How does a homeowners association apply for the Texas franchise-tax exemption, and does it also cover sales tax?

Plain-English summary

This is a procedural letter telling a homeowners association how to apply for a Texas franchise-tax exemption. There are two paths:

• Path 1 - federal 501(c) exemption (Sec. 171.063). If the association has obtained a federal exemption under IRC 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25), the only documentation it needs to send is a copy of the IRS determination letter.
• Path 2 - the homeowners-association route (Sec. 171.082). The association can qualify if voting control is vested in the owners of individual lots or residential units (not a developer, declarant, bank, investor, individual, or other party). This route requires supporting documents (copies, not originals):
  • the file-stamped articles of incorporation;
  • the declaration, covenants, or deed restrictions, including any amendments;
  • the plat of the residential development;
  • the total number of lots or units;
  • a list of all owners and the date each acquired their lot/unit; and
  • the date owners gained voting control (over 50 percent of the votes).
• Sales tax is not included. The letter states the Sec. 171.082 exemption does not extend to sales tax. (A separate sales-tax exemption under Sec. 151.310 requires a federal 501(c)(3), (4), (8), (10), or (19) determination.)
• Keep filing meanwhile. Until notified that the exemption is granted, the association remains responsible for filing the appropriate franchise tax reports and paying the amounts 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, but confirm the present application requirements.

What this means for you

Homeowners associations preparing an exemption request

If you already hold an IRS 501(c) determination, the process is simple - send that letter. Without it, you must document the voting-control transfer to owners with the full package (articles, declaration/deed restrictions, plat, owner list, and the over-50-percent control date). Either way, keep filing and paying franchise tax until the Comptroller confirms the exemption.

Managing agents and CPAs

The franchise-tax exemption does not carry over to sales tax. If the association makes taxable sales, address a sales tax permit separately, and pursue the Sec. 151.310 sales-tax exemption only through a qualifying federal 501(c) determination.

Common questions

Q: What are the two ways an HOA can get the franchise-tax exemption?
A: A federal 501(c) exemption under Sec. 171.063 (send the IRS determination letter), or the homeowners-association route under Sec. 171.082 (prove owner voting control with supporting documents).

Q: What documents does the Sec. 171.082 route require?
A: File-stamped articles, the declaration/covenants/deed restrictions with amendments, the plat, the number of lots/units, an owner list with acquisition dates, and the date owners gained over-50-percent voting control.

Q: Does the Sec. 171.082 exemption also exempt the HOA from sales tax?
A: No - the letter states it does not extend to sales tax; a sales-tax exemption requires a qualifying federal 501(c) determination under Sec. 151.310.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.082 - franchise-tax exemption for homeowners/residential property owners/condominium associations; voting-control requirement; does not extend to sales tax
• Texas Tax Code Sec. 171.063 - franchise-tax exemption for corporations 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/200206153L

Original ruling text

June 5, 2002

Dear **:

Thank you for your request for exemption from the franchise tax and sales tax
for HOMEOWNERS ASSOCIATION, Taxpayer No. **.

Section 171.063 of the Tax Code provides for a franchise tax exemption to a
corporation that has applied and obtained a federal exemption under Section
501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25) of the
Internal Revenue Code (IRC), and Tax Code Section 151.310 allows for an
exemption to an organization that has qualified under IRC Section 501(c)(3),
(4), (8), (10), or (19). If the corporation has applied and obtained a federal
exemption under one of these IRC sections, the only documentation you need to
provide our office is a copy of the Internal Revenue Service (IRS)
determination letter. For information on how to apply for a federal exemption,
call the IRS at 1-877-829-5500 or 1-800-829-3676 to get the application forms.

Tax Code Section 171.082 outlines the requirements for a franchise tax
exemption for homeowners, residential property owners, and residential
condominium associations. Among other requirements, the voting control of the
organization must be vested in the owners of individual lots, or residential
units. The voting control cannot be vested in a developer, declarant, bank,
investor, an individual, or other party. This exemption does not extend to
sales tax. The request for franchise tax exemption should include the
following (copies, not originals):

-- The file stamped articles of incorporation;

-- The declaration, covenants, or deed restrictions, including any subsequent
amendments;

-- The plat of the residential real estate development;

-- The total number of lots or units within the development;

-- A list of all owners and the date each acquired their lot or unit; and

-- The date the individual resident owners gained voting control (over 50
percent of the votes).

Send the additional information along with a copy of this letter 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 filing the appropriate franchise tax reports and paying the
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 us 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