1. (a) General policy. This section is administered using the following guiding principles:

   1. (1) Because exemptions are not favored under the laws of the State of Texas, the provisions of this section shall be strictly interpreted.
   2. (2) An organization must show by clear and convincing evidence that it meets the requirements of this section and the statutes. Any unresolved question about the qualifications of an organization will result in denial of exempt status.

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

   1. (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, 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 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. 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 charitable organization, even if the nonprofit organizations 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 the Tax Code, §151.310(a)(2), if they obtain an exemption from the Internal Revenue Service (IRS) under the Internal Revenue Code (IRC), §501(c). Chambers of Commerce may qualify under paragraph (6) of this subsection;
   2. (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 the Tax Code, §151.310(a)(2), if they obtain an exemption from the IRS under the IRC, §501(c);
   3. (3) a nonprofit religious organization that is an organized group of people who regularly meet 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 an exemption under the Tax Code, §151.310(a)(2), if they obtain an exemption from the IRS under the IRC, §501(c);
   4. (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. (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 the IRC, §501(c)(3), (4), (8), (10), or (19);
   6. (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. (7) a nonprofit convention and tourist promotional agency organized or sponsored by at least one Texas city or county;
   8. (8) an electric cooperative formed under the Electric Cooperative Corporation Act (Utilities Code, Chapter 161) and nonprofit electric cooperatives located outside the state;
   9. (9) a telephone cooperative formed under the Telephone Cooperative Act (Utilities Code, Chapter 162) and nonprofit telephone cooperatives located outside the state; and
   10. (10) a local organizing committee that is exempt from federal income tax under the IRC, §501(c). The local organizing committee must be authorized by an endorsing municipality to pursue an application and submit a bid on the municipality's behalf to a site selection organization for selection as the host site of the 2007 Pan American Games or the 2012 Olympic Games.

3. (c) Entities always exempt. The following entities and organizations are exempt under the law and are not required to request and prove exempt status except to send information as requested by the comptroller to verify its exempt status under this subsection:

   1. (1) the United States, its unincorporated agencies and instrumentalities;

      1. (A) The United States includes all parts of the executive, legislative, and judicial branches and all independent boards, commissions, and agencies of the United States government.

      2. (B) Instrumentalities and agencies of the United States include:

         1. (i) various military entities under the supervision of a base commander;
         2. (ii) organizations that contract with the United States and whose contracts explicitly and unequivocally state that they are agents of the United States;
         3. (iii) organizations wholly owned by the United States or wholly owned by an organization that is itself wholly owned by the United States; and
         4. (iv) organizations specifically named as agents of the United States or exempted as instrumentalities of the United States by federal statutes.

      3. (C) Instrumentalities and agencies of the United States also include organizations having substantially all of the following characteristics:

         1. (i) they are funded by the United States;
         2. (ii) they carry out a specific program of the United States;
         3. (iii) they are managed or controlled by officers of the United States;
         4. (iv) their officers are appointed by the United States;
         5. (v) they perform commitments of the United States under an international treaty; and
         6. (vi) they are not organized for private profit.
   2. (2) any incorporated agency or instrumentality of the United States wholly owned by the United States or by a corporation wholly owned by the United States. "Wholly owned" means total or 100% ownership;
   3. (3) federal credit unions organized under 12 United States Code, §1768;
   4. (4) the State of Texas, its unincorporated agencies and instrumentalities;
   5. (5) any county, city, special district or other political subdivision of the State of Texas, and any college or university created or authorized by the State of Texas;
   6. (6) 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;
   7. (7) nonprofit corporations formed under the Development Corporation Act of 1979 or the 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. See §3.291 of this title (relating to Contractors); and
   8. (8) nonprofit corporations established by the Texas National Research Laboratory Commission under Government Code, §465.008(g). Taxable items purchased or leased from these corporations are also exempt from tax if the items are used in or for carrying out an eligible undertaking as defined by Government Code, §465.021.

4. (d) Qualification requirements. To qualify for exempt status under subsection (b) of this section, an organization must satisfy all of the following requirements.

   1. (1) An organization must be organized or formed solely to conduct one or more exempt activities. The Comptroller will consider all documents necessary to prove the purpose for which an organization is formed.
   2. (2) An organization must devote its operations exclusively to one or more exempt activities.
   3. (3) An organization must dedicate its assets in perpetuity to one or more exempt activities.
   4. (4) No profit or gain may pass directly or indirectly to any private shareholder or individual. All salaries or other benefits furnished officers and employees must be commensurate with the services actually rendered.

5. (e) How to obtain exempt status.

