Texas Comptroller of Public Accounts    STAR System


200401308R



STAR SUPERSEDED WITHOUT SUMMARY 

Accession No.(s): 200401308R

Document superseded on: 08/15/2013 



STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
FRANCHISE TAX

Section 3.541  Exemptions. (Tax Code, secs. 171.051-171.087)

(a)  Application for exemption. A corporation must apply for an exemption from 
franchise tax.  For provisional exemptions for certain corporations, see 
subsection (i) of this section; for trade show exemptions, see subsection (j) 
of this section. 

(1)  A corporation that believes it is exempt from payment of franchise tax 
must furnish to the comptroller sufficient evidence to establish its exempt 
status.  The corporation 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 (e), (i), and (j) of this 
section, each corporation must submit to the comptroller: 

(A)  a request for exemption in writing, indicating the particular provision of 
the Tax Code, Chapter 171, Subchapter B, under which exemption is claimed; 

(B)  a detailed statement of the corporation's past activities, if any, and its 
future plan of activities, both in relation to the manner in which the 
corporation proposes to implement the purposes clause in its articles of 
incorporation or certificate of authority; 

(C)  a copy of the articles of incorporation and, for a foreign corporation, a 
copy of the application for a certificate of authority; 

(D)  for a homeowners' association only, a copy of all relevant documents, such 
as, the bylaws or the declaration, specifying the requirements for membership 
in the association, the classes of membership and the attendant voting rights 
for each membership class, the conditions or events, if any, resulting in the 
termination of a membership class or resulting in the reinstatement of a 
membership class, and a listing of each lot or unit within the association and 
the name and address of the owner of that lot or unit; and 

(E)  any additional information the comptroller may require to make a 
determination whether the corporation is eligible for a franchise tax 
exemption. 

(b)  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 corporation was eligible for exemption. If the corporation 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 
corporation 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 corporation must pay through the end of such 
privilege period.  A corporation that has been subject to the earned surplus 
component of the tax and becomes eligible for exemption is liable for Tax Code 
sec. 171.0011 additional tax.  The additional tax is equal to 4.5% of the 
corporation's net taxable earned surplus computed on the period beginning on 
the day after the last day for which the tax imposed on net taxable earned 
surplus was computed under Tax Code sec. 171.1532 and ending on the day before 
the corporation was eligible for exemption.  

(2)  If the exemption is denied or revoked, the corporation 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 Chapter 111 of Tax Code; 

(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 Chapter 112 of Tax Code; or 

(C)  requesting a redetermination hearing pursuant to Tax Code, sec. 111.009 if 
the comptroller issues a deficiency determination. 

(c)  Qualification for exemption. 

(1)  Corporations subject to insurance premium taxes.  All insurance, surety, 
guaranty, or fidelity companies that are subject to the annual gross premiums 
tax levied by Chapter 4 of the Insurance Code, or all insurance organizations, 
title insurance companies, and title insurance agents that are subject to 
annual gross premium tax levied by Chapter 9 of the Insurance Code are exempt 
from payment of the franchise tax regardless of whether any gross premiums 
taxes are actually paid in any given year.  A non-admitted insurance 
organization that is required to pay a gross premium receipts tax during a tax 
year is exempted from the franchise tax for the same tax year.  The exemption 
in this paragraph covers the periods upon which the earned surplus component 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, 2003, for premiums received during calendar year 2002.  The 
entity would be exempt from franchise tax for the 2003 annual report covering 
the January 1, 2003 through December 31, 2003 privilege period, if the tax was 
based on net taxable earned surplus earned in calendar year 2002.  

(2)  Those corporations 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 
corporation and not merely an incidental result. A corporation 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)  A nonprofit corporation 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 corporation must be able to 
provide evidence of an established congregation showing that there is an 
organized group of people regularly attending these services. A corporation 
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 corporations 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, sec. 171.063, 
if they obtain an exemption from the Internal Revenue Service (IRS) under 
Internal Revenue Code, sec. 501(c). 

(4)  A nonprofit corporation 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 a 
corporation engages in any substantial activity other than the activities that 
are described in this section, 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, sec. 171.063, if they obtain an exemption from the 
IRS under Internal Revenue Code, sec. 501(c). 

