Sales tax . . . A (if not the most) commonly overlooked tax for nonprofit organizations. In 2022, I blogged on Florida Sales Tax on Ticket Sales for the Sunshine State's Nonprofits. This Freeman Law Insights blog focuses on the sales tax regime applicable to "admissions" collected by nonprofit organizations in the State of Texas, the Lone Star State.
Texas Sales Tax, Briefly. Texas imposes a tax on each sale of a taxable item in this state. The term "taxable item" includes tangible personal property and taxable services. When tax is imposed on tangible personal property, the taxing entity's prima facie burden of proof is easily met because, unless an exemption applies, all sales of tangible personal property in Texas are taxable. However, the Texas Legislature has elected to tax only those services that are specifically enumerated in the Texas Tax Code. If the Texas Comptroller (i.e., its Tax Division) demonstrates that a service was sold and that the service is taxable, it becomes the taxpayer's burden to prove, by a preponderance of the evidence, that the Comptroller is incorrect, or by clear and convincing evidence that the taxable services were exempt from taxation.
General Rule for Admissions. Sales tax is imposed on the provision of an amusement service. Under Texas law, a taxable amusement service is defined to include the provision of amusement, entertainment, or recreation within the state of Texas. The Comptroller construes amusement services quite broadly as pretty much any service that results in enjoyment that is a "pleasurable occupation of the senses." Live performances, including musical concerts, are examples of amusement services. The sale of an admission to an amusement service means, essentially, the transfer of title to, or possession of, a ticket or other admission document for consideration.
Exemption for Nonprofit Corporations or Associations. Under the Texas Tax Code, amusement services are exempted from sales taxes only if exclusively provided by a nonprofit corporation or association (other than organizations described by section 501(c)(7) of the Internal Revenue Code), if the proceeds do not go to the benefit of an individual except as a part of the services of a purely public charity. See Tex. Tax Code§ 151.3101(a)(3). The provider of an amusement service is "the person who has legal rights of ownership over, or the legal right to provide, present, or offer, an amusement, entertainment, or recreation that is rendered on a regular basis at a fixed location, and for which admissions are sold." 34 Tex. Admin. Code § 3.298(a)(4).
Ticket Agents. Sales tax also is not due on the sale of amusement service by a ticket service or any other seller of amusement services when the provider of the amusement service is a nonprofit corporation or association whose sales of tickets would be exempt from sales and use tax.
Use of Expertise of For-Profit Organizations. A nonprofit corporation may hire a for-profit organization to provide the expertise to produce an event without loss of the sales tax exemption; however, the nonprofit corporation must hold itself out as the provider of the amusement and may not be a joint venturer with the for-profit entity. For example, the nonprofit organization must hold itself out as the sole provider of the amusement in advertising as well as on the face of the physical tickets and that the event is exempt from Texas sales and use tax.
Insights. Nonprofit organizations—whether in Texas or other states—are wise to engage competent legal counsel to evaluate their potential sales tax liabilities arising from admissions from events, concerts, and the like. Contract terms and review are critical on this subject. Speaking from much experience, sales tax is but one of many considerations to take into account for liability exposure in these types of events or amusement programs.
Have fun with the amusements, but be sales-tax-careful, on the front end, preferably.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
