TITLE 34 PUBLIC FINANCE
PART 1 COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3 TAX ADMINISTRATION
SUBCHAPTER V FRANCHISE TAX
RULE §3.583 Margin: Exemptions
(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.
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