(5)  A nonprofit corporation 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. A corporation 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 corporation will not be considered 
for exemption under this provision if the systematic instruction or educational 
classes are incidental to some other facet of the corporation'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 under this category of exemption as 
educational organizations, they may qualify for the exemption under Tax Code, 
sec. 171.063, if they obtain an exemption from the IRS under Internal Revenue 
Code, sec. 501(c). 

(6)  A nonprofit corporation requesting franchise tax exemption as a 
homeowners' association must prove that it meets all requirements to qualify 
for the exemption. The corporation 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 corporation 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 
corporation must establish that the collective resident owners of individual 
lots, residences or units control at least 51% of the votes of the corporation 
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 corporation, 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 corporation, the association does not meet the requirement 
that the resident owners must control at least 51% of the votes of the 
corporation. Accordingly, the corporation does not qualify for the franchise 
tax exemption as a homeowners' association. 

(d)  Revocation, withdrawal, or loss of exemptions. 

(1)  A corporation 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 corporation no longer qualifies for 
exemption, the comptroller's representative will notify the corporation that 
its exempt status is under review. The comptroller's representative may request 
additional information necessary to ascertain the continued validity of the 
corporation's exempt status. If the comptroller determines that a corporation 
is no longer entitled to its exemption, notification to that effect will be 
sent to the corporation. The effective date of revocation is the date the 
corporation 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 corporation's privilege period and for all other 
purposes related to franchise tax.

(2)  For nonprofit corporations granted an exemption under Tax Code, sec. 
171.063, the revocation, withdrawal, or loss of the federal income tax 
exemption automatically terminates the franchise tax exemption.  A nonprofit 
corporation 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 corporation 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 corporation's beginning date for determining its 
privilege periods and for all other purposes of the franchise tax. 

(3)  An electric cooperative corporation previously exempted from franchise tax 
under Tax Code, sec. 171.079, that participates in a joint powers agency on or 
after September 1, 1995, thereby loses its franchise tax exemption. The 
commencing date of participation in the joint powers agency shall be considered 
the corporation's beginning date for purposes of determining the corporation's 
privilege periods and for all other purposes of the franchise tax. The electric 
cooperative corporation 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. 

(e)  Federal exemption. A corporation 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 corporation that has been exempted from the federal income tax 
under the provisions of Internal Revenue Code, sec. 501(c)(3), (4), (5), (6), 
or (7); or 

(2)  for reports due on or after January 1, 1988, any corporation that has been 
exempted under the provisions of Internal Revenue Code, sec. 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; or 

(3)  for each annual period that begins on or after June 2, 1989, and for each 
initial period that on that date has six months or more before expiration and 
for any second period if the change applies to the initial period, a 
corporation that is exempted from federal income tax under Internal Revenue 
Code, sec. 501(c)(16); and 

(4)  for reports due on or after January 1, 1996, a nonprofit corporation that 
has been exempted from the federal income tax under the provisions of Internal 
Revenue Code, sec. 501(c)(8), (10), or (19). 

(f)  Solar energy device. For purposes of Tax Code, sec. 171.056, 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. 

(g)  Exemption for recycling operation. A corporation engaged solely in the 
business of recycling sludge as defined by Health and Safety Code, Chapter 361, 
Solid Waste Disposal Act, sec. 361.003, is exempt from franchise tax beginning 
with reports due on or after September 1, 1991. 

(h)  Exemption for Texas National Research Laboratory Commission Corporation. A 
corporation formed by the Texas National Research Laboratory Commission under 
Government Code, sec. 465.008(g), is exempt from franchise tax beginning with 
reports originally due on or after September 1, 1991. 

(i)  Provisional exemptions. 

(1)  If established with the comptroller, the following corporations may be 
granted a temporary exemption from franchise tax: 

(A)  a nonprofit corporation that has applied for exemption from federal income 
tax under Internal Revenue Code, sec. 501(c)(3), (4), (5), (6), or (7), (8), 
(10), or (19); 

(B)  or reports due on or after January 1, 1988, a corporation that has applied 
for exemption from federal income tax under Internal Revenue Code, sec. 
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)  a corporation that has applied for exemption from federal income tax under 
Internal Revenue Code, sec. 501(c)(16). 

