A Guide to Texas State Laws that Affect Nonprofit Fundraising

A Guide to Texas State Laws that Affect Nonprofit Fundraising
Raise Money
Without Raising Issues:
a Guide to Texas State Laws that Affect
Nonprofit Fundraising
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Nonprofit organizations, especially those
exempt from tax under section 501(c)(3) of the
Internal Revenue Code (“LR.C. §501(c)(3)”) are
subject to a variety of legal regimes. Depending
on how an organization is structured, it may be
subject to state corporate law, charitable trust
law, or unincorporated nonprofit association law.
In order to maintain its tax-exempt status and
avoid excise and unrelated business income
taxes, the organization must comply with various
provisions of the Internal Revenue Code,
Organizations also are subject to other state and
federal laws (such as those governing the
employment relationship, whistle-
blower = protections, = document
destruction, environmental issues,
etc.) that apply to all organizations.
This outline examines
various Texas State laws that apply
to common fundraising activities. In
particular, this outline will discuss
charitable raffles, poker tournaments,
bingo, sales tax, and certain issues
related to alcoholic beverages.
The Texas Constitution, which generally
prohibits raffles and lotteries, was amended in
1989 to allow specified organizations to hold
charitable raffles. Following the amendment, the
Texas Legislature passed the Charitable Raffle
Enabling Act (“Raffle Act”), which sets out the
requirements that charitable raffles must satisfy.
I. The Texas Charitable Raffle Enabling
The Raffle Act permits (1) qualified
religious societies, (2) qualified volunteer fire
departments, (3) a qualified volunteer emergency
medical service organizations, (4) certain
' Tex. Occ. Code Ann. §2002.01 et seq.
nonprofit wildlife conservation associations,’
and (5) qualified nonprofit organizations to
participate in two non-concurrent raffles per
calendar year if the organization conforms to
certain statutory requirements
A qualifying organization may hold a
raffle provided: (1) the prizes offered conform to
the statutory requirements; (2) the money raised
goes to a charitable purpose; (3) the raffle is not
improperly promoted; (4) the necessary
information required by statute can be found on
the ticket itself; and (5) rafile tickets are only
sold by persons authorized to do so.
2. Qualification to Conduct a Raffle
The first requirement of the Raffle Actis
that the organization holding the raffle must be
of a type permitted to do so. The five types of
organizations that can qualify are religious
societies, volunteer fire departments,
volunteer emergency medical service
organizations, nonprofit wildlife
conservation associations and
nonprofit organizations.’
Religious Societies
For a religious society to
qualify, it must be a church,
synagogue, or similar association
with religion as the primary
purpose.” It must also have been in
existence for ten years and cannot distribute any
of its income, other than reimbursement of
expenses or reasonable compensation of
services, to any member of the organization.”
* In June 2009, the Texas Legislature passed H.B. No.
3113, which amended the Texas Occupations Code to
provide that certain nonprofit wildlife associations are
“qualified nonprofit organizations.” Under prior law, in
order to conduct a charitable raffle, nonprofit organizations
were prohibited from participating or intervening in any
political campaign in any manner. This prohibition
prevented many nonprofit wildlife associations from
holding raffles to raise funds for their activities.
* Tex. Occ. Code Ann. §2002.002(2).
¿Tex Occ. Code Ann. § 2002.002(3).
Volunteer Emergency Medical Service
To qualify as a volunteer emergency
medical service organization, the organization
must be structured, primarily, to provide
ambulance, rescue, or emergency medical
services.“ Additionally, the organization cannot
distribute any of its income to its members other
than for the reimbursement of expenses and
cannot pay wages of any kind other than nominal
Volunteer Fire Departments
A volunteer fire department must operate
fire-fighting equipment and must be primarily
organized for that purpose to qualify under the
Raffle Act* It also may pay only nominal
wages, and it cannot distribute income to its
Nonprofit Organizations
Certain nonprofit organizations also may
qualify to hold raffles.’ An nonprofit
corporation that is incorporated or that holds a
certificate of authority in Texas is eligible if it
(1) does not distribute any income to its
members, officers, or governing body other than
as reasonable compensation for services; (2) has
existed for three years; (3) is exempt from tax
and has obtained exemption under LR.C.
8501(c); (4) does not devote a substantial part of
its activities to attempting to influence
legislation'' or participate or intervenes in any
political campaign on behalf of any candidate
for public office, including by publishing or
distribution statements or making campaign
contributions; and (5) does not have or recognize
any local chapter, affiliate, unit, or subsidiary
organization in the state of Texas.
> Tex. Occ. Code Ann. §2002.002(4).
* Tex. Occ. Code Ann. 82002.002(5).
> Id.
'9 Tex. Occ. Code Ann. 82002.003.
"An organization is considered to devote a substantial
part of its activities to attempting to influence legislation
if, in any 12-month period in the three preceding years,
more than 10 percent of the organization’s expenditures
were made to influence legislation. Tex. Occ. Code Ann.
