us-tx/regs
34 Tex. Admin. Code § 3.583 — Margin: Exemptions
(a)
Effective date. This section applies to franchise tax reports originally due on or after January 1, 2008, except as otherwise noted.
(b)
Application for exemption. An entity that has not previously established an exemption from franchise tax with the comptroller must apply for an exemption. An entity that is not a corporation, but whose activities would qualify it for a specific exemption under Tax Code, Chapter 171, Subchapter B, if it were a corporation, may qualify for the exemption from the tax in the same manner and under the same conditions as a corporation. See Tax Code, §171.088 (Exemption--Noncorporate Entity Eligible for Certain Exemptions). For provisional exemptions for certain entities, see subsection (i) of this section; for trade show exemptions, see subsection (j) of this section.
(1) An entity that believes it is exempt from franchise tax must furnish to the comptroller sufficient evidence to establish its exempt status. The entity claiming the exemption bears the burden to establish its entitlement to exempt status and any doubts will result in a denial of the application for exemption.
(2) Except as otherwise provided in subsections (f), (i), (j), and (n) of this section, each entity must submit to the comptroller:
(A) a request for exemption in writing, which may require using forms developed by the comptroller for requesting exemptions, indicating the particular provision of Tax Code, Chapter 171, under which exemption is claimed;
(B) a detailed statement of both the entity's past and current activities, if any, and its future plan of activities, each in relation to the manner in which the entity proposes to implement the purposes clause in its certificate of formation or application for registration;
(C) an entity formed or created under Texas law whose articles of organization or formation is on file with the Texas Secretary of State need not submit copies of those documents with its request for exemption. A Texas entity that is not required to file organizational documents with the Texas Secretary of State must furnish a signed and dated copy of its organizational documents with its exemption request. If a non-Texas entity is required to file articles of organization or formation with its home jurisdiction Secretary of State, or other designated agency or officer, the entity must provide file-stamped copies of those filed organizational or formation documents. If a non-Texas entity is not required to file its articles of organization with the Secretary of State or other authority of its home jurisdiction, it must furnish a signed and dated copy of its organizational or formation documents with its exemption request; and
(D) any additional information the comptroller may require to make a determination whether the entity is eligible for a franchise tax exemption.
(c)
Actions by comptroller. Upon receipt of an application for exemption, the comptroller's representative will review the application and send the applicant a notification either granting the exemption or denying the exemption, or requesting additional information.
(1) If the exemption is granted, the exemption will be effective from the first date the entity was eligible for exemption. If the entity paid any franchise taxes prior to the comptroller's notification granting the exemption for a privilege period after the effective date of the exemption, the entity may request a refund, subject to the applicable statute of limitations. If the effective date of the exemption occurs after the beginning of a privilege period, the entity must pay through the end of such privilege period. An entity that has been subject to the tax and becomes eligible for exemption is liable for the additional tax under Tax Code, §171.0011 (Additional Tax).
(2) If the exemption is denied or revoked, the entity may contest the denial or revocation by filing all reports due as required by the comptroller; and
(A) paying all amounts of tax, penalty, and interest due and requesting a refund hearing pursuant to the provisions of Tax Code, Chapter 111 (Collection Procedures);
(B) paying all amounts of tax, penalty, and interest due, accompanying the payment with a written protest, and filing suit for the recovery of amounts paid pursuant to the provisions of Tax Code, Chapter 112 (Taxpayers' Suits); or
(C) requesting a redetermination hearing pursuant to Tax Code, §111.009 (Redetermination), if the comptroller issues a deficiency or jeopardy determination.
(d)
Qualification for exemption.
(1) Entity subject to insurance premium taxes.
(A) Insurance organization authorized to do business in this state. An insurance, surety, guaranty, fidelity or title insurance company, title insurance agent, or other insurance organization authorized to engage in insurance business in this state, that is required to pay an annual tax measured by its gross premium receipts is exempt from payment of the franchise tax, regardless of whether any gross premiums taxes are actually paid in any given year.
