Texas Sales and Use Tax for Exempt Entities – Part 2

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Jason A. Hendrix

Jason A. Hendrix

Attorney

469.998.8484
jhendrix@freemanlaw.com

Jason Hendrix primarily focuses on assisting individuals and businesses with a variety of state tax matters, including Texas sales and use tax, Texas franchise tax, mixed beverage taxes, and motor vehicle taxes. He has several years of experience assisting clients involving disputes with the Texas Comptroller at all levels, including pre-audit, audit, administrative appeals, and collections. He also has experience assisting clients with matters involving the Texas Workforce Commission, as well as corporate matters, including formation and structuring, and federal tax matters.

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

  1. 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]

  1. 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:

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:

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).