When a tax-exempt nonprofit organization hires a for-profit carnival operator to run an event, who owes sales tax on the amusement -- the carnival operator or the exempt entity?

Subject

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

Plain-English summary

This letter responds to a request (from someone representing a carnival, working with a person named Roy Scudday) for a clear line between carnival events that are subject to Texas sales tax and carnival events that are not, when a tax-exempt entity contracts with a for-profit carnival operator to hold the event.

The Comptroller's answer sets out two questions to work through in order.

First: is the contract a joint venture? If the exempt entity and the carnival operator have formed a joint venture, tickets sold for the carnival are subject to sales tax. A joint venture requires a genuine sharing of both profit and loss -- shared equally or on a percentage basis. A contract where one party bears all the losses while profit is simply divided does not create a joint venture. Likewise, the exempt entity contributing things like land or electricity for the event does not, by itself, turn the arrangement into a joint venture -- the key factor is whether losses (not just profits) are actually shared.

Second: if it's not a joint venture, who is the "provider" of the event? The letter looks at the form contract used, which includes a space for a guaranteed payment to the carnival operator. If the exempt entity agrees to pay the carnival operator a guaranteed amount, that is strong evidence the exempt entity is the one providing the carnival (and the event isn't taxed as the operator's amusement service). If there's no guarantee, or only a negligible one, the Comptroller looks at which entity holds itself out as the provider of the event. Using the carnival operator's name in advertising does not, by itself, make the amusement taxable -- the letter compares this to a symphony that advertises "Entertainers A, B, C" without losing its status as the entity presenting the concert.

What this means for you

Nonprofit and exempt organizations hosting carnivals or similar events

Whether your organization's carnival fundraiser is tax-free turns on your contract with the carnival operator. Avoid structures that share losses (not just profits) with the operator, since that risks being treated as a joint venture with taxable ticket sales. If you pay the operator a guaranteed fee, that supports treating your organization as the event's provider.

For-profit carnival and amusement operators contracting with nonprofits

Using your company's name in event advertising does not, by itself, make the amusement service taxable, as long as the exempt entity is genuinely holding itself out as the provider of the event. But if your contract calls for sharing losses with the exempt entity, or if there is no meaningful guaranteed payment and you are the one presenting yourself as the event provider, the taxability analysis can shift.

Accountants and tax professionals

Apply the two-question framework in order: (1) does the contract create a true joint venture based on shared losses (not merely contributions like land or electricity, and not merely divided profits), and (2) if not, does the contract show a guaranteed payment to the operator (pointing to the exempt entity as provider), or does the totality of the facts show which party holds itself out as the provider?

Common questions

Q: Does an exempt entity providing the carnival's land and electricity turn the contract into a taxable joint venture?
A: No. Contributions like land and electricity by the exempt entity do not create a joint venture. What matters is whether losses are shared equally or on a percentage basis, not the mere fact of contributing resources.

Q: If one party bears all the losses but profit is split, is that a joint venture?
A: No. A joint venture requires that losses (not just profits) be shared, either equally or by percentage. A contract where one party absorbs all losses while profit is divided does not create a joint venture.

Q: Does advertising under the carnival operator's name make the event taxable?
A: Not by itself. If the exempt entity is holding itself out as the provider of the event, using the carnival's name in advertising does not cause the amusement service to be taxable -- similar to a symphony advertising named entertainers without losing its role as the concert's provider.

Q: What is strong evidence that the exempt entity, not the carnival operator, is the "provider" of the event?
A: A contract term guaranteeing a set payment to the carnival operator is strong evidence the exempt entity is providing the carnival.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1436D13

Original ruling text

August 28, 1996

Dear ***:

On August 19, 1996 you asked that I look into the
policy of taxing amusements provided by exempt entities. Subsequent to
receiving your letter, we discussed your concerns; and I also examined the
general form contract used by the carnival you represent.

You and Roy Scudday would like a statement setting out
the dividing line between carnivals that are taxable and those that are not.
There are two basic questions that need to be answered. The first is whether a
joint venture exists between the exempt entity and the carnival operator. If
the answer is "yes," tickets sold for the carnival are subject to the sales
tax. If the contract is not a joint venture, the second question is, "Which
entity is the provider?"

In order for a joint venture to exist, there must be a
sharing of both profit and loss. The losses must be shared equally or on a
percentage basis. A contract that provides one party will bear all the losses
and the profit will be divided, does not create a joint venture. Items
provided by an exempt entity in connection with the event will not create a
joint venture. In creating a joint venture, each joint venturer is required to
contribute equally or to the extent of the joint venturer's percentage of
interest in the joint venture. The fact the exempt entity provides the land
and electricity does not convert the contract into a joint venture. The key to
determining whether a contract creates a joint venture turns on the sharing of
losses as well as profits, and contributions by an exempt entity are not the
equivalent of an equal or percentage sharing in the losses.

The second question addresses the issue of who is the
provider of the event. Your client's form contract provides a space for a
guaranteed amount to be paid to the carnival operator. If the exempt entity
agrees to pay the carnival operator some guaranteed amount, this is strong
evidence that the exempt entity is providing the carnival. If there is no
guarantee or a negligible amount to be paid to the carnival operator, the
determination must then be made as to which entity holds itself out as the
event provider. The fact that the carnival's name is used in the advertisement
will not cause the amusement service to be taxable so long as the exempt entity
is holding itself out as the provider of the event any more than the local
symphony holding out that it is presenting "ENTERTAINERS A, B, C" means that
the symphony is not providing the concert because the entertainers' names are
used in advertising the concert.

I hope this satisfactorily answers your inquiry.

Sincerely,

Wade Anderson
Director, Tax Policy

NOTE: Previous Accession Number 9608708L