   1. (1) To apply for and obtain a letter of exemption from the comptroller, an organization must submit to the comptroller a written statement that details the nature of the activities conducted or to be conducted and the following documentation:

      1. (A) a copy of the bylaws, a copy of its constitution, and a copy of any applicable trust agreement, and if the organization is a corporation, a copy of the articles of incorporation and any related amendments;
      2. (B) if the claimed exemption is under §501(c)(3), (4), (8), (10), or (19) of the IRC, a copy of all pages of a determination letter or a group exemption ruling letter from the IRS. If the original determination letter or group exemption ruling letter is more than four years old, then the organization must send a copy of a recent letter from the IRS. A nonprofit organization that claims exemption under a parent's exemption must provide a copy of the parent organization's group exemption ruling letter from the IRS and a letter from the parent organization that states that the applicant nonprofit organization is a subordinate covered under the parent organization's group exemption.
   2. (2) The comptroller may require an organization to furnish additional information to establish the claimed exemption. For example, the comptroller may request financial information and documentation that shows all services that the organization performs.
   3. (3) After a review of the material, the comptroller will inform an organization in writing if it qualifies for exemption.
   4. (4) 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.

6. (f) Revocations, withdrawals, or loss of exemptions.

   1. (1) Except as provided in paragraph (2) of this subsection, if at any time the comptroller has reason to believe that an exempt organization no longer qualifies for exemption, a comptroller's representative will notify the organization that its exempt status is under review. A comptroller's representative may request additional information that is necessary to ascertain the continued validity of the organization's exempt status. An organization must immediately notify the comptroller in writing of a revocation, withdrawal, or loss of exemption when the organization no longer qualifies for exemption. If the comptroller determines that an organization is no longer entitled to its exemption, then the comptroller will notify the organization. The date of the notification letter is the effective date of the revocation. All subsequent purchases are subject to tax.

   2. (2) For nonprofit organizations that are granted an exemption under Tax Code, §151.310(a)(2), the revocation, withdrawal, or loss of the federal income tax exemption automatically terminates the sales tax exemption effective the earlier of the date on which the IRS serves formal written notice of the revocation on the nonprofit organization or the date on which the IRS notifies the comptroller.

      1. (A) The effective date of a revocation for a nonprofit organization that was granted an exemption as a recognized subordinate is the date on which the organization ceased to be recognized as a subordinate under the federal group exemption. All subsequent purchases by the organization are subject to tax.
      2. (B) The organization must notify the comptroller in writing of the revocation, withdrawal, or loss of exemption immediately upon receiving notice from the IRS of such revocation, withdrawal, or loss.
      3. (C) Under a federal/state exchange agreement, the IRS may notify the comptroller when an organization no longer qualifies for federal exemption.
   3. (3) An organization that loses its exempt status must immediately notify its suppliers that its purchases are subject to tax. Failure to so notify a supplier is a violation of the sales tax law.
   4. (4) After revocation, the organization may re-apply for exempt status under other provisions of this section.

7. (g) Purchases by an exempt organization.

   1. (1) The purchase, lease, or rental of a taxable item that relates to the purpose of an exempt organization listed in subsection (b)(1), (2), (3), or (5) of this section is exempt from tax when the organization or an authorized agent of the organization pays for the item and provides the vendor an exemption certificate in the form prescribed by the comptroller. See §3.287 of this title (relating to Exemption Certificates).
   2. (2) The purchase, lease, or rental of a taxable item to an exempt organization listed in subsections (c) and (b)(4), (6), (7), (8), or (9) of this section is exempt from tax when the organization or an authorized agent pays for the taxable item and provides the vendor an exemption certificate in lieu of tax.
   3. (3) A purchase voucher issued by any one of the entities identified in subsection (c) of this section is sufficient proof of the entity's exempt status.
   4. (4) An exemption certificate must be given to a vendor when an authorized agent makes a cash purchase of merchandise for an exempt organization.
   5. (5) An employee of an exempt organization cannot claim an exemption from tax when the employee purchases taxable items of a personal nature even though the employee receives an allowance or reimbursement from the organization.
   6. (6) A person who travels on official business for an exempt organization must pay sales tax on taxable purchases whether reimbursed on a per diem basis or reimbursed for actual expenses incurred.

8. (h) Sales by an exempt organization.

   1. (1) An exempt organization that sells taxable items must obtain a sales tax permit and is responsible for collection and remittance of tax on all sales of taxable items that the organization makes, unless such sales are otherwise exempt from the tax. See §3.293 of this title (relating to Food; Food Products; Meals; Food Service), §3.299 of this title (relating to Newspapers, Magazines, Publishers, Exempt Writings), and §3.298 of this title (relating to Amusement Services).

   2. (2) A religious, educational, charitable, eleemosynary organization, or an organization exempt under IRC, §501(c)(3), (4), (8), (10), or (19) and each of its bona fide chapters, may have two one-day tax-free sales or auctions each calendar year. During a tax-free sale or auction lasting only one day, the organization is not required to collect sales tax on the sales price of taxable items sold for $5,000 or less. Additionally, a taxable item may be sold tax-free during a one-day tax-free sale or auction regardless of price if the item is manufactured by the organization or is donated to the organization and is not sold to the donor.

