I’ve previously posted about various Texas sales and use tax rules – general rules, exceptions, and exemptions applied to both taxable services and tangible personal property. However for certain entities—specifically, governmental entities and religious, educational, and public service organizations, all of those go out the window. I’ll discuss the exempt-status of these entities, as well as how the sales tax rules apply, below.
- Governmental Entities
Tex. Tax Code § 151.309 sets forth an exemption for the following types of governmental entities:
- The United States;
- An unincorporated instrumentality of the United States;
- A corporation that is an agency or instrumentality of the United States and is wholly owned by the United States or by another corporation wholly owned by the United States;
- This state;
- A county, city, special district, or other political subdivision of this state; or
- A state, or a governmental unit of a state that borders this state, but only to the extent that the other state or governmental unit exempts or does not impose a tax on similar sales of items to this state or a political subdivision of this state. [1]
This exemption effectively applies to the federal government or an agency thereof, any government or quasi-government within Texas, or any other state government that provides for reciprocal exemption for other governmental entities. These types of entities are automatically exempt from Texas sales and use tax – they do not have to apply for or establish criteria for exemption. [2]
- Religious, Educational, and Public Service Organizations
Tex. Tax Code § 151.310 sets forth an exemption for the following types of entities:
- An organization created for religious, educational, or charitable purposes if no part of the net earnings of the organization benefits a private shareholder or individual and the items purchased, leased, or rented are related to the purpose of the organization;
- An organization qualifying for an exemption from federal income taxes under Section 501(c)(3), (4), (8), (10), or (19), Internal Revenue Code, if the item sold, leased, rented, stored, used, or consumed relates to the purpose of the exempted organization and the item is not used for the personal benefit of a private stockholder or individual;
- A nonprofit organization engaged exclusively in providing athletic competition among persons under 19 years old if no financial benefit goes to an individual or shareholder;
- A company, department, or association organized for the purpose of answering fire alarms and extinguishing fires or for the purpose of answering fire alarms, extinguishing fires, and providing emergency medical services, the members of which receive no compensation or only nominal compensation for their services rendered, if the taxable item is used exclusively by the company, department, or association; or
- A chamber of commerce or a convention and tourist promotional agency representing at least one Texas city or county if the chamber of commerce or the agency is not organized for profit and no part of its net earnings inures to a private shareholder or other individual. [3]
Unlike governmental entities, entities falling in the above categories need to establish that they are exempt. Specifically, the entities need to apply with the Texas Comptroller’s office for exemption, and must provide both governing documents (formation documents, bylaws, etc.) as well as IRS documents, if the entity is applying based on exemption under the Internal Revenue Code. [4] The entity also needs to meet certain criteria:
- The organization must be organized or formed solely to conduct one or more exempt activities;
- The organization must devote its operations exclusively to one or more exempt activities;
- The organization must dedicate its assets in perpetuity to one or more exempt activities; and
- No profit or gain may pass directly or indirectly to any private shareholder or individual. [5]
If the entity satisfies the above criteria and submits a completed application, the Comptroller will review and, upon approval, will issue a letter informing the entity of its qualification for exemption. [6]
In a follow-up post, I’ll discuss the tax implications of being an exempt entity, as well as some additional pertinent information related to maintaining exempt status.
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[1] Tex. Tax Code § 151.309; 34 Tex. Admin. Code §§ 3.322(c)(1)-(5).
[2] 34 Tex. Admin. Code § 3.322(c).
[3] Tex. Tax Code §§ 151.310(a)(1)-(5); see also 34 Tex. Admin. Code § 3.322(b).
[4] 34 Tex. Admin. Code § 3.322(e).
[5] 34 Tex. Admin. Code § 3.322(b).
[6] 34 Tex. Admin. Code § 3.322(e)(4).
