Was a nonprofit charitable organization that may have done business in Texas during 1995 subject to former Texas franchise tax?

Plain-English summary

The nonprofit could owe former franchise tax, but the letter did not have enough facts to decide.

Texas did not impose an income tax, but it did impose franchise tax on corporations, banks, savings and loan associations, and limited liability companies. The organization's filing of federal Forms 990 and 990-T did not by itself answer the Texas question.

The Comptroller identified three conditions: the organization had to be a type of entity subject to franchise tax, have Texas nexus under Rule 3.546, and not qualify for an exemption under Subchapter B. The letter also warned that other Texas taxes could apply depending on the organization's activities.

What this means for you

Nonprofit organizations operating in Texas

Nonprofit status alone did not resolve former Texas franchise-tax liability; entity form, nexus, and a specific exemption all mattered.

Advisers reviewing this letter

Treat it as a decision framework, not a holding that this particular organization owed or did not owe tax.

Common questions

Q: Did Texas impose an income tax on the organization?
A: No; the letter instead addressed franchise tax.

Q: Did the Comptroller decide whether this nonprofit owed franchise tax?
A: No.

Q: What facts controlled the conditional answer?
A: Taxable entity type, Texas nexus, and eligibility for an exemption.

Citations and references

• 34 Tex. Admin. Code Sec. 3.546, as cited in the letter
• Former franchise-tax statute, Subchapter B, as cited for exemptions

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9610802L

Original ruling text

October 3, 1996

Dear **:

In your letter of September 26, you requested information regarding your
client's liability for taxes.

You state that your client is a non-profit charitable organization that may
have conducted business in Texas during the 1995 tax year. You also state that
your client has already filed a Form 990 and Form 990-T with the Internal
Revenue Service.

Although Texas has no income tax, the state does impose a franchise tax on
corporations, banks, savings and loan associations, and limited liability
companies. Therefore, your client could be subject to franchise tax if the
organization is a corporation or other type of entity which can be subject to
franchise tax.

If the organization is a corporation or other entity which can be subject to
franchise tax and had nexus in Texas as defined in Rule 3.546 (enclosed), the
company will be subject to franchise tax unless it qualifies for exemption. I
have enclosed Subchapter B of the franchise tax statute (which addresses
exemptions) for your review. I you have questions regarding exemptions, I
suggest that you contact the Exempt Organizations section of Tax Policy
Division. You may call toll free 1-800-531-5441, or the regular number is
512/463-4600. You may write the section at Tax Policy Division, Comptroller of
Public Accounts.

Of course, the organization may also be subject to other state taxes depending
on their activity in the state.

If you have other questions you may contact me at the toll free number and
address indicated above. If you call, my extension is 3-4662.

Sincerely,

Bob Jeffcoat
Tax Policy Division