(B) Insurance organization not authorized to do business in this state (non-admitted insurance organization). A non-admitted insurance organization required to pay a gross premium receipts tax during a tax year is exempted from the franchise tax for the same tax year. A non-admitted insurance organization that is subject to an occupation tax or any other tax that is imposed for the privilege of doing business in another state or foreign jurisdiction, including a tax on gross premium receipts, is exempted from the franchise tax.
(C) Period covered. The exemption in this paragraph covers the periods upon which the franchise tax is based, provided the gross premium receipts tax is required to be paid on premiums received or written, as applicable, during the same period. For example, an insurance organization's gross premium receipts tax is due and payable on March 1, 2009, for premiums received during calendar year 2008. The entity would be exempt from franchise tax for the 2009 annual report covering the January 1, 2009 - December 31, 2009, privilege period, for margin attributable to calendar year 2008. An entity is subject to the franchise tax, however, for a tax year in any portion of which it is in violation of an order issued by the Texas Department of Insurance under Insurance Code, §2254.003(b) (Refund or Discount Based on Excessive or Unfairly Discriminatory Premium Rates), that is final after appeal or that is no longer subject to appeal.
(2) Nonprofit entity organized to promote county, city, or another area. A nonprofit entity organized for the exclusive purpose of promoting the public interest of any county, city, town, or other area within the state, must show that promotion of the public interest is the exclusive purpose of the entity and not merely an incidental result. An entity will not be considered to be promoting the public interest if it engages in activities to promote or protect the private, business, or professional interests of its members or patronage.
(3) Nonprofit entity organized for religious purposes. A nonprofit entity seeking franchise tax exemption as a religious organization must be an organized group of people regularly meeting for the primary purpose of holding, conducting, and sponsoring religious worship services according to the rites of their sect. The entity must be able to provide evidence of an established congregation showing that there is an organized group of people regularly attending these services. An entity that supports and encourages religion as an incidental part of its overall purpose, or one whose general purpose is furthering religious work or instilling its membership with a religious understanding, will not 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 entities 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 meet for the purpose of holding prayer meetings, Bible study or revivals. Although these organizations do not qualify for exemption under this category of exemption as religious organizations, they may qualify for the exemption under Tax Code, §171.063 (Exemption-Nonprofit Corporation Exempt from Federal Income Tax), if they obtain an exemption from the Internal Revenue Service (IRS) under Internal Revenue Code (IRC), §501(c).
(4) Nonprofit entity organized for public charity. A nonprofit entity seeking a franchise tax exemption as organized for purely public charity must devote all or substantially all of its activities to the alleviation of poverty, disease, pain, and suffering by providing food, clothing, drugs, 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 an entity engages in any substantial activity other than the activities that are described in this paragraph, it will not be considered as having been organized for purely public charity, and therefore, will not 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 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. Even though not organized for profit and performing services that are often charitable in nature, these types of organizations do not meet the requirements for exemption under this provision. Although these organizations do not qualify for exemption under this category of exemption as charitable organizations, they may qualify for the exemption under Tax Code, §171.063, if they obtain an exemption from the IRS under IRC, §501(c).
(5) Nonprofit entity organized for educational purposes. A nonprofit entity seeking a franchise tax exemption as an educational organization must show that its activities are devoted solely to systematic instruction, particularly in the commonly accepted arts, sciences, and vocations, and has a regularly scheduled curriculum, using 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 entity that has activities consisting solely of presenting public discussion groups, forums, panels, lectures, or other similar programs, may qualify for exemption under this provision, if the presentations provide instruction in the commonly accepted arts, sciences, and vocations. The entity will not be considered 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 via tangible or electronic media. Although these organizations do not qualify for exemption under this category of exemption as educational organizations, they may qualify for the exemption under Tax Code, §171.063, if they obtain an exemption from the IRS under IRC, §501(c).
