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Is your business tax-exempt?

Is your business tax-exempt?

Author: James Watson, Owner/President
Texas Marshal Protection Agency, LLC

Statistically, most of our clients have been nonprofit organizations.

Nonprofits are generally exempt from certain taxes in the State of Texas. Unfortunately, however, if they haven’t applied for sales tax exemption with the Texas Comptroller of Public Accounts, we must charge them sales tax on their invoices. Why? Well, according to the Texas Tax Code §151.0075, Private Security & Investigation services are taxable, and per Texas Administrative Code §3.333, we are required to collect said taxes.

“Hey…what if we’re already a 501(c)?” #

Glad you asked; we get this a lot! A federal tax exemption certainly helps, but that alone does not satisfy the requirements for claiming a tax exemption for Texas Sales Tax.

The meat and potatoes of Texas Administrative Code §3.322 states the following:

(b) Entities that must prove exempt status. Entities or organizations that may qualify for exempt status include:

(1) a nonprofit charitable or eleemosynary organization that devotes all or substantially all of its activities to the alleviation of poverty, disease, pain, and suffering by providing food, clothing, medicine, medical treatment, shelter, or psychological counseling directly to indigent or similarly deserving members of society with its funds derived primarily from sources other than fees or charges for its services. If the organization engages in any substantial activity other than the activities described in this section, it cannot qualify for exemption under this provision because it is not organized for purely public charity. However, if the organization is engaged in activities, other than those described in this section, and the additional activities are incidental to and in support of the activities conducted by the organization that are described in this section, the organization may be considered for this exemption. No part of the net earnings of the organization may inure to the benefit of any private party or individual other than as reasonable compensation for services rendered to the organization. Some examples of organizations that do not meet the definition of a charitable organization, even if they are nonprofit organizations that perform services that are often charitable in nature, are as follows: fraternal organizations, lodges, fraternities, sororities, service clubs, veterans groups, mutual benefit or social groups, professional groups, trade or business groups, trade associations, medical associations, chambers of commerce, and similar organizations. Although these organizations do not qualify for exemption as charitable organizations, they may qualify for the exemption under Tax Code, §151.310(a)(2), if they obtain an exemption from the Internal Revenue Service (IRS) under Internal Revenue Code (IRC), §501(c). Chambers of Commerce may qualify for exemption under paragraph (6) of this subsection;

(2) a nonprofit educational organization or governmental entity whose activities are devoted solely to systematic instruction, particularly in the commonly accepted arts, sciences, and vocations, and has a regularly scheduled curriculum that uses the commonly accepted methods of teaching, a faculty of qualified instructors, and an enrolled student body or students in attendance at a place where the educational activities are regularly conducted. An organization that has activities that solely consist of presentation of discussion groups, forums, panels, lectures, or other similar programs, may qualify for the exemption under this provision, if the presentations provide instruction in the commonly accepted arts, sciences, and vocations. An organization cannot qualify for exemption under this provision if the systematic instruction or educational classes are incidental to some other facet of the organization’s activities. No part of the net earnings of the organization may inure to the benefit of any private party or individual other than as reasonable compensation for services rendered to the organization. Some examples of organizations that do not meet the requirements for exemption under this definition are professional associations, business leagues, information resource groups, research organizations, support groups, home schools, and organizations that merely disseminate information by distributing printed publications. Although these organizations do not qualify for exemption as educational organizations, they may qualify for the exemption under Tax Code, §151.310(a)(2), if they obtain an exemption from the IRS under IRC, §501(c);

(3) a nonprofit religious organization that is an organized group of people who regularly meet at a designated physical location for the primary purpose of holding, conducting, and sponsoring religious worship services according to the rites of their sect. The organization must be able to provide evidence of an established congregation that shows regular attendance of these services by an organized group of people. An organization that supports or encourages religion as an incidental part of its overall purpose, or one whose general purpose is to further religious work or instill its membership with a religious understanding, cannot qualify for exemption under this provision. No part of the net earnings of the organization may inure to the benefit of any private party or individual other than as reasonable compensation for services rendered to the organization. Some examples of organizations that do not meet the requirements for exemption under this definition are conventions or associations of churches, evangelistic associations, churches with membership consisting of family members only, missionary organizations, and groups that organize for the purpose of holding prayer meetings, Bible study, or revivals. Although these organizations do not qualify for exemption as religious organizations, they may qualify for the exemption under Tax Code, §151.310(a)(2), if they obtain an exemption from the IRS under IRC, §501(c);

(4) a youth athletic organization that is a nonprofit corporation or association that exclusively provides athletic competition among persons under 19 years of age;