(2)  To obtain a temporary franchise tax exemption with the comptroller, a 
corporation that has applied for but has not yet received a letter of exemption 
from the IRS must timely file 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)  Paragraphs (2)(A) and (2)(B)(ii) of this subsection apply only if the 
corporation has filed its application for recognition of exemption during the 
14th or 15th month after its beginning date. Beginning date means: 

(A)  for a corporation chartered in this state, the date on which the 
corporation's charter takes effect; and 

(B)  for a foreign corporation, the date on which the corporation begins doing 
business in this state. 

(4)  If the information required in paragraphs (2)(A) and (2)(B)(i) of this 
subsection are provided in a timely manner, a 90-day provisional franchise tax 
exemption will be granted. 

(5)  A corporation qualifying under paragraphs (2)(A) and (2)(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 corporation of the provisional exemption. If the IRS notification 
is not provided within the 30-day period, the provisional exemption will be 
canceled. A corporation whose provisional exemption is canceled will be subject 
to all tax, penalty, and interest that has accrued since the corporation'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 paragraphs (2)(A) and (2)(B)(i) or (2)(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 corporation's beginning 
date. 

(7)  Before the expiration of the 90-day provisional exemption, the corporation 
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 corporation 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)  A corporation 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 (e) of this section. 

(11)  If the federal exemption is denied by the IRS, the corporation 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 
corporation 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, sec. 171.084 for the requirements for 
exemption for certain foreign corporations that participate in trade shows in 
Texas. 

(1)  Notification to comptroller. Corporations need not apply for an exemption 
under Tax Code, sec. 171.084. 

(A)  If a foreign corporation has obtained a certificate of authority or has 
already notified the comptroller that it is doing business in Texas, the 
corporation must notify the comptroller in writing by the due date of the first 
report for which the corporation is exempt that the report and payment are not 
due because the corporation is exempt under Tax Code, sec. 171.084. After such 
notification, the corporation must notify the comptroller in writing only when 
the corporation no longer qualifies for exemption. 

(B)  If a foreign corporation has not obtained a certificate of authority and 
if the corporation has not notified the comptroller that it is doing business 
in Texas, the corporation must notify the comptroller in writing only when the 
corporation no longer qualifies for exemption under Tax Code, sec. 171.084. 
There is no need to apply for exemption as long as the corporation 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, sec. 171.153 and sec. 171.1532, the corporation does not 
qualify for exemption. A corporation may be exempt from one component of the 
franchise tax, but not exempt from the other component, because the business 
upon which the tax is based may be different for the two components. For 
example, assume the following corporations meet the requirements of Tax Code, 
sec. 171.084, except possibly the number of periods during which they solicit 
orders. 

(A)  A corporation with its fiscal year ending December 31, 2002 that filed a 
2002 annual report, will not have to file and pay a 2003 annual report if it 
did not solicit orders for more than five periods during 2002. 

(B)  Assume a foreign corporation participated in its first trade show in Texas 
on April 1, 2001.  It also participated in trade shows in 2002 on January 1, 
March 1, May 1, June 1, August 1, and October 1. The corporation's fiscal year 
ends are December 31, 2001 and 2002. The corporation would be exempt for its 
initial report and payment (covering the privilege periods from April 1, 
2001-December 31, 2002) because it only solicited for one period from April 1, 
2001-December 31, 2001 (i.e., the business upon which the initial report is 
based). The corporation would be required to file a 2003 annual report and pay 
tax, however, because it solicited for six periods from January 1, 
2002-December 31, 2002 (i.e., the period upon which the 2003 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 corporation does not qualify for 
exemption. For example, a corporation that meets the other requirements of Tax 
Code, sec. 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, a corporation may qualify for the 
exemption even if it leases space at a wholesale center for the entire period 
upon which the tax is based.

(4)  Effective dates. The exemption provided by Tax Code, sec. 171.084, is 
effective for 1988 annual reports and initial reports originally due on or 
after January 1, 1988.

(k)  A corporation organized under 12 U.S.C. sec. 2071, or an agricultural 
credit association regulated by the Farm Credit Administration is exempt from 
franchise tax beginning with reports originally due on or after January 1, 
2002.


Effective Date:  January 5, 2004
Filed with Secretary of State:  December 16, 2003



Texas Comptroller 




ACCESSION NUMBER: 200401308R   
SUPERSEDED: Y 
DOCUMENT TYPE: R 
DATE: 01/05/2004 
TAX TYPE: FRANCHISE