Are unredeemed coupon revenue, exhibitor car-pass charges, and game revenue at a nonprofit state fair subject to Texas sales tax?

Plain-English summary

This 1992 letter is internal guidance from the Comptroller's Tax Administration Division to an audit manager, answering three separate questions that came up during a sales tax audit of a nonprofit state fair. The stub's inherited heading, "State Fair Of Texas — Admission And Game Rides Revenues," is misleading: the letter is not primarily about admission or ride revenue at all (that issue had already been settled as exempt back in 1984). Instead it addresses unredeemed coupon revenue, exhibitor parking/car-pass charges, and revenue from games -- a more accurate title is used above ("State Fair Audit: Unredeemed Coupon Revenue, Exhibitor Parking Charges, and Game Revenue Taxability").

On unredeemed coupons, the fair sold coupons redeemable for rides (exempt) or food (taxable), and after the fair closed, any unredeemed balance was moved from a clearing account into revenue on the books. The Comptroller ruled that this book-revenue recognition is not itself a taxable event -- coupons represent only an intangible right to redeem for property or a service in the future, and no transfer of title, possession, or performance of a service has occurred under Tax Code § 151.005 until the coupon is actually redeemed. Tax is due only when coupons or tickets are redeemed for food or an amusement service, regardless of how the fair treats the money for accounting purposes.

On parking, exhibitors received free admission passes but paid for "car passes" that varied from covering a car and all occupants to just the driver. The fair argued that because the city's parking fee was only $3/day, any excess charged for the car passes was really disguised admission revenue, not taxable parking. The Comptroller rejected that argument: the entire car-pass charge is taxable as parking unless the fair can show that a specific dollar amount was represented to exhibitors -- in the contract or on the pass itself -- as the parking charge. The Fair License Agreement reviewed was silent on how much of the charge was for parking, leaving the whole amount taxable.

On game revenue, the fair (a 501(c)(3) nonprofit organized to encourage agriculture through public fairs and exhibitions) had already been ruled exempt on admission and ride revenue in 1984, but games weren't part of that ruling because the fair didn't take over running the games until 1990. The Comptroller held that game revenue is likewise exempt as an amusement service under 34 Tex. Admin. Code § 3.298(g)(1)(B), since the fair provides the games itself. Under § 3.298(g)(3), the fair doesn't lose that exemption just by hiring a for-profit game operator to run the games -- so long as the fair holds itself out as the provider of the amusement and isn't operating as a joint venturer with the for-profit operator.

What this means for you

Nonprofit fairs, festivals, and exhibition operators

If your organization is a 501(c)(3) nonprofit that provides amusement services (rides, games, exhibits), that revenue can be exempt from Texas sales tax even when you outsource day-to-day operation of specific attractions to a for-profit contractor -- as long as your organization holds itself out publicly as the provider and doesn't function as a joint venturer with the operator. Document that relationship carefully (operating agreement, public-facing signage/branding) to support the exemption.

Businesses selling coupons, vouchers, or gift certificates redeemable for mixed taxable/exempt items

The taxable event is redemption, not sale or book-revenue recognition. If you sell coupon books redeemable for a mix of taxable (food) and exempt (rides/amusement) items, don't assume that moving stale, unredeemed balances into a revenue account for accounting purposes creates a sales tax liability -- it doesn't, under this ruling's reading of § 151.005.

Accountants and auditors handling parking/admission bundled charges

If a client charges a bundled fee that covers both parking and something else (like extra admission), the whole charge is presumed taxable as parking unless the client can point to a specific, separately stated or contractually identified parking amount. A vague reference to a city ordinance rate is not enough -- the allocation has to be documented in the pricing or contract itself.

Common questions

Q: When is tax actually due on the fair's coupons -- when sold or when redeemed?
A: When redeemed. Selling the coupon transfers only an intangible right to redeem later; recognizing unredeemed balances as book revenue after the fair closes doesn't change that, and no tax is owed on that unredeemed portion.

Q: Are the exhibitor car passes taxable as parking, admission, or a mix of both?
A: The entire charge is taxable as parking unless the fair can show a specific amount was represented to exhibitors as the parking portion (stated on the pass or in the contract). Here, the license agreement didn't specify an amount, so the whole car-pass charge was taxable.

Q: Does hiring an outside company to run the fair's games cause the fair to lose its nonprofit amusement exemption?
A: No. Under 34 Tex. Admin. Code § 3.298(g)(3), a nonprofit fair can hire a for-profit operator to run games without losing the exemption, as long as the fair holds itself out as the provider of the amusement and isn't a joint venturer with the operator.