An organization that is a local chapter,
affiliate, unit or subsidiary of a nonprofit
corporation that is incorporated or that holds a
certificate of authority in Texas is eligible if (1)
neither the local organization nor that parent
distributes any of its income to its members,
officers, or governing body other than as
reasonable compensation for services; (2) the
local organization has existed for the three
preceding years and during those years has been
formally recognized as a local chapter, affiliate,
unit, or subsidiary of the parent organization; (3)
neither organization devotes a substantial part of
its activities to attempting to influence legislation
or participates or intervenes in any political
campaign on behalf of any candidate for public
office, including by publishing or distribution
statements or making campaign contributions;
and (4) either the local organization or the parent
qualifies for and has obtained an exemption from
federal income tax under LR.C. §501(c).
An organization that is ° formally
recognized as and that operates as a local
chapter, affiliate, unit, or subordinate lodge of a
grand lodge or similar institution can be eligible
if certain statutory requirements are met.
An . unincorporated organization,
association, or society is eligible if it (1) does not
distribute any income to its members, officers, or
governing body other than as reasonable
compensation for services; (2) for the three
preceding years, has been affiliated with a state
or national organization organized to perform the
same purposes as the unincorporated
organization, association, or society; (3) does not
devote a substantial part of its activities to
attempting to influence legislation or participate
or intervenes in any political campaign on behalf
of any candidate for public office, including by
publishing or distribution statements or making
campaign contributions; and (4) qualifies for and
has obtained an exemption from federal income
tax under LR.C. §501(c).
A nonprofit wildlife conservation
association (that supports wildlife, fish, or fowl)
and its local chapters, affiliates, wildlife
cooperatives, or units are eligible if the parent
organization meets the eligibility criteria for a
nonprofit organization (other than the lobbying
limitation and political campaign intervention
prohibition) An association or a local chapter,
affiliate, wildlife cooperative, or unit that is
eligible under this subsection may not use any
proceeds from a raffle conducted under this
chapter to attempt to influence legislation or
participate or intervene mn a political campaign
on behalf of a candidate for public office in any
manner, including by publishing or distributing a
statement or making a campaign contribution.
Importantly, Independent School
Districts do not fall within the requirements of
the statute and therefore are ineligible to conduct
raffles.” Parent Teacher Organizations,
however, qualify if they meet the requirements
for nonprofit organizations.”
An organization that qualifies under the
Raffle Act is allowed to conduct a maximum of
two non-concurrent raffles per calendar year.'*
Timine and Frequency of
affles |
Ai (>
A qualified organization may
conduct two non-concurrent rafiles per
calendar year. >
A nonprofit wildlife
conservation association may conduct
two raffles each years, and each local
chapter, affiliate, wildlife cooperative,
or unit may conduct two raffles per
Before selling tickets to a
raffle, an organization must set a date upon
which the prizes will be awarded.” The
organization also must have the prize in its
possession, or post a bond of equivalent value
with the county clerk.'* If unable to provide the
prizes on the specified date, the organization can
set another date within 30 days.” If it cannot
meet that deadline, it must refund every
purchased ticket.”
Op. Tex. Att’y Gen. No. JM-1176 (1990).
' Tex, Occ. Code Ann. 82002.052.
1 Tex, Occ. Code Ann. 82002.003(€).
17 Tex. Occ. Code Ann. $2002.052(d).
1? Tex. Occ. Code Ann. 82002.052(e).
20 Tex. Occ. Code Ann. §2002.052(f).
4. Raftle Requiremenis: Prizes
The Raffle Act also restricts the items
that can be awarded as prizes. First and
foremost, money cannot be a prize.”
This restriction applies not only to
currency, but also any negotiable instrument
readily convertible to currency.” Therefore, a
certificate of deposit, cashier’s check, or similar
note cannot be awarded as a prize because they
represent, and are intended to be converted into,
currency.” The purpose of this prohibition is to
prevent a charitable raffle from being a
form of gambling or money-making
activity for those who purchase a raffle
ticket.“ Savings bonds and pre-paid
stored-value credit cards, however, can
be awarded as prizes because they are
non-negotiable and cannot be readily
converted into their associated cash
Prizes purchased by the
organization, or for which the
organization has given any
consideration, cannot exceed $50,000
unless the prize 1s a residential dwelling, in
which case the cap 1s $250,000.% However, if
the prize is donated, the caps do not apply.”
Also, a prize may consist of state lottery tickets
with a total face value of less than $50,000.%
The state lottery ticket exception applies
regardless of whether a prize in the lottery game
to which the ticket relates exceeds $50,000.
*! Tex. Occ. Code Ann. §2002.056(a). As discussed
below, an exception applies for reverse raffles.
* Tex, Occ. Code Ann. 82002.002(1-a).
7 Op. Tex. Att y Gen. No. JC-0111 (1999).
* Td.
” Op. Tex. Att'y Gen. No. GA-0341 (2005).
* Tex. Occ. Code Ann. 882002.056(b), (b-1).
** Tex. Occ. Code Ann. 882002.056(c).
* Td.
5. Raffle Requirements: Use of Procesds
All proceeds from the raffle must be
spent for the charitable purposes of the
organization.” These purposes include
benefiting needy or deserving persons in the
State of Texas, providing for the erection and
maintenance of public structures in the State of
Texas, and performing or initiating worthy
public works in the State of Texas.”