      1. (A) One day is a consecutive 24-hour period. If a designated tax-free sale or auction exceeds a consecutive 24-hour period, the organization or chapter may not hold another tax-free sale or auction that calendar year. An organization or chapter may hold the two tax-free sales or auctions consecutively, but the two tax-free sales or auctions by that organization or chapter cannot exceed a maximum of 48 consecutive hours in a calendar year.
      2. (B) The organization may employ an auctioneer to conduct the sale or auction and pay the auctioneer a reasonable fee not to exceed 20% of the gross receipts.
      3. (C) If two or more exempt organizations or chapters jointly hold a tax-free sale or auction, each is considered to have held a tax-free sale or auction during that calendar year. Each exempt organization that participates in a joint tax-free sale or auction may hold one additional tax-free sale or auction during that calendar year.
   3. (3) Sales by agencies and instrumentalities of the federal government are subject to tax, and the agencies and instrumentalities must collect and remit tax unless the collection of tax is specifically prohibited by federal law. If the collection is prohibited by specific federal law, the purchaser of the taxable item shall be liable for reporting the tax directly to the state.
9. (i) Organizations that do not qualify for exempt status. Examples of organizations that cannot qualify for exempt status include professional groups, certain mutual benefit or social groups, political, trade, business, bar, or medical associations. For information on exempt sales by senior citizens' organizations or exempt sales by student organizations affiliated with a college or university, see §3.316 of this title (relating to Occasional Sales and Other Tax-Free Sales).

10. (j) Consular officers, administrative, and technical employees.

    1. (1) Foreign diplomatic personnel stationed in the United States are exempt from the payment of sales or use tax if they hold a photo-identification card issued by the United States Department of State. Cards are not transferable and may not be used by others, including spouses.

    2. (2) Procedure for retailers.

       1. (A) A retailer should retain a copy of the sales invoice or contract signed by the consular official that bears the consular exemption certificate number appearing on the back of the card.
       2. (B) Certain cards are limited in what and how much may be purchased tax free. This information is contained on the card itself. Retailers who make sales to persons with cards that require purchases to exceed a certain dollar limit should include only those taxable items that are purchased in the same transaction to determine if the appropriate level has been reached. Purchases made in separate transactions may not be added together to reach minimum exemption levels.

11. (k) The Alabama-Coushatta, Kickapoo, and the Tigua Native American tribes.

    1. (1) The purchase, lease, or rental of a taxable item to a tribal council or a business owned by a tribal council of these Native American tribes is exempt from sales tax. An exemption certificate or purchase order from the tribal council is sufficient proof of the exempt sale.

    2. (2) Sales made by a tribal council or a business owned by a tribal council of these Native American tribes within the boundaries of the reservation are exempt from sales tax if:

       1. (A) the taxable item being sold is made by a member of the tribe; and
       2. (B) the taxable item is a cultural artifact of the tribe.
    3. (3) Sales made off the reservation or sales made on the reservation of items that are not cultural artifacts are taxable.

12. (l) Bordering states and governmental units of states that border Texas.

    1. (1) The State of Arkansas, State of Louisiana, State of New Mexico, State of Oklahoma, or a governmental unit of a state that borders Texas may qualify for exemption on the purchase, lease, or rental of taxable items, but only to the extent that the bordering state or governmental unit of a state that borders Texas exempts or does not impose a tax on similar sales of items to the State of Texas or a political subdivision of the State of Texas.
    2. (2) A bordering state or a governmental unit of a state that borders Texas may enter into a reciprocal agreement with the comptroller for the exemption of taxable items purchased, leased or rented to the State of Texas or a political subdivision of the State of Texas.
    3. (3) The purchase, lease, or rental of a taxable item to a bordering state or a governmental unit of a bordering state is exempt from sales tax to the extent allowed under the terms of the reciprocal agreement. An exemption certificate from a qualifying bordering state or a governmental unit of a bordering state is sufficient proof of the exempt sale.

Source Note:The provisions of this §3.322 adopted to be effective January 1, 1976; amended to be effective October 10, 1976, 1 TexReg 2669; amended to be effective September 15, 1977, 2 TexReg 3392; amended to be effective November 17, 1981, 6 TexReg 4065; amended to be effective February 6, 1984, 9 TexReg 414; amended to be effective November 19, 1984, 9 TexReg 5717; amended to be effective June 18, 1986, 11 TexReg 2553; amended to be effective September 10, 1991, 16 TexReg 4681; amended to be effective September 19, 1996, 21 TexReg 8734; amended to be effective June 20, 2000, 25 TexReg 5915; amended to be effective December 2, 2002, 27 TexReg 11160.