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RULE §3.583Margin: 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 Cont'd...

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