(5) a nonprofit organization that applies for and obtains a determination letter or a group exemption ruling letter from the IRS that states that the organization qualifies for exemption from federal income tax under IRC, §501(c)(3), (4), (8), (10), or (19);

(6) a nonprofit chamber of commerce that represents at least one Texas city, county, or geographic locality. For the purpose of this section, a chamber of commerce is a perpetual organization devoted exclusively to promoting the general economic interest of all commercial enterprises in the city, county, or areas it represents. The term does not include chamber-like organizations such as trade associations or business leagues that serve a single line or closely related lines of business within a single industry;

(7) a nonprofit convention and tourist promotional agency organized or sponsored by at least one Texas city or county;

(8) an electric cooperative formed under the Electric Cooperative Corporation Act (Utilities Code, Chapter 161) and nonprofit electric cooperatives located outside the state;

(9) a telephone cooperative formed under the Telephone Cooperative Act (Utilities Code, Chapter 162) and nonprofit telephone cooperatives located outside the state;

(10) a local organizing committee, as defined in Texas Civil Statutes, Article 5190.14, §1(7), that is exempt from federal income tax under IRC, §501(c). The local organizing committee must be authorized by an endorsing municipality, an endorsing county, or more than one endorsing municipality or county acting collectively to pursue an application and submit a bid on the municipality’s or county’s behalf to a site selection organization for selection as the host site of one or more games or events, as defined in Texas Civil Statutes, Article 5190.14, §§5A, 5B, or 5C;

(11) any 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 nominal or no compensation for their services; and

(12) nonprofit corporations formed under Local Government Code, Chapter 501 (Development Corporation Act of 1979) or Health and Safety Code, Chapter 221 (Health Facilities Development Act of 1981) when they purchase items for their exclusive use and benefit. The exemption does not apply to items purchased by the corporation to be lent, sold, leased, or rented.

Enough of the boring stuff…you came here to get help. Let’s get that exemption! #

The info below is per Texas Administrative Code §3.322(e) – Exempt Organizations, How to obtain exempt status.

(1) Application. To apply for and obtain notification of exemption from the comptroller, an organization must complete and submit to the comptroller the appropriate application or its equivalent. Applicants should refer to the Guidelines to Texas Tax Exemptions (publication 96-1045) for assistance in completing the proper application for any exemption sought.

(2) Documentation required. In addition to a properly completed application, an organization must submit with the application all documents requested by the application and comptroller publication 96-1045, Guidelines to Texas Tax Exemptions, all governing documents as indicated by subparagraph (A) of this paragraph, and all IRS documents indicated by subparagraph (B) of this paragraph.

(A) Governing documents. A copy of each of the organization’s governing documents must be submitted with the application as indicated in clauses (i) – (iii) of this subparagraph.

(i) An unincorporated organization requesting an exemption must include copies of its formation documents, such as bylaws, constitution, articles of association, certificate of formation, or applicable trust agreement, and any related amendments. If the exemption being sought requires that the organization be a nonprofit, the governing documents must state that the organization is a nonprofit.

(ii) A non-Texas corporation requesting an exemption must include file-stamped copies of its formation documents and certificate of existence from the home state of incorporation, and any related amendments.

(iii) A non-Texas limited liability company requesting an exemption must include file-stamped copies of its formation documents and certificate of existence from the home state of formation, and any related amendments.

(iv) Exception. An organization applying for exemption based on its federal exempt status under IRC, §501(c)(3), (4), (8), (10), or (19), is not required to submit file-stamped copies of its governing documents and certificate of existence unless it is a corporation or limited liability company chartered outside the state of Texas.

(B) IRS documents. If an organization is applying for exemption based on its federal exempt status under IRC, §501(c)(3), (4), (8), (10), or (19), the organization must provide copies of all pages of its IRS determination letter or group exemption ruling letter and include any caveat or addendum that applies. If the original determination letter or group exemption ruling letter is more than four years old, the organization must also include a copy of a recent letter from the IRS to confirm the exemption is still valid. A nonprofit organization that claims exemption under a parent’s exemption must provide a copy of the parent organization’s IRS group exemption ruling letter and a letter from the parent organization that states the applicant nonprofit organization is a subordinate covered by the parent organization’s group exemption.

(3) The comptroller may require an organization to furnish additional information to further clarify the organization’s overall purpose and activities to establish the claimed exemption. For example, the comptroller may request a written statement that details the nature of the activities conducted, or to be conducted, financial information, and documentation that shows all services the organization performs.

(4) After a review of the material, the comptroller will inform an organization in writing if it qualifies for exemption.

(5) The comptroller or an authorized representative of the comptroller may audit the records of an organization at any time during regular business hours to verify the validity of the organization’s exempt status.

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