(6) Certain homeowners' associations. A nonprofit entity requesting franchise tax exemption as a homeowners' association must prove that it meets all requirements to qualify for the exemption. The entity must show that it is organized and operated to obtain, manage, construct, and maintain the property in or of a residential condominium or residential real estate development. The entity also must prove that the condominium project, or, for a real estate development, the related property, is legally restricted for use as residences. Furthermore, the entity must establish that the collective resident owners of individual lots, residences or units control at least 51% of the votes of the entity and that voting control, however acquired, is not held by: a single individual or family; one or more developers, declarants, banks, investors, or other similar parties. For example, an association is formed for a residential condominium consisting of 12 units with each unit being entitled to one vote. Each of five individuals separately owns and occupies one unit, a total of five units. A sixth individual owns two units, living in one unit and leasing the other. A seventh individual owns and leases the remaining five units. None of the owners are related. In determining whether the collective resident owners control at least 51% of the votes of the organization, the sixth owner is a resident owner regarding the one unit in which the owner lives and an investor regarding the other. The collective resident owners, therefore, have a total of six votes. Consequently, since the collective resident owners only have 50% of the votes of the entity, the association does not meet the requirement that the resident owners must control at least 51% of the votes of the organization. Accordingly, the entity does not qualify for the franchise tax exemption as a homeowners' association.
(e)
Revocation, withdrawal, or loss of exemptions.
(1) An entity that no longer qualifies for the franchise tax exemption is required to notify the comptroller in writing of its change in status. Except as provided in paragraph (2) of this subsection, if at any time the comptroller has reason to believe that an exempt entity no longer qualifies for exemption, the comptroller's representative will notify the entity that its exempt status is under review. The comptroller's representative may request additional information necessary to ascertain the continued validity of the entity's exempt status. If the comptroller determines that an entity is no longer entitled to its exemption, notification to that effect will be sent to the entity. The effective date of revocation is the date the entity no longer qualified for the exemption. The day immediately following the date of withdrawal, loss, or revocation shall be the beginning date for determining the entity's privilege period and for all other purposes related to franchise tax.
(2) For nonprofit entities granted an exemption under Tax Code, §171.063, the revocation, withdrawal, or loss of the federal income tax exemption automatically terminates the franchise tax exemption. A nonprofit entity that no longer qualifies for the federal income tax exemption which was the basis for obtaining the franchise tax exemption must notify the comptroller in writing within 30 days of its change in status and must provide a copy of the notice of such revocation, withdrawal, or loss. The effective date of withdrawal or loss is the date of withdrawal or loss of the federal tax exemption. The effective date of a revocation is the date the IRS serves written notice of the revocation to the non-profit entity or the date the IRS serves written notice of revocation to the comptroller, whichever is earlier. The day immediately following the date of withdrawal, loss, or revocation shall be the entity's beginning date for determining its privilege periods and for all other purposes of the franchise tax.
(3) An electric cooperative entity previously exempted from franchise tax under Tax Code, §171.079 (Exemption--Electric Cooperative Corporation), that subsequently participates in a joint powers agency thereby loses its franchise tax exemption. The commencing date of participation in the joint powers agency shall be considered the entity's beginning date for purposes of determining the entity's privilege periods and for all other purposes of the franchise tax. The electric cooperative must notify the comptroller in writing that it is a participant in a joint powers agency within 30 days after the commencing date of its participation.
(f)
Federal exemption. An entity meeting the requirements of any paragraph of this subsection establishes its exempt status by furnishing to the comptroller a copy of a current exemption letter from the IRS.
(1) A nonprofit entity that has been exempted from federal income tax under the provisions of IRC, §501(c)(3) - (8), (10), (19); or
(2) any entity that has been exempted from federal income tax under the provisions of IRC, §501(c)(2) or (25), if the entity or entities for which it holds title to property are either exempt from or not subject to the franchise tax; and
(3) any entity that has been exempted from federal income tax under IRC, §501(c)(16).