The “all proceeds” language 1s slightly
misleading, however, because the organization is
not prevented from using a portion of the raffle’s
gross proceeds to pay the expenses incurred from
conducting the raffle.” — Therefore, the raffle
proceeds may be used to pay for reasonable,
incidental, and necessary expenses arising
therefrom.” It is only the net proceeds of the
raffle that must be used for the organization’s
charitable purposes.
A wildlife conservation association must
not use the proceeds of the raffle to influence
legislation or to participate or intervene in an
political campaign or on behalf of any candidate
for public office in any manner, including
publishing or distributing a statement or making
campaign contributions.”
6. Raffle Requirements: Promotion of
The Raffle Act places restrictions on the
methods of, and procedures for, promoting the
raffle and selling raffle tickets. A raffle cannot
be promoted or advertised statewide. A raffle
cannot be promoted using paid advertising using
any medium of mass communication, including
television, radio, or newspaper.’ An
* Tex. Occ. Code Ann. 82002.053.
3! Ву (1) enhancing their opportunities for religious or
educational advancement; (1) relieving them from
disease, suffering, or distress; (111) contributing to their
physical well-being; (iv) assisting them in establishing
themselves in life as worthy and useful citizens; or (v)
increasing their comprehension of and devotion to the
principles on which this nation was founded and enhancing
their loyalty to their government. Tex. Occ. Code Ann.
** Tex. Occ. Code Ann. §2002.002(1).
у Op. Tex. Att’y Gen. No. JC-0046 (1999).
> Id.
* Tex. Occ. Code Ann. §2002.003(e).
°° Tex. Occ. Code Ann. §2002.054(a).
organization may promote a raffle on its website,
in a newsletter or through social media or email!
that 1s provided only to previously identified
supporters of the organization.”
An organization may not compensate a
person (directly or indirectly) for organizing or
conducting a raffle or for selling or offering to
sell tickets to a raffle.* An employee of an
organization may organize and conduct the
organization’s raffle so long as the employee’s
work in organizing and conducting the raffle is
not more than a de minimis portion of his
employment with the organization.”
Federal law makes it a crime to
“knowingly deposit in the mail” or “send or
deliver by mail” material concerning a “scheme
offering prizes dependent on lot or chance.”
The restriction applies to a variety of materials
including raffle tickets and raffle ticket stubs.
The penalty for violation includes a fine
or imprisonment for up to two years.“ The
penalty for subsequent offenses includes
imprisonment for up to five years.”
Although an LR.C. §501(c)(3)
organization cannot send raffle tickets or ticket
stubs through the mail, it may send an
advertisement, list of prizes, or other information
concerning the raffle through the mail.”
According to 18 USC $1307, the postal
restrictions do not apply to:
an advertisement, list of prizes, or
other information concerning a
lottery, gift enterprise, or similar
scheme, that 1s authorized or not
otherwise prohibited by the state in
which it is conducted and which is
conducted by a nonprofit
organization or a governmental
*" Tex. Occ. Code Ann. §2002.054(a)(2), as amended by
H.B. No. 457.
* Tex, Occ. Code Ann. $2002.054(b).
” Id as amended by H.B. No. 457.
* 18 USCA $1302.
* Id.
© Id.
3 See 18 USCA 81307.
However, 1f an organization malls. out
raffle information, its plans for conducting the
raffle should not include sending tickets or ticket
stubs to purchasers of tickets.
The langnage of 18 USCA §1302 does
not refer to raffle prizes; thus, 1t appears an
organization may mail a raffle prize to the holder
of the winning ticket if the winner 1s not able to
claim his prize in person.
Rarfle Requirements: Raffle Tickets
The physical appearance of the ticket is
also the subject of strict regulation. A raffle
ticket must contain the following information:
e The mame and address of the
e The price of the ticket;
e The date the prizes will be awarded;
e A general description of each prize
worth more than ten dollars.”
As stated above, federal law prohibits
mailing raffle tickets and ticket stubs.
8. Reverse Raifles.
The Raffle Act permits reverse raffles.”
A reverse raffle consists of drawing tickets until
none remain; the holder of the last ficket or
tickets drawn wins the raffle.* In a reverse
raffle, the winner may be given a refund of his
raffle ticket price as a prize.’ This permission
is an exception to the rule that cash cannot be
given as a raffle prize.
After the drawing of tickets in a reverse
raffle has begun, the sponsoring organization
may auction off additional tickets to persons
present at the drawing for more than face value
(despite the requirement that raffle tickets must
contain the price of the ticket). *
Also, after the drawing has begun, the
sponsoring organization may permit ticket
holders to resell their own tickets to other people
* Tex. Occ. Code Ann. §2002.055.
* See Tex. Occ. Code Ann. §2002.0541.
* Tex, Occ. Code Ann. $2002.002(7).
47 Tex. Occ. Code Ann. §2002.0541(b).
* Tex. Occ. Code Ann. §2002.0541(c).
present at the drawing for more than the face
value of the ticket.” However, the sale must be
made through a designated representative of the
sponsoring organization, and at least ten percent
of the sale proceeds must be retained by the
organization.” In this situation, only the portion
of the proceeds retained by the organization is
required to be spent for the charitable purposes
of the organization.”
