Texas Letter Ruling 9210L1200A01: Exempt/Nonprofit Entity And For — Profit Organization Holding Event — Guidelines

Subject

Exempt/Nonprofit Entity And For — Profit Organization Holding Event — Guidelines

Plain-English summary

A nonprofit 501(c)(3) organization asked the Texas Comptroller whether admission tickets to a volleyball exhibition it was presenting would stay exempt from tax, given that it planned to hire a for-profit professional sports marketing firm to handle the day-to-day operations of the event. Under the agreement described, the nonprofit would present the event under its own name and contract, and would retain 50% of the gross box office receipts, with the for-profit firm handling the rest of the arrangement described in the parties' Letter of Agreement.

The Comptroller's office answered by quoting Rule 3.298(g)(3) (Amusement Services), which allows a nonprofit group to hire a for-profit organization to provide the expertise needed to produce an event without losing the ticket exemption — as long as the nonprofit holds itself out as the provider of the amusement and is not a joint venturer with the for-profit entity.

Applying that rule, the Comptroller told the nonprofit that its tickets would qualify for exemption as long as: (1) the nonprofit is the "provider" of the event as defined in Rule 3.298(a)(4), and (2) the nonprofit holds itself out as the provider in advertising, billboards, tickets, or other promotional media. The Comptroller noted that the Letter of Agreement identified the nonprofit as the "sole provider" of the event, but that the agreement did not address how the event would actually be promoted — so that piece of the test was not resolved by the ruling itself. The Comptroller also flagged that the nonprofit could not be a joint venturer with the for-profit firm, meaning any profit or loss from the exhibition had to revert to the nonprofit rather than being shared with the marketing firm. The letter closes by noting the opinion is based on the facts presented and that other, even similar, facts could produce a different result.

What this means for you

Nonprofit organizations presenting events

If your nonprofit hires a for-profit promoter, marketing firm, or event-production company to run the logistics of an event, you can still keep the admissions tax exemption on your tickets. But two things have to be true: your organization has to be the one the public sees as the provider of the event (through advertising, billboards, tickets, and other promotional materials), and your organization cannot share the profit or loss of the event with the for-profit firm as a joint venture — the financial outcome has to land on the nonprofit.

For-profit event/marketing companies working with nonprofits

Being retained purely to provide operational expertise for a nonprofit's event does not, by itself, cause the nonprofit's tickets to lose their exemption. But if your compensation or contract structure effectively makes you a joint venturer sharing in the event's profit or loss, or if your firm rather than the nonprofit is held out publicly as the provider, that can jeopardize the nonprofit's exemption.

Accountants and tax professionals

This ruling illustrates how the Comptroller applies the two-part test under Rule 3.298(g)(3): (a) the nonprofit must be the "provider" as defined in Rule 3.298(a)(4), and (b) the nonprofit must hold itself out as such in advertising, billboards, tickets, or other media. Note that in this specific case, the Comptroller did not confirm the promotion prong was satisfied — the Letter of Agreement named the nonprofit as "sole provider" contractually, but was silent on how the event would actually be advertised, so that fact still needed to be established. Also confirm that the profit/loss from the event reverts entirely to the nonprofit, since a joint-venture arrangement with the for-profit contractor would break the exemption regardless of promotional materials.

Common questions

Q: Does hiring a for-profit company to run an event cause a nonprofit to lose its ticket tax exemption?
A: Not automatically. Under Rule 3.298(g)(3), a nonprofit may hire a for-profit organization to provide the expertise to produce an event without losing the exemption, as long as the nonprofit holds itself out as the provider of the amusement and isn't a joint venturer with the for-profit entity.

Q: What does "holding itself out as the provider" require?
A: The nonprofit needs to be identified as the provider in advertising, billboards, tickets, or other media promoting the event. In this ruling, the written agreement named the nonprofit as the "sole provider," but the agreement itself did not address how the event was actually promoted to the public.

Q: What is a "joint venturer" problem in this context?
A: If the nonprofit and the for-profit firm share in the profit or loss of the event, rather than any profit or loss reverting entirely to the nonprofit, the arrangement can look like a joint venture, which would jeopardize the exemption.

Q: Does this ruling apply to other nonprofits or events?
A: No. The Comptroller explicitly states the opinion is based on the facts presented and that other facts, even if similar, may produce a different result.

Citations and references

No statutes were cited in this letter. The Comptroller's response quotes and applies 34 Tex. Admin. Code Rule 3.298 (Amusement Services), specifically subsection (g)(3) (nonprofit hiring a for-profit operator without losing the exemption) and the definition of "provider" in subsection (a)(4).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9210L1200A01

Original ruling text

October 6, 1992

Dear **:

Thank you for your recent letter regarding the taxability of admissions to a
volleyball exhibition presented by the **.

The ** , a non-profit 501 (c) (3) organization, will present the
exhibition at ** in **, Texas on October 14, 1992. In
its capacity as presenter, the **will enter into a contract with
**, a professional sports marketing firm, to provide day-to-day
operations generally necessary to effectively produce such an event.

The agreement between the ** and ** will be
represented by the enclosed Letter of Agreement dated September 23, 1992.
Pursuant to the overall agreement, the ** will present the
performance upon all the applicable terms and conditions of the agreement and
will contract in its name to furnish all of the services set forth therein.
The ** will retain in its capacity, 50% of the gross box office
receipts as defined in paragraph 7 of the Letter of Agreement.

RESPONSE: Section (g)(3) of Rule 3.298, Amusement Services, reads as follows,

Except as provided by subsection (h) of this rule, a nonprofit group may hire a
for-profit organization to provide the expertise to produce an event without
loss of the exemption provided by paragraph (1) (A) of this subsection. The
nonprofit organization must hold itself out as the provider of the amusement
and may not be a joint venturer with the for-profit entity. (emphasis added)

Tickets for this performance qualify for exemption as long as the
** is the provider, as that term is defined in Rule 3.298(a) (4),
and the ** holds itself out as the provider (in advertising,
billboards, tickets, or other media promoting the event). The Letter of
Agreement identifies the ** as the "sole provider" of the event,
but does not address how the event was promoted. Additionally, the
** may not be a joint venturer with ** i.e., any profit
or loss from the exhibition must revert to the **.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

If you have other questions or need more information, you may call me at
1-800-252-5555, extension 3-4502. The regular number is 512/463-4600. You may
also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division