under the listed IRC 501(c) paragraphs
• Texas Tax Code Sec. 151.310 - sales/use tax exemption for organizations qualified under IRC 501(c)(3), (4), (8), (10), or (19)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200205047L

Original ruling text

May 7, 2002

Dear **:

Thank you for your letter requesting franchise tax exemption for
**, Taxpayer Number **.

Tax Code Section 171.057 of the Texas franchise tax statute provides for an
exemption to a nonprofit corporation that is organized solely to promote the
public interest of a specific county, city, town, or other area within the
state. This exemption does not extend to the Texas sales and use tax.

Before we can proceed with your exemption request, you will need to provide a
photocopy of the file stamped Articles of Incorporation, a detailed description
of the activities conducted or to be conducted, and describe how the
corporation is organized solely to promote the public interest of a specific
county, city, town, or other area within the state.

If the sole purpose of the corporation is not to promote the public interest of
a specific county, city, town, or other area within the state, the corporation
will not qualify for exemption under Tax Code Section 171.057. However, if the
corporation applies for and receives a determination letter from the Internal
Revenue Service (IRS) under the Internal Revenue Code (IRC) Section 501(c)(2)
through 501(c)(8), (10), (16), (19), or (25) an exemption from the franchise
tax under Section 171.063 of the Tax Code may be possible. Furthermore,
exemption from the payment of the sales and use tax under Tax Code Section
151.310 is possible for an entity that has applied for and obtained a federal
income tax exemption under IRC Section 501(c)(3), (4), (8), (10), or (19).
Information on these federal exemptions can be obtained by calling the IRS at
1-877-829-5500. Forms to apply for the federal exemption can be obtained by
calling the IRS at 1-800-829-3676.

The Tax Code is available on-line at
.

We will notify you of the organization's exempt status after you provide the
additional information. You may send your information to the Exempt
Organizations Section, Post Office Box 13528, Austin, Texas 78711-3528. Until
you are notified the corporation is exempt from the franchise tax, you are
responsible for completing and filing the appropriate Public Information
Report(s), the Texas Corporation Franchise Tax Report(s), and paying any amount
due. For questions about the franchise tax filing requirements, please contact
our Tax Assistance Section at 1-800-252-1381, or directly at 512/463-4600.

If you have any questions, you may e-mail me at or
call me toll free at 1-800-531-5441, extension 5-9704. My Austin number is
512/305-9704.

Sincerely,

Janice Womack
Exempt Organizations Section