After the drawing has begun, the
sponsoring organization may permit the holder
of a previously-drawn ticket to purchase
additional chances for the ticket to be selected to
win a prize or to purchase additional tickets for
the raffle.”
Other than these exceptions, reverse
raffles are subject to the provisions of the Raffle
9. Injunctive Relief for Violations
A county attorney, district attorney,
criminal district attorney, or the attorney general
may bring an action in county or district court
for a permanent or temporary injunction or a
temporary restraining order prohibiting conduct
involving a raffle or similar procedure that
violates or threatens to violate the Raffle Act or
other law.”
10. Federal Tax Issues
Organizations conducting raffles should
be aware of accompanying withholding and
filing obligations.
Form W-2G
A Form W-2G is filed by a gaming
operators (including exempt organizations
operating raffles) to report certain gambling
winnings and any federal income tax withheld on
those winnings.”* Specifically, a Form W-2G is
required 1f the winnings are $600 or more and
* Tex. Occ. Code Ann. 82002.0541(d).
* 7d,
>! Tex. Occ. Code Ann. $2002.0541(5).
*2 Tex. Occ. Code Ann. §2002.0541(e).
* Tex. Occ. Code Ann. §2002.058(a).
* IRS Pub. 3079, Gaming Publication for Tax-Exempt
such winnings ar: at least 300 times the amount
o the wager.”
Withholding and Backup Withholding
Withholding is required on raffle prizes
m excess of $5,000 if the prize is at least 300
times as large as the amount of the wager.”
Withholding on raffle proceeds is required at a
rate of 25% >”
If a winner’s proceeds total $600 or more
and the organization fails to obtain the winner’s
taxpayer identification number (via a Form W-
9), backup withholding is required at a rate of
If the prize is not cash, the fair market
value of the item won is considered the amount
of the winnings, and the withholding rates are
applied to this value.
Withholding and backup withholding are
reported by the organization on a Form 945,
Annual Return of Withheld Federal Income Tax.
The Form is required to be filed annually by
January 31 of the following year.
Unrelated Business Income Tax
Organizations also should be alert to
unrelated business income tax issues and the
exceptions thereto (including exceptions for
certain ¡bingo activities and volunteer
1. In General
Gambling in most forms is prohibited by the
Texas Penal Code Violation of these
provisions can lead to criminal liability for both
the participant and the organizer.
Specifically, it is a Class C misdemeanor
for a participant to play or bet “for money or
other thing of value at any game played with
cards.” Tt is a Class A misdemeanor for the
> Instructions to IRS Form W-2G and 5754, р. 3.
°° 1.В.С. $3402(а)(3)(С).
*"LR.C. §3402(q)(1).
* LR.C. §3406(a)(1).
LR.C. 8511 et seg.
* Tex. Penal Code Ann. $47.01 et seg.
” Tex. Penal Code Ann. §47.02(3).
organizer to either promote” or house” the
A poker tournament falls squarely within
this prohibited
conduct, but
exceptions to the
statute exist. So
while a non-profit
organization needs
to be very careful
in organizing a
poker tournament, it is possible to legally use
such an event as a fundraiser.
2. Exceptions and Exclusions
The Penal Code’s prohibitions against
gambling can be legally circumvented in several
Private Home Games
— The Penal Code specifically excludes
from the offense of gambling any game that: 1)
occurs in a private place; 2) no person receives
any benefit other than personal winnings; and 3)
except for the advantage of skill or luck, the risk
of losing and chance of winning were the same
for all participants. *
While useful for individuals concemed
about the legality of their weekly at-home poker
games, this exception is generally unhelpful for a
non-profit for several reasons. First, “private
place” 1s defined very narrowly and specifically
excludes most places where an event could be
held (such as clubs, hotels, or recreation
centers). Further, for the exception to apply,
the non-profit organization cannot not receive
any benefit, directly thwarting the purpose of a
fundraiser. Finally, while the private place
exception would also protect an organizer from
penalty for housing the event, * the Penal Code
ls silent as to whether potential liability still
exists for promoting such an event.”
5% Tex. Penal Code Ann. 847.03.
% Tex. Penal Code Ann. 847.04.
°* Tex. Penal Code Ann. §47.02(3).
” Tex. Penal Code Ann. §47.01(8).
” Tex. Penal Code Ann. §47.04(b).
$ Tex, Penal Code Ann. 847.03.
Do Not “Gamble”
To fall within the definition of gambling
under the Penal Code, three basic factors must be
present: consideration, chance, and a prize.”
While 1t 1s impossible to remove chance from a
poker tournament, consideration or a prize can
be removed quite easily. Both consideration and
a prize are required for the existence of a bet, as
used in the Penal Code.” Once either of these
factors 1s removed, the activity is no longer
“gambling” and the Penal Code provisions do
not apply.”