Q: Why weren't games covered by the fair's original 1984 exemption ruling?
A: Because the fair itself didn't take control of operating the games until 1990 -- the 1984 ruling only addressed admission and ride revenue, which the fair was already directly providing at that time.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.005(1), (3), (5) (definition of "sale" — transfer of title/possession or performance of a taxable service)
• 34 Tex. Admin. Code § 3.298(g)(1)(B), (g)(3) (Amusement Services — nonprofit exemption and use of for-profit game operators)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205028L

Original ruling text

DATE: May 14, 1992

TO: Dan Linn, Manager, ** Audit

FROM: Gilbert Zamora, Tax Administration Division

SUBJECT: FAIR- **

SITUATION

Auditor Sheila Natho is currently conducting an audit of the FAIR. Three
questions have arisen concerning unredeemed coupon revenue, parking, and
revenue from games.

QUESTIONS

Your questions are restated below followed by my response:

(1) UNREDEEMED COUPON REVENUE

After the close of the FAIR, an amount exists on the books in a coupon clearing
account for unredeemed coupons. This amount is then transferred to a revenue
account and recognized as revenue. Taxpayer contends that when the coupon is
sold, a taxable event has not occurred and that tax is due when a coupon is
redeemed. Taxpayer has microfiche to support this argument. However, the fiche
does not go on to address the issue of unredeemed coupons which have been
recognized as revenue. The unredeemed coupons are not a liability on the
taxpayer's books. These coupons can be used from year to year, however, the
result is the revenue being recognized twice since no liability was
established. We believe that when the unredeemed coupons are recognized as
revenue, that is when the taxable event occurred. Also, coupons can be redeemed
for rides (exempt) or food taxable). We will apportion the unredeemed coupon
revenue accordingly. Is a portion of the recognized revenue taxable?

RESPONSE: The portion of unredeemed coupons recognized as revenue is not
taxable.

The coupons represent an intangible right to redeem for tangible personal
property or an amusement service in the future. A transfer of title or
possession of tangible personal property or the performance of a service has
not occurred as required by Sec. 151.005(1), (3), or (s). Tax is due when the
coupons or tickets are redeemed for food or an amusement service. The fact that
income on the unredeemed coupons is recognized for book purposes does not
override 151.005.

Research: 800A10, 913A10, 1037C12, 1047G10, 616D13, 633B09, 787F12, 829Fl0

(2) PARKING

Taxpayer has a revenue account for amounts charged to exhibitors for car
passes. Taxpayer contends that this amount is for a combination of parking and
admissions. These car passes vary from allowing car and occupants to car and
driver only. It must be noted that all exhibitors receive sufficient admission
passes for the length of the FAIR at no charge. Taxpayer argues that the city
has set a parking fee of $3 per day and that since these passes exceed this
amount that a portion is really admissions. See microfiche #891G09 regarding
scrip fees at **. Would the entire charge be taxable as parking or
only an amount equal to $3 parking for each day the fair operates?

RESPONSE:

The entire amount charged to exhibitors for car passes is taxable, unless the
taxpayer can show that the $3 is represented to exhibitors (i.e., stated on
pass or in the contract) as the charge for parking. I have reviewed the Fair
License Agreement for Game Operation that you provided. Section 5 of this
agreement, Gate Admission, is silent as to the amount charged for parking, but
does state that "additional vehicle passes may be purchased by Lessee-Operator
with the price of said vehicle passes... to be determined by Lessor, in its
sole and absolute discretion." This would tend to indicate that the taxpayer
can charge the Lessee-Operator whatever rate it wishes for parking.

Research: 891G09, 769D06,

(3) REVENUE FROM GAMES

The admission and ride revenue at the FAIR was ruled exempt in 1984 (see
microfiche #595Aol and #589Ell) since the FAIR is an exempt entity [501(c)(3)]
providing the amusement. Games were not ruled on at that time because the FAIR
did not take control of the games until 1990. Is the revenue from games at the
FAIR taxable?

RESPONSE:

As a nonprofit organization organized for the purpose of encouraging
agriculture by the maintenance of public fairs and exhibitions, revenue from
games (amusement services) at the FAIR is not subject to tax if the games are
provided exclusively by the nonprofit organization [see section (g)(l)(B) of
Rule 3.298, Amusement Services]. Under section (g)(3) of this rule the FAIR may
hire a for-profit organization (i.e., the game operators) to run the games
without loss of the exemption. The FAIR must hold itself out as the provider of
the amusement and may not be a joint venturer with the for-profit entity.

Research: 595A01, 589Ell, 943G06