HOA and gross sales tax exemptions | Winstead PC

In Texas, real estate owners’ associations (“Associations”) are typically not-for-profit corporations formed under Chapter 22 of the Texas Business Organizations Code. As a result, many associations want to know if they qualify for certain tax exemptions that are reserved for nonprofits and that may be significant during the life of the association. Texas tax law provides for an exemption from sales tax for goods and services purchased for use by organizations that are registered under Section 5.01 (c) (3), (4), (8), (10) or (19) of the Internal Revenue Code (the “Code”). This article focuses on the qualifications an association needs to earn the 501 (c) (3) or 501 (c) (4) distinction from the IRS, as well as some helpful guidelines from IRS Revenue Rulings, in which the IRS has provided an official interpretation of the Code relating to a specific matter.

Code § 501 (c) (3)

Code §501 (c) (3) provides for federal income tax exemption for an organization that is organized and operated FOR COMMON PURPOSES ONLY. The Treasury Regulations provide that an organization should not be formed or operated solely for one or more exempt purposes unless it serves a public interest rather than a private one. The Treasury Regulations provide that the term “non-profit” in Code §501 (c) (3) is used in the generally recognized legal sense and includes, among other things, the discharge of the state. The reduction of government burdens overlaps with social assistance and may include the provision of services normally provided by a government agency, such as services provided at the expense of taxpayers.

Lightening the burden on government can be a major hurdle. Evidence that an organization alleviates burdens on government requires that (i) its activities are activities that a government entity considers its burdens; and (ii) the activities actually reduce that government burden. The organization must demonstrate that a government entity believes that the organization is acting on behalf of the government, which in fact frees government assets – human, material and tax – that would otherwise have to be used for the respective activity.

This determination is based on facts and circumstances. An activity is a burden on government only when an entity objectively manifests that it regards the organization’s activities as its burden. Such a consideration can be evidenced by the interrelationship between the unit of government and the organization. A favorable working relationship between a government and an organization is strong evidence that the organization actually alleviates the burdens on the government. [1] Examples of different projects that are considered charitable projects in this category are: (i) Combating drug trafficking [2] and (ii) maintaining the volunteer fire departments [3] and police benefit programs. [4]

Otherwise, even if an organization’s activities reduce the burdens on government, it must meet the requirements of Code § 501 (c) (3). Thus, an organization has to prove that its activity serves a public rather than a private interest within the meaning of the Treasury Regulations. This means that an organization that claims to alleviate the burdens of the state must demonstrate that any private benefit that individuals or corporations receive is related, both qualitatively and quantitatively, to their exempted purposes. In order to be qualitatively secondary, the private benefit must be a necessary accompaniment to activities that benefit the general public. To be quantitatively irrelevant, the private benefit may be insignificant in the context of the total public benefit.

In summary, even if an association demonstrates that (i) its activities are activities that a government entity considers its burdens; and (ii) the activities actually reduce that government burden, since the association is not primarily providing or benefiting from services to individuals other than members of the association, it will likely be difficult to demonstrate that the associations serve the public more than a private one Interest.

Code § 501 (c) (4)

Code § 501 (c) (4) provides for exemption from federal income tax for civil associations or organizations that are not organized for profit, but exclusively serve the promotion of social welfare. The term social welfare implies a service or program that is directed towards the benefit of the community rather than a private group of individuals. According to the Treasury Regulations, an organization is operated solely for the promotion of social welfare if its primary purpose is to promote the common good and the general good of individuals within a community. Under the Treasury Regulations, an organization described in Code Section 501 (c) (4) is an organization that operates primarily for the purpose of civic and social improvement.

The IRS has generally found that homeowner associations in a gated community do not qualify for an exemption under Section 501 (c) (4) of the Code because the public is restricted from access to company property. [5] However, the fact that there is a security gate does not automatically mean that the club’s property is inaccessible to the public. In most cases, the gate restricts access for the general public, but there are two generally recognized exceptions: (1) if the association can prove that it serves the general public, ie the association offers a community advantages that extend beyond the gates extends; or (2) when the association occupies substantially the same geographic area as a recognized government entity.

It should be noted that, in accordance with Revenue Ruling 80-63, in general, the term “community” is determined on a case-by-case basis, including by analyzing whether the organization’s activities have sufficient community-wide benefit to promote social welfare, as it does from . Code § 501 (c) (4) is required.

Even if an area represented by an association cannot be a community within the meaning of the exemption, if the activity of the association benefits a community it can still be eligible for an exemption. If the association owns and maintains, for example, common areas and facilities for the use and enjoyment of the general public, in contrast to areas and facilities whose use and use is restricted to members of the association, it can meet the requirement to serve a community. If the association represents an area that is not a municipality, it is usually not entitled to an exemption under Section 501 (c) (4) if it restricts the use of its leisure facilities to its members, i.e. the use and enjoyment of the communal areas that are owned and maintained by an association, must be accessible and expanded to members of the general public, in contrast to controlled use or access that is restricted to the members of the association.[6] Organizations that represent the interests of the residents of a particular housing estate are usually out of the question.

In summary, it can be said that associations can be considered as social welfare organizations under Code § 501 (c) (4), but such organizations often have difficulty fulfilling the requirement that they serve the interests of a community and not just the interests of the association members .

We recommend that the association hire an auditor and work with him to advise the association on tax matters and to fill out the relevant tax forms.

[1] Rev. Rule. 85-2, 1985-1 CB 178.
[2] Rev. Rule. 85-1, 1985-1 CB 177.
[3] Rev. Rule. 74-361, 1974-1 CB 130.
[4] Rev. Rule. 74-246, 1974-2 CB 159.
[5] Revenue Ruling 74-99, 1974-1 CB 131, as amended by Revenue Ruling 80-63, 1980-1 CB 116; PLR 200706014.
[6] Tax regulation 80-63, 1980-1 CB 116.