Eliminate Consideration
By eliminating any requirement that a
participant in the poker tournament “buy-in” or
otherwise purchase the right to participate, no
consideration has been provided and no bet has
been made.” As such, there is nothing
prohibiting the organizer from promoting or
housing the event, or providing prizes to the
winners. ”“
This approach undercuts the ability of the
poker tournament itself to raise funds, but it
could still be successful functioning on voluntary
contributions or be effectively combined with
other fundraising avenues. An organization
could, for example, simply accept donations or
host an accompanying dinner. The only
requirement is that nothing of value be required
in exchange for participation in the poker
Eliminate Prizes
Similar to consideration, eliminating
prizes” for the poker tournament would also
prevent the existence of a bet.”* Without a bet,
the organization could sell entry into the
5 Op. Tex. Att’y Gen. Nos. GA-0335 (2005), DM-112
(1992), IM-412 (1985).
Op. Tex. Att” y Gen. No. GA-0335 (2005).
7 An organization might want to refrain from even
providing a trophy or plaque to the winner, as that could
potentially be construed as a prize.
“ Op. Tex. Att'y Gen. No. GA-0335 (2005).
tournament as a fundraising tool, and legally
promote and house the event.”
While the lack of available prizes may
dissuade some from participating, playing for
pride and the benefit of the nonprofit
organization should still allow for an effective
The Texas Legislature passed the Bingo
Enabling Act 1n 1999, legalizing bingo and
strictly regulating its implementation and play.
1. Authorized Organizations
Only the {following entities can be
licensed to conduct bingo: 1) a religious society
that has existed in the state for at least three
years; 2) a nonprofit organization whose
predominant activities are for the support of
medical research
or treatment
programs that
has ‘ been ın
existence for at
least three years;
3) a fraternal
organized in the
state for at least
three years that
has actively and
continuously engaged in furthering its authorized
purposes and refrained from endorsing or
opposing political candidates; 4) a veteran’s
organization that has existed in the state for at
least three years; 5) a volunteer fire department
that has existed in the state for at least three
years; or 6) a volunteer emergency services
provider that has existed in the state for at least
three years .”°
2. License Required
Any authorized organization seeking to
conduct bingo must obtain either a full or
temporary license. A temporary license entitles
an authorized organization to, after payment of a
$25 fee, conduct bingo for four hours during any
’® Tex. Occ. Code Ann. 82001.101.
one day.” Further, an organization can only
obtain six temporary licenses during a calendar
year,” |
A full license can be issued for either one
or two years and is subject to tiered fees, ranging
from $100 to $2,500 annually.” The application
process for a full license 1s quite cumbersome as
is the renewal process.” An authorized
organization seeking a full license must also
have at least one member complete an eight hour
training program regarding conducting and
promoting bingo.
3. Operation of Bingo
Bingo may not be conducted at more than
one premises on property owned or leased by a
licensed authorized organization.” Further,
bingo may only be conducted in the county
where the organization has its primary business
office.” If the organization has no business
office, bingo may only be conducted in the
county of the principal residence of its chief
executive officer.”
No more than two affiliated organizations
or seven authorized organizations may conduct
bingo at the same premises.” Further, no
portion of the rent for a premises may be based
on a percentage of the proceeds of, or the
attendance at, a bingo game. The process for
determining and paying rent is also strictly
All equipment and materials used in
conducting bingo may only be purchased from a
licensed bingo distributor.” A separate process
also exists to independently approve, license, and
set pricing on the bingo cards themselves.”
To conduct, promote, administer, or
assist in conducting or promoting bingo, one
must generally be an active member of the
77 Tex, Occ. Code Ann. $2001.103(b).
* Tex. Occ. Code Ann. §2001.101
7 Tex. Occ. Code Ann. 82001.104 et seg.
80 Tex. Occ. Code Ann. 82001.102 et seg.
8 Tex. Occ. Code Ann. 82001.107.
5 Tex, Occ. Code Ann. 82001.402.
83 Tex. Occ. Code Ann. §2001.404(1).
% Tex. Occ. Code Ann. §2001.404(2).
8 Tex. Occ. Code Ann. §2001.402.
8 Tex. Occ. Code Ann. §2001.406.
87 Tex. Occ. Code Ann. §2001.407.
5 Tex. Occ. Code Ann. §2001.056.
licensed authorized organization.” Further, oniy
the licensed authorized organization itself is
. . 9
allowed to advertise bingo. ©
4 Frequency of Bingo
Any period m which bingo is conducted,
beginning when the premises is opened to the
public, 1s considered an independent bingo
“occasion.” A licensed authorized organization
may not conduct a bingo occasion more often
than three days during any calendar week and no
bingo occasion may exceed four hours.”
No more than two licensed authorized
organizations can conduct a bingo occasion at
the same premises within any 24 hour period.”
In this scenario, the bingo occasions must be
announced separately and the bingo occasions
may not overlap.”
5. Bingo Prizes
No single bingo game may have a prize
with a value of greater than $750.°> The prizes
awarded for an entire bingo occasion cannot
exceed an aggregate value of $2,500.”° Further,
a licensed authorized organization cannot award
or offer to award a door prize with a value
greater than $250.”
1. In General
The Texas Sales and Use Tax (the “Texas
Sales Tax”) applies to sales of tangible personal
property and to taxable services (collectively,
“taxable items”).”* Texas Sales Tax is collected
by the seller of the taxable item and remitted to
the Texas Comptroller. ”
% Tex. Occ. Code Ann. $2001.411.