(g)
Solar energy devices exemption. An entity engaged solely in the business of manufacturing, selling, or installing solar energy devices is exempted from the franchise tax. For purposes of this section, the term "solar energy device" includes, but is not limited to:
(1) devices used in the conversion of solar thermal energy into electrical or mechanical power;
(2) devices used in the photovoltaic (solar cell) generation of electricity;
(3) systems used in the heating of water and the heating and cooling of structures by use of solar collectors to gather the sun's energy; and
(4) heat pumps used as an integral part of a system designed to make the best combined use of solar energy and conventional heating.
(h)
Recycling operation exemption. An entity engaged solely in the business of recycling sludge is exempt from franchise tax. For purposes of this subsection, "sludge" means solid, semisolid, or liquid waste generated from a municipal, commercial, or industrial wastewater treatment plant, water supply treatment plant, or air pollution control facility, excluding the treated effluent from a wastewater treatment plant, as provided under Health and Safety Code, Chapter 361 (Solid Waste Disposal Act), §361.003 (Definitions).
(i)
Provisional exemptions.
(1) If established with the comptroller, the following entities may be granted a temporary exemption from franchise tax:
(A) a nonprofit entity that has applied for exemption from federal income tax under IRC, §501(c)(3) - (8), (10), (19); or
(B) an entity that has applied for exemption from federal income tax under IRC, §501(c)(2) or (25), if the entity or entities for which it holds title to property is either exempt from or not subject to the franchise tax; and
(C) an entity that has applied for exemption from federal income tax under IRC, §501(c)(16).
(2) To obtain a temporary franchise tax exemption with the comptroller, an entity that has applied for but has not yet received a letter of exemption from the IRS must timely file, as provided in paragraph (6) of this subsection, with the comptroller:
(A) a copy of the application for recognition of exemption that has been filed with the IRS; and
(B) a copy of:
(i) a written notice from the IRS stating that the application for recognition of exemption has been received; or
(ii) a receipt as proof that the application has been sent to the IRS by means of the United States Postal Service, other carrier, or hand delivery to the IRS.
(3) Paragraph (2)(A) and (B)(ii) of this subsection, applies only if the organization has filed its application for recognition of exemption during the 14th or 15th month after its beginning date. Beginning date means:
(A) for an entity organized under the laws of this state, the date on which the entity's certificate of formation or other similar document takes effect; and
(B) for a foreign entity, the date on which the entity begins doing business in this state.
(4) If the information required in paragraph (2)(A) and (B)(i) of this subsection is provided in a timely manner, as provided in paragraph (6) of this subsection, a 90-day provisional franchise tax exemption will be granted.
(5) An entity qualifying under paragraph (2)(A) and (B)(ii) of this subsection, will be granted a 90-day provisional exemption with the condition that a copy of the notice required in paragraph (2)(B)(i) of this subsection be provided to the comptroller within 30 days from the date of the letter notifying the entity of the provisional exemption. If the IRS notification is not provided within the 30-day period, the provisional exemption will be canceled. An entity whose provisional exemption is canceled will be subject to all tax, penalty, and interest that has accrued since the entity's beginning date.
(6) The information necessary for obtaining a temporary franchise tax exemption will be considered to be provided to the comptroller in a timely manner if:
(A) the application for recognition of exemption is provided to the IRS within their timely filing guidelines; and
(B) the information required in paragraph (2)(A) and (B)(i) or (B)(ii) of this subsection, is postmarked within 15 months after the day that is the last day of a calendar month and that is nearest to the entity's beginning date.
(7) Before the expiration of the 90-day provisional exemption, the entity must provide the comptroller a copy of the letter from the IRS showing that the decision on the federal exemption is still pending or stating that the federal exemption is either granted or denied.
(8) If the comptroller is notified as required in paragraph (7) of this subsection, that the decision on the federal exemption is still pending, an extension of the provisional exemption may be considered.
(9) If the information in paragraph (7) of this subsection, is not provided as required, the provisional exemption may be canceled. If the provisional exemption is canceled, the entity will be responsible for all franchise tax reports and payments that have become due since its beginning date, and penalty and interest will be based on the original due date of each report.
(10) An entity that provides the comptroller a copy of the letter from the IRS stating that the federal exemption has been granted will be considered for franchise tax exemption under subsection (f) of this section.
