Can a 50/50 joint venture between a 501(c)(3) nonprofit and a for-profit company use a direct payment permit to claim a partial (50%) sales tax exemption?

Plain-English summary

A 501(c)(3) nonprofit organization and a for-profit company formed a joint venture to provide medical care, with each partner owning 50%. The joint venture planned to apply for a Texas direct payment permit, then issue direct payment blanket exemption certificates to its vendors in lieu of paying tax at the time of purchase, and instead accrue use tax itself on 50% of the purchase price of taxable goods and services (assuming it would properly collect and remit tax on its own taxable sales).

The Comptroller answered three specific questions:

1. May the joint venture issue direct payment blanket exemption certificates to its vendors? Yes.
2. May the joint venture then claim a Pro Rata Exemption when it accrues and remits taxes on taxable items? Yes — the joint venture may claim a 50% exemption for purchases of taxable items that are in keeping with the exempt purpose of its exempt (nonprofit) partner, mirroring the partner's 50% ownership stake.
3. Does purchasing an item under a direct payment blanket certificate create any presumption about whether that item is ultimately taxable or nontaxable? No — buying under the certificate doesn't by itself establish the item's tax character one way or the other. The joint venture still has to correctly determine and report tax under Rule 3.288's direct payment procedures and qualifications.

What this means for you

Nonprofit/for-profit joint ventures

If your joint venture is co-owned by a tax-exempt nonprofit and a for-profit entity, you can use a direct payment permit to defer tax determination to the point of use rather than at purchase, and you can pro-rate the exemption based on the exempt partner's ownership percentage and exempt purpose — but you must still correctly characterize each purchase as taxable or not, and follow Rule 3.288's procedures.

Accountants and tax professionals

This letter illustrates the mechanics of a "Pro Rata Exemption" for mixed-ownership entities: the exemption percentage tracks the exempt partner's ownership share, and using a direct payment blanket certificate is purely a payment-timing mechanism, not a substitute for correctly classifying each purchase.

Common questions

Q: Does a joint venture with a nonprofit partner get a full sales tax exemption?
A: No, per this letter — only a pro rata exemption matching the exempt partner's ownership percentage (here, 50%) and only for purchases consistent with that partner's exempt purpose.

Q: Does using a direct payment certificate mean an item is automatically nontaxable?
A: No, per this letter — the certificate is a payment mechanism, and using it creates no presumption about an item's ultimate taxability.

Q: What rule governs how the joint venture must report its direct-pay purchases?
A: Rule 3.288 (Direct Payment Procedures and Qualifications), per this letter.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.288 (Direct Payment Procedures and Qualifications)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9806587L

Original ruling text

June 3, 1998

Dear Mr. **:

Thank you for your recent letter regarding a joint venture of an organization
designated by the Internal Revenue Service as an exempt organization under
Section 501(c)(3) of the Internal Revenue code and a for-profit organization.
The purpose of the joint venture is the provision of medical care and each
participant owns 50% of the joint venture.

The joint venture proposes to apply for a direct payment permit. After
securing a direct pay permit, the joint venture will issue direct payment
blanket exemption certificates to its vendors. The joint venture would then
accrue use tax on 50% of the purchase price of all taxable goods and services.
Please assume that the joint venture will properly collect and remit Texas
sales and use taxes on all sales of taxable items.

(1) May the joint venture issue direct payment blanket exemption certificates
to its vendors in lieu of payment of tax on purchases of taxable items.

Response: Yes.

(2) If the answer to the preceding question is yes, may the joint venture
claim the Pro Rata Exemption when it accrues and remits taxes on taxable items.

Response: The joint venture may claim a 50% exemption for purchases of taxable
items the purchase of which is in keeping with the exempt purpose of the exempt
partner.

(3) The mere fact that an item is purchased under a direct payment exemption
blanket certificate creates no inference or presumption regarding the ultimate
characterization of the purchased item as taxable or nontaxable.

Response: No. However, the joint venture must comply with the provisions of
Rule 3.288 regarding Direct Payment Procedures and Qualifications.

This opinion is rendered based on the facts presented. If there are additional
or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division