Tex. Occ. Code Ann. 82001.415.
’! Tex. Occ. Code Ann. §2001.419(a).
72 Tex. Occ. Code Ann. §2001.419.
” Tex, Occ. Code Ann. §2001.419(d).
°* Id.
” Tex. Occ. Code Ann. 82001.420(a).
” Tex, Occ. Code Ann. §2001.415(b).
” Tex. Occ. Code Ann. 82001.420(c).
”* Tex. Tax Code Ann. §151.051.
” Tex. Tax Code Ann. 8151.052.
Certain entities are exempt from paying
Texas Sales Tax.” In particular, a nonprofit
organization that applies for and obtains a
determination letter or a group exemption ruling
letter from the Service that states that the
organization qualifies for exemption from federal
income tax under IRC. $501(c)(3), (4). (8),
(10), or (19) may qualify for sales tax
exemption.’ For the exemption to apply, the
item sold, leased, rented, stored, used, or
consumed must relate to the purpose of the
exempted organization and the item must not be
used for the personal benefit of a privates
tockholder or individual. '*
2. Obtaining Exempt Status
In order to obtain exempt status, an
organization must apply for and obtain a letter of
exemption from the Comptroller.” In its
application, the organization must submit to the
Comptroller a written statement that details the
nature of the activities conducted or to be
conducted as well as provide a copy of the
bylaws, constitution and any applicable trust
agreement.’ If the organization is a corporation,
it must include a copy of the articles or
incorporation and any related amendments.'* In
addition, if the organization is claiming
exemption under IL.R.C. §501(c)(3), (4), (8), (10),
or (19), the organization must include a copy of
all pages of a determination letter or a group
exemption ruling letter from the IRS.'%
3. Purchases
The purchase, lease, or rental of a taxable
item that relates to the purpose of the exempt
organization is not subject to the Texas Sales
Tax when the authorized agent of the
organization pays for the item and provides the
vendor with an exemption certificate. !®”
'0 For a complete list of exempt organizations, see 34
TAC §§3.322(b) and (c).
191 34 TAC §3.322(b)(5).
19 Tex. Tax Code Ann. §151.310(a)(2).
103 34 TAC §3.322(e)(1).
104 Id.
105 Id.
106 34 TAC 83.322(e)(1)(B).
197 34 TAC 83.322(g)(1).
One area of frequent confusion concerns
2. 108 >
sales by exempt organizations.” Specifically,
many exempt organizations mistakenly assume
that because purchases by the organization are
exempt from Texas Sales Tax, sales by the
organization also are exempt. In fact, an
exempt organization that sells taxable items
generally 1s required to obtain a sales tax permit
and 1s responsible for collection and remittance
of tax on all sales of taxable items that the
organization makes, unless those sales are
otherwise exempt from the Texas Sales Tax.'''
5. Sales that are “Otherwise Exempt”
A number of items commonly sold for
fundraisers by exempt organizations are not
taxable items.
Meals and Food Products
Sales of prepared food, candy, and soft
drinks are exempt if sold by the following
SEE groups:
e (Churches or at a
function of the
church. !!!
e Public or private
elementary or secondary schools, school
districts, bona fide student organizations
or parent-teacher organizations and
associations if the items are sold or
served during a regular school day
pursuant to an agreement with the proper
school authorities."!”
'% See, e.g., T-Shirt Sales — Go Directly to Jail (and Other
Consequences of Selling Things): What Nonprofits Need to
Know about Texas Sales Tax Collection, LEGAL MINUTE,
Summer 2007, Available at:
http://www. texascbar.org/content/legal library/pubs/downl
109 77
1934 TAC §3.322(h)(1) (2009)
"134 TAC 83.293(g)(1).
"7 34TAC 83.293(9)(2).
a Parent-teacher organization or association
during a fund-raising sale if the proceeds
ge 113
do not go to benefit an individual. ”
e (Groun associated with a private or public
elem.ntary or secondary school if the
sale is part of a fund-raising drive
sponsored by the organization for its
exclusive use. ''*
* Member or volunteer for a nonprofit
organization devoted to the exclusive
purpose of education or religious or
physical training of persons under 19
years of age if the sale 15 part of a fund-
raising drive sponsored by the
organization for its exclusive use.’ В
o Hospitals, day care centers, summer
camps, or other institutions licensed by
the state for the care of humans if sold
or served to the patients, children,
students or residents of the facility.
Sales to visitors or employees are
e Retirement facilities if the sale is to its
permanent residents. ''
Bake Sales
Texas Sales Tax 1s not due on sales of
bakery items (e.g., bread, rolls, buns, biscuits,
bagels, croissants, pastries, doughnuts, Danishes,
cakes, pies, tarts, muffins, cookies, large
pretzels, tortillas, etc.) as long as the items are
sold without plates or eating utensils.''*
Nontaxable Food Ttems
Texas Sales Tax 1s not due on sales of
nontaxable food items. Examples of such items
include cookie dough, pizza kits, cheese spreads,
1°34 TAC §3.293(g)(3).
