This post is the second of two focused on the Texas sales and use tax treatment of tax-exempt entities. The first, which can be found here, discussed the general categories and criteria applicable tax-exempt entities for Texas sales and use tax purposes. This post will dive into the actual tax impact of being a tax-exempt entity, as well as how tax-exempt status can be lost.
Sales and Purchases by Exempt Entities
- Purchases
Comptroller Rule 3.322(g) provides that a tax-exempt entity can purchase, lease, or rent any “taxable item” (including tangible personal property or taxable services) [1] tax-free if the item relates to the purpose of the exempt organization. [2]. The exempt entity must provide the vendor with an exemption certificate in a form prescribed by the Comptroller. [3]
- Sales
Texas Tax Code § 151.309 states that “[a] taxable item sold, leased, or rented to, or stored, used, or consumed by” a governmental tax-exempt entity (discussed in my prior blog post) is exempt from Texas sales and use tax. [4]
Texas Tax Code § 151.310(a) states that ““[a] taxable item sold, leased, or rented to, or stored, used, or consumed by” a religious, educational, or public service organizational tax-exempt entity (discussed in my prior blog post) is exempt from Texas sales and use tax. [5]. For these entities, however, there are additional rules that may apply:
- An organization that qualifies for exemption via Tex. Tax Code §§ 151.310(a)(1) (referring to organizations created for religious, educational, or charitable purposes) or (a)(2) (referring to organizations qualifying for exemption under various provisions of the Internal Revenue Code, such as 501(c)(3)) may hold “two tax-free sales or auctions…during a calendar year and each tax-free sale or auction may continue for one day only.” [6]
- An organization that qualifies for exemption via Tex. Tax Code § 151.310(a)(4) (referring to fire departments and emergency medical service providers) may hold “10 tax-free sales or auctions during a calendar year” and each “may continue for not more than 72 hours.” [7]
The general distinction that these rules draw is that, as a general matter, sales by an exempt organization under Tex. Tax Code § 151.310 are only exempt if the items are related to the purpose of the organization. [8] However, in the case of a “tax-free sale[] or auction[],” the sale are exempt regardless of whether the item being sold relates to the purpose of the exempt organization. Therefore, these carve-outs will primarily apply to fundraisers held by an exempt organization.
Sales – 3.322(h); 151.310(a); 151.309
Loss or Revocation of Exempt Status
As noted in my prior post, organizations that are exempt pursuant to Tex. Tax Code § 151.310 are not automatically exempt, but rather must meet certain criteria and application requirements in order to gain exempt status. It stands to reason, therefore, that these entities can also lose exempt status.
Comptroller Rule 3.322(f) sets forth the following guidelines for the revocation, withdrawal, or loss of exempt status:
- Generally, if the Comptroller has reason to believe that an exempt organization no longer qualifies as exempt (via the failure of one or more of the criteria for exempt status), the Comptroller may notify the organization that its exempt status is under review, and may ultimately revoke that status. [9].
- If an organization is granted exempt status as a result of its federal tax exempt status, the loss of such status will also result in the automatic termination of state tax exempt status. [10]
An organization that loses its exempt status must immediately notify suppliers that its purchases are subject to tax – failure to do so is a state law violation. [11]
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[1] Tex. Tax Code § 151.010.
[2] 34 Tex. Admin. Code § 3.322(g)(1).
[3] Id.
[4] Tex. Tax Code § 151.309.
[5] Tex. Tax Code § 151.310(a).
[6] Tex. Tax Code § 151.310(c).
[7] Tex. Tax Code § 151.310(c-1).
[8] See, e.g., Tex. Tax Code §§ 151.310(a)(1), (2).
[9] 34 Tex. Admin. Code § 3.322(f)(1).
[10] 34 Tex. Admin. Code § 3.322(f)(2).
[11] 34 Tex. Admin. Code § 3.322(f)(3).