Is a nonprofit water supply corporation exempt from the Texas franchise tax, and what sales/use tax exemption does it get?

Plain-English summary

This is an exempt-organization confirmation letter. The Comptroller told a nonprofit water supply corporation that it qualifies for two separate Texas tax exemptions.

• Franchise tax exemption. The corporation is an exempt organization and qualifies for exemption from the Texas franchise tax under Sec. 171.065 as a water supply corporation.
• Sales and use tax exemption. Because the corporation is designated by the Texas Commission on Environmental Quality (TCEQ) - formerly the Texas Natural Resource Conservation Commission (TNRCC) - as a regional water supplier, it also qualifies for exemption from state and local sales and use tax under Sec. 151.355(5) on its purchases of equipment, services, and supplies used to construct or operate the water or wastewater system.
• How to claim it. The corporation may give vendors a Form 01-339 exemption certificate in lieu of paying state and local sales tax on those qualifying purchases. The certificate needs no number to be valid and may be reproduced.
• Limits. The exempt items may not be used for the personal benefit of a private member or individual, and the exemptions do not extend to the Texas hotel occupancy tax or the motor vehicle tax.
• Keep the state informed. The corporation must notify the Texas Secretary of State if it changes its name, registered agent, or registered office.

Currency note: The letter describes the pre-2008 franchise tax, later replaced by the margin tax (House Bills 3 and 3928, effective January 1, 2008). The water-supply-corporation exemption itself continues under current law, but confirm its present terms and the current TCEQ-designation requirements.

What this means for you

Nonprofit water supply and wastewater corporations

A qualifying water supply corporation does not owe the franchise tax, and - if TCEQ designates it a regional supplier - can buy the equipment, services, and supplies it uses to build and run its system free of state and local sales tax by handing vendors a Form 01-339. Watch the boundaries: the exemption covers system construction and operation, not items diverted to a private member's personal benefit, and it does not reach hotel occupancy tax or motor vehicle tax.

Vendors selling to a water supply corporation

You may accept a properly completed Form 01-339 exemption certificate in place of collecting sales tax on qualifying system-related equipment, services, and supplies. Keep the certificate on file to support the untaxed sale.

Common questions

Q: Does a nonprofit water supply corporation owe Texas franchise tax?
A: No. It qualifies for exemption from the franchise tax under Sec. 171.065.

Q: Are all of its purchases exempt from sales tax?
A: No. The Sec. 151.355(5) exemption (for a TCEQ-designated regional supplier) covers equipment, services, and supplies used to construct or operate the water or wastewater system - not items for a private member's personal benefit, and not hotel occupancy tax or motor vehicle tax.

Q: How does the corporation claim the sales tax exemption?
A: By giving vendors a Form 01-339 exemption certificate; it needs no number to be valid.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.065 - franchise tax exemption for a nonprofit water supply corporation
• Texas Tax Code Sec. 151.355(5) - sales and use tax exemption for a regional water/wastewater supplier's purchases of equipment, services, and supplies used to construct or operate the system

Form:

• Texas Sales and Use Tax Exemption Certification (Form 01-339)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200212752L

Original ruling text

December 10, 2002

Dear **:

Our records show WATER SUPPLY CORPORATION is an exempt organization. It
qualifies for exemption from Texas franchise tax under Section 171.065 as a
water supply corporation.

Based on the corporation's designation by Texas Commission on Environmental
Quality (TCEQ), formerly Texas Natural Resource Conservation Commission
(TNRCC), as a regional water supplier, it qualifies for exemption from Texas
sales and use tax under Section 151.355(5) on its purchases of equipment,
services and supplies used to construct or operate the water or wastewater
system.

The Tax Code is available online at
http://www.capitol.state.tx.us/statutes/txtoc.html.

It may issue a valid exemption certificate in lieu of paying state and local
sales tax on its purchases of equipment, services and supplies used to
construct or operate the water or wastewater system. These items may not be
used for the personal benefit of a private member or individual.

The enclosed certificate, form 01-339, does not require a number to be valid
and you may reproduce it in any quantity. You may download additional copies
online at http://window.state.tx.us/taxinfo/taxforms/01-3392.pdf, or you can
call Tax Assistance at 1-800-252-5555.

However, the above exemptions do not extend to the Texas hotel occupancy tax or
motor vehicle tax.

If you receive any franchise tax notices or have questions regarding sales tax
purchases and/or sales of taxable items or services, contact Tax Assistance at
the number above.

The corporation must notify the Texas Secretary of State if it changes its
name, registered agent, or registered office address. The phone number is
512/463-5582.

If you have questions about your exempt status, you may email me at
[email protected] or call me at 1-800-531-5441, extension 5-0252.

Sincerely,

Peter Kevin Hudson
Exempt Organizations Section