"1434 TAC §3.293(g)(4).
1534 TAC §3.293(g)(5).
1134 TAC §3.293(g)(6).
| Tex. Tax Code Ann. §151.314(d)(1)
118 34 TAC 883.293(c)(7)(A) (2009) and 3.293(c)(8).
meat sticks, jelly, salsa, fresh fruit, and mixes
packaged for preparation at home. ‘”
Magazine Subscriptions
Texas Sales Tax 1s not due on sales of
subscriptions to magazines entered as
periodicals-class (formerly called “second-
> . С 120
class”) mail and sold for six months or more.
Texas Sales Tax 1s due on single issues and
subscriptions for fewer than six months."
Gift Certificates and Passbooks
Texas Sales Tax 1s not due on sales of
intangibles such as gift certificates and coupon
passbooks.'** Retailers collect Texas Sales Tax
when certificates or coupons are redeemed for
purchases of taxable items. 7
Car Washes
Washing a car is not a taxable
service, so Texas Sales Tax is not
due on sales of car washes.'**
Amusement Services
Finally, Texas Sales Tax is not due on
sales of amusement services by a nonprofit
organization if the proceeds do not go to the
benefit of an individual, except as a part of the
services of a purely public charity.'*°
Amusement services include live or
recorded performances, *° circuses,'?’ ice skating
shows,'** motion pictures,'? musical concerts,
'exhibitions or displays,'*' antique shows,'*
"7 See “School Fundraisers and Texas Sales Tax,” Sales
and Use Tax Bulletin (July 2009) at p.4 available at
Www. window. state.tx.us/taxinfo/taxpubs/tx94 183 pdf.
121 к
122 77
'* Id. The tax is based on the item’s actual retail selling
price, less any cash discount given at the time of sale (e.g.,
a deduction for a coupon).
124 Id
> Tex. Tax Code Ann. $151.3101(3).
126 34 TAC §3.298(a)(1)(A).
127.34 TAC §3.298(a)(1)(A)(ii).
128 34 TAC §3.298(a)(1)(A)(iii).
129 34 TAC §3.298(a)(1)(A) (iv).
1934 TAC §3.298(a)(1)(A)(V).
arts and crafts shows,” auto shows, =" Zoos,
rodeos, '* wrestling, > boxing, * bowling
games, ” golf driving ranges,'* health clubs
(admissions and memberships), * chartered boat
excursions, * pool games, swimming pools,
“rides for pleasure, ” and parties that radio
stations, etc. sponsor (ticket price includes meal,
set-ups, entertainment, and party favors). *
5. Other
Exceptions (o Sales Tax
There are several limited exceptions to
the rules regarding sales of taxable items by
exempt organizations. Even though the
underlying items are taxable items, these
exceptions could apply to an exempt
organization's fundraiser. -
Annual Banquets
All volunteer, nonprofit organizations
can hold one tax-free banquet or other food sale
per calendar year if all food is prepared, served
and sold by members of the organization. The
sale, however, cannot be professionally catered,
held in a restaurant, hotel or similar place of
business and cannot directly compete with a
retailer required to collect tax.”
131 34 83.298(a)(1)(B)(2009).
13234 TAC §3.298(a)(1)(B)(ii).
13 34 TAC §3.298(a)(1)(B)(iv).
134 34 TAC §3.298(a)(1)(B)(v).
135 34 TAC §3.298(a)(1)(B)(vii).
136 34 TAC §3.298(a)(1)(C)(v).
137 34 TAC 83.298(a)(1)(C)(vii).
138 Id.
13934 TAC §3.298(a)(1)(D)(ii).
14934 TAC §3.298(a)(1)(D)(vii).
141 34 TAC §3.298(a)(1)(D)(viii).
147 34 TAC 83.298(a)(1)(D)(x).
63 34 TAC 83.298(a)(1)(D)(xi).
164 34 TAC 83.298(a)(1)(D)(xiv).
145 34 TAC 83.298(a)(1)(E){iv).
146 34 83.298(a)(1)(E)(iii).
* The ammual banquet exception is not codified in any
statute or rule. It is a matter of administrative practice and
frequently is cited in Comptroller publications. See, e.g.,
Publication 196-122 “Exempt Organizations: Sales and
Purchases” = (March 2008), available at
http://www.window. state. tx. us/taxinfo/taxpubs/tx96 _122.p
df: Comptroller's Letter 881210922606;
Auctions, Rummage Sales and Other
Another exempticn 1s provided for
religious, educational, charitable, eleemosynary
organizations as well as organizations exempt
under LR.C. §501(c)(3), (4), (3), (10), or (19)."®
Specifically, these organizations may have two
one-day (twenty four hours) 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.” If the item is manufactured by
the organization or donated to the organization
(and not sold to the donor), the organization may
sell the item during a one-day tax-free sale or
auction regardless of price. ”
Organizations that hold a joint one-day
tax-free sale or auction is each considered to
have held one tax-free sale or auction during the
calendar year; however, each such organization
may hold one additional tax-free sale or auction
during that calendar year, '”*
Nonprofit organizations frequently serve
alcoholic beverages at their fundraisers. To do
so lawfully, an organization can make alcoholic
beverages available in one of three ways.