(11) If the federal exemption is denied by the IRS, the entity is responsible for all franchise tax reports and payments that have become due since its beginning date and interest will be based on the original due date of each report. Late filing and payment penalties will be waived for any reports and payments postmarked within 90 days after the date of the final denial of the federal exemption. The penalty waiver process will begin when the entity submits a written request for penalty waiver and a copy of the letter denying the federal exemption when filing reports and payment.
(j)
Trade show exemption. See Tax Code, §171.084 (Exemption--Certain Trade Show Participants), for the requirements for exemption for certain foreign entities that participate in trade shows in Texas.
(1) Notification to comptroller. Entities need not apply for an exemption under Tax Code, §171.084.
(A) If a foreign entity has obtained a registration or has already notified the comptroller that it is doing business in Texas, the entity must notify the comptroller in writing by the due date of the first report for which the entity is exempt that the report and payment are not due because the entity is exempt under Tax Code, §171.084. After such notification, the entity must notify the comptroller in writing only when the organization no longer qualifies for exemption.
(B) If a foreign entity has not obtained a registration or otherwise qualified to do business in the state, if applicable, and if the entity has not notified the comptroller that it is doing business in Texas, the entity must notify the comptroller in writing only when the entity no longer qualifies for exemption under Tax Code, §171.084. There is no need to apply for exemption as long as the entity qualifies for the exemption.
(2) Solicitation periods. If the solicitation of orders is conducted during more than five periods during the business period upon which tax is based as set out in Tax Code, §171.1532 (Business on Which Tax on Net Taxable Margin is Based), the entity does not qualify for exemption.
(A) For example, an entity with its fiscal year ending December 31, 2008, that filed a 2008 annual report, will not have to file and pay a 2009 annual report if it did not solicit orders for more than five periods during 2008.
(B) For example, assume a foreign entity participated in its first trade show in Texas on April 1, 2008. It also participated in trade shows in 2009 on January 1, March 1, May 1, June 1, August 1, and October 1. The entity's fiscal year ends are December 31, 2008, and 2009. The entity would be exempt for its initial report and payment (covering the privilege periods from April 1, 2008 - December 31, 2009) because it only solicited for one period from April 1, 2008 - December 31, 2008 (i.e., the business upon which the initial report is based). The entity would be required to file a 2010 annual report and pay tax, however, because it solicited for six periods from January 1, 2009 - December 31, 2009 (i.e., the period upon which the 2010 annual report is based).
(3) One hundred twenty hours. A solicitation period may not exceed 120 consecutive hours. If the solicitation of orders is conducted during a single period of more than 120 consecutive hours, the entity does not qualify for exemption. For example, an entity that meets the other requirements of Tax Code, §171.084, will meet the 120 hours requirement if the solicitation occurs Monday - Friday, but will not meet the 120 hours requirement if the solicitation occurs Monday - Saturday. If none of the solicitation limits prescribed in this subsection are exceeded, an entity may qualify for the exemption even if it leases space at a wholesale center for the entire period upon which the tax is based.
(k)
Credit association exemption. A cooperative credit association incorporated under Agriculture Code, Chapter 55 (Cooperative Credit Associations), an entity organized under 12 U.S.C. §2071, or an agricultural credit association regulated by the Farm Credit Administration is exempt from franchise tax.
(l)
Bingo unit exemption. For reports originally due on or after October 1, 2009, a bingo unit formed under Occupations Code, Chapter 2001, Subchapter I-1 (Unit Accounting), is exempt from franchise tax. "Unit" means two or more licensed authorized organizations that conduct bingo at the same location joining together to share revenues, authorized expenses, and inventory related to bingo operation.
(m)
TexAmericas Center nonprofit corporation exemption. Effective June 16, 2015, a nonprofit entity created by the TexAmericas Center under Special District Local Laws Code, §3503.111 (Nonprofit Corporations), is exempt from franchise tax.