1. Provide Free Alcoholic Beveraces
A nonprofit organization does not need a
permit of any kind to
serve free alcoholic
beverages.’ The Texas
Alcoholic Beverage
Commission (“TABC”)
15 particular in
determining when
alcoholic beverages are
truly “free.”
168 Tex. Tax Code Ann. 8151.310.
*? Tex. Tax Code Ann. §151.310(c).
151 Id.
°? Tex. Tax Code Ann. §151.310(d).
153 See TABC Bulletin MPB026.
“free” means that an alcoholic beverage must be
provided at no cost to any of-age person who
requests one. * While admission to an event can
be restricted to only those who have purchased a
ticket or paid some form of fee, service of an
alcoholic beverage cannot.'>™ In fact, if an of
age person refuses the admission price at the
door, but requests an alcoholic beverage, one
must be provided free of charge. If the
alcoholic beverage is not provided, TABC
concludes that the alcohol must constitute a
portion of the purchase price of the ticket or
admission. In this case, the beverages are being
sold, and a permit is required.’
If alcoholic beverages are provided free
of charge at an event, the nonprofit organization
may legally serve donated alcoholic
2. Obtain a Permit -
A nonprofit organization may obtain
temporary permits from the TABC. A special
three-day wine and beer permit allows nonprofit
organizations to sell beer and wine for
consumption at the permitted location.” A
daily temporary mixed beverage permit allows
the sale of mixed beverages under similar
conditions.'* Once the proper permits are
obtained, the nonprofit organization may sell
alcoholic beverages in accordance with the
If a temporary permit is obtained, the
organization must purchase the alcoholic
beverages from an authorized distributor or
wholesaler. The alcohol cannot be donated. The
organization can, however, solicit cash donations
from the alcoholic beverage industry, provided
that no relationship exists between the donation
and any benefit to the donor (including an
understanding that the cash will be used to
purchase alcoholic beverages from the donor).
154 Id.
155 Id.
156 Id.
157 Id.
> 16 Tex. Admin. Code $ 45.113(5).
'* Tex. Alco. Bev. Code Ann. 827.11 et seg.
' Tex. Alco. Bev. Code Ann. 830.01 et seg.
'! See TABC Bulletin MPB026.
Use a Third-Party “o Sel Alcoho!
A nonprofit organization can also use a
third-party caterer to sell and serve alcohol, or
may have the event at an establishment that
possesses Its own alcoholic beverage permit.
This option places the permitting and procedural
responsibilities on the third-party. °?
Alcoholic beverages can be used as
auction items by a nonprofit provided that the
organization obtams a Temporary Charitable
Auction Permit (“Permit”) and
obeys the following requirements.
|. Entities Entitled to Obtain a
A nonprofit organization
may obtain a Permit only if it
qualifies for tax-exempt status as an
LR.C. $501(c)(3) organization. No
other organization, regardless of its
nonprofit status, qualifies.'°
2. Permit Requirements
Once a qualifying organization has paid
the $25 fee'®* and the $171 surcharge to obtain
the Permit, the organization may auction
alcoholic beverages for consumption off
premises to raise funds for the Permit holder’s
charitable works.'®® The Permit is valid for five
days'* and only one Permit may be issued to the
organization per calendar year, '**
3. Auction Requirements
The auction may only be conducted at a
location where sale of the type of alcohol to be
auctioned is allowed.'” The auction items must
also be kept separate from any alcoholic
beverages sold, stored, or served at the premises
162 Id.
13 Tex. Alco. Bev. Code Ann. 853.004.
'** Tex. Alco. Bev. Code Ann. 853.002.
'S 16 Tex. Admin. Code 8 33.23(a).
°° Tex. Alco. Bev. Code Ann. 853.001,
'7 Tex. Alco. Bev. Code Ann. 853.003.
°* Tex. Alco. Bev. Code Ann. §53.008(3).
19 Tex. Alco. Bev. Code Ann. §53.005(a).
and removed from the premises promptly
following the auction. The organization can
only auction alcoholic beverages that have been
donated and on which no taxes are owed.”
The organization must also provide
written notice to the nearest branch office of the
Texas Alcoholic Beverage Commission of: 1)
the date, time, and place of the auction; and 2)
the inventory of alcoholic beverages to be
The proceeds from the auction must then
be deposited into the account of the Permit
holder.” Further, the organization cannot pay a
commission or promotional allowance to any
person or entity to assist with the auction or
secure the donation of alcoholic beverages.”
Violations of the above-described laws
can have punitive consequences. In addition to
the legal consequences, the negative publicity
that may accompany a violation could have
significant deleterious effects on an
organization's ability to attract contributions.
By being aware of the various state laws
that apply to fundraising, organizations can
avoid violations and devote their time and
resources to their worthy nonprofit purposes.
17 Tex. Alco. Bev. Code Ann. §53.005(b).
171 Tex, Alco. Bev. Code Am. 853.008(1).
'7 Tex. Alco. Bev. Code Ann. 853.006.
' Tex. Alco. Bev. Code Ann. 853.007.
174 Tex. Alco. Bev. Code Ann. §53.008(4).
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