(n)
Disaster response exemption for an out-of-state business entity. Effective June 16, 2015, an out-of-state business entity, as defined in this subsection, is not required to file a franchise tax report with or pay franchise tax to this state if the business done in this state is limited to the performance of disaster- and emergency-related work during a disaster response period. An out-of-state business entity that remains in Texas after a disaster response period is not entitled to this exemption.
(1) Notification to comptroller. An entity need not apply for an exemption from franchise tax under Business & Commerce Code, §112.004 (Exemption of Out-of-State Business Entity From Certain Obligations During Disaster Response Period). An entity must notify the comptroller in writing only when the entity no longer qualifies for the exemption.
(2) Definitions. For the purpose of this subsection, the terms defined in subparagraphs (B) - (H) of this paragraph have the meanings given in Business & Commerce Code, §112.003 (Definitions).
(A) Affiliate--A member of a combined group as that term is described by Tax Code §171.1014 (Combined Reporting; Affiliated Group Engaged in Unitary Business).
(B) Critical infrastructure--Equipment and property that is owned or used by a telecommunications provider or cable operator or for communications networks, electric generation, electric transmission and distribution systems, natural gas and natural gas liquids gathering, processing, and storage, transmission and distributions systems, and water pipelines and related support facilities, equipment, and property that serve multiple persons, including buildings, offices, structures, lines, poles, and pipes.
(C) Declared state disaster or emergency--A disaster or emergency event that occurs in this state and:
(i) in response to which the governor issues an executive order or proclamation declaring a state of disaster or a state of emergency; or
(ii) that the president of the United States declares a major disaster or emergency.
(D) Disaster- or emergency-related work--Repairing, renovating, installing, building, rendering services, or performing other business activities relating to the repair or replacement of critical infrastructure that has been damaged, impaired, or destroyed by a declared state disaster or emergency.
(E) Disaster response period--
(i) the period that:
(I) begins on the 10th day before the date of the earliest event establishing a declared state disaster or emergency by the issuance of an executive order or proclamation by the governor or a declaration of the president of the United States; and
(II) ends on the earlier of the 120th day after the start date or the 60th day after the ending date of the disaster or emergency period established by the executive order or proclamation or declaration, or on a later date as determined by an executive order or proclamation by the governor; or
(ii) the period that, with respect to an out-of-state business entity:
(I) begins on the date that the out-of-state business entity enters this state in good faith under a mutual assistance agreement and in anticipation of a state disaster or emergency, regardless of whether a state disaster or emergency is actually declared; and
(II) ends on the earlier of the date that the work is concluded or the seventh day after the out-of-state business entity enters this state.
(F) In-state business entity--A domestic entity or foreign entity that is authorized to transact business in this state immediately before a disaster response period.
(G) Mutual assistance agreement--An agreement to which one or more business entities are parties and under which a public utility, municipally owned utility, or joint agency owning, operating, or owning and operating critical infrastructure used for electric generation, transmission, or distribution in this state may request that an out-of-state business entity perform work in this state in anticipation of a state disaster or emergency.
(H) Out-of-state business entity--A foreign entity that enters this state at the request of an in-state business entity under a mutual assistance agreement or is an affiliate of an in-state business entity and;
(i) that:
(I) except with respect to the performance of a disaster- or emergency-related work:
(-a-) has no physical presence in this state and is not authorized to transact business in this state immediately before a disaster response period; and
(-b-) is not registered with the secretary of state to transact business in this state, does not file a tax report with this state or a political subdivision of this state, and does not have nexus with this state for the purpose of taxation during the year immediately preceding the disaster response period; and
(II) enters this state at the request of an in-state business entity, the state, or a political subdivision of this state to perform disaster- or emergency-related work in this state during the disaster response period; or
(ii) that performs work in this state under a mutual assistance agreement.
Source Note: The provisions of this §3.583 adopted to be effective January 1, 2008, 32 TexReg 10018; amended to be effective January 1, 2009, 33 TexReg 10502; amended to be effective December 31, 2009, 34 TexReg 9466; amended to be effective January 29, 2017, 42 TexReg 213.
Source: official text