Untitled Texas Attorney General Opinion

WILL WILSON

December 16, 1959

Honorable Robert 8. Calvert Opinion No. ~~-762 Comptroller of Public A,coountr Capitol Station Re: Whether exempt sponsor Austin 11, Texas of entertainment is subject to Admission Tax Liability under Art. 7047a-19, V.C.S., under a dual consideration Dear Mr. Calvert: contract.

We quote from your opinion request aa follows:

“Opinion WW-15 issued In answer to my question regarding sponsorship, or the production of, means of entertainment where the contract calla for the payment for the services of the enter- talners

I’1 . By Outright Purchase, and the funds applied to e,xempt oauses.’

” 2. Where the services of the entertainers was pald.for based on a percentage of the proceeds derived from the sale of tickets, with the proceeds being applied to exempt causes - bearing in mind that the agency entering into contract, was due exempt c,onslderation under the con- dition that no part of the proceeds could be US8d for other than exempt caus8s.

“There now exists the question 1nVOlVing such exsnpt produC8rs or aponsora where the COntraCt 18 of dual consideration in that

“Provlalon 1 - Calls for the obligation of th8 producer to pay a epecl- fled amount If the proceed8 from the sale of ticket8 reaches a Speciried total - "

“Provision 2 - Calls for the obligation to be baaed on a specified per-,

I Hon. Robert S. Calvert, Page 2 (Opinion No. ~~-762)

centage, if the gross amount set out under Provision 1 is not reached, with the us8 of the funds limited to exempt causes, and a settlement is made using Provision 1 as th8 basis. “Please let me have your opinion as to whether such a contract provides for exemption from th8 admission tax.” Article 7047a-19, V.A,C,S,, contains the following exemption provision: It. I . no tax shall be levied under this Act on any admission collected for dances, moving pictures, operaa, plays and musical entertainment, all the proceed6 of which inure exclusively to thnezit f St t rel$gious, educational, or charitable kstik~ions societies, or organizations, if no part of the net earnin s thereof lnurss to the benefit, of any ---T-G- pr va .e stockholder or individual * . . (Emphasis added, ) In,order to answer your questioh, It is neceseary that the term “all the proceeds” be defined. The U. S. Code Con- ressional and Administrative News, Federal Tax Regulations 7 1956), Section 101.15, Page 1973 et seq=, construes the corresponding portion of the Federal Admission Tax exemption provision as follows i “The term ‘all the prooeeds! means all the net proceeds of t.he regular admission charges or excess charges, as the case, may be after payment

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Hon. Robert S. Calvert, Page 3 (Opinion No. WW-762)

reasonable sum and not more than would ordinarily be received on a flat rate basis for the same or similar talents or servloes, and the contract actually operates to the benefit of the exempt or~anlzation."

No court of record In this Stat8 has oonstrued the exemption provision In Article 7047a-19; thereiore, defer- ence must be given the Federal construction. See Attorney General's Opinion No. WW-593 (April 14, 1959). In accord- ance with such construction, you are advised that before an exemption may be accorded to an exempt organization apon- Boring or lvlng a performance on which admission taxes accrue, (17 all 8Xp8nR88 aid by the organization must be actually Incurred, 'and (2P the amount of each expense must bear a reasonable relation to the service rendered. Other- wise, all proceeqe cannot be deemed to inure exclusively to the exempt organization. This Is true even though the par- ticular talent or SerViOe iB compensated by a flat fee. Whether certain expenses are reasonable must be determined on the basis of all the facts involved.

Expanses may be paid on the basis of a percentage of tha net or rose prooeede. In all such.caaes it must appear that (1 the maximum amount to be received Is a r8a- sonable sum and not more than would3rnnarliy be received on a flat-rat8 basis for the same or similar talent or ser- ViC8, and (2) the Contract actually Operates t0 the benefit of the exempt organlz&tlon. .: ..: .,‘. The party ilalmlng a tax exemptlon'muat clearly

ar8 in the alternative, it must be shown that both methods oonform to the requirements aet,,forth above. Whether or not "all the proceeds" Inure to an exempt organization under the * oontraot her8 Involved 18 a iact queution whioh mu& be dbcldsd by your department according to the roregoing rulss. Exemptions from taxation are to be strictly construed; all doubts as to whether a party is entitled to an exemption must b8 resolved against the exemption and in favor of tax- ation'. Markham Hospital v. City of Longvlew, 191 S.W.2d 695 (Tex.Clv.App. 1943, error rexUS cl)* Clty of' & ongvlew v. Markham-McKee Memorial Hospital: 152 S.W. (T8X. COm. A 1941 inl dtd) . Santa Rosa Infirmary, et al. v. C%i of &n"kto$o~ &eS.&. 92b (Tex.Com.App. l$P+, opin- Ion adopted). .

Hbn. Robert S. Calved', Page 4 (Opinions ho a WW-‘762)

Attorney General’s Opinion N,o. WW-15 (February 4, 1957) held that an exempt orgaiaizatlon whlbh epllt, admiselone on a percentage basis with the entertalnniiintwaB not entitled to an exemption. This result was based upon a construction of “all the proceeds” as meaning that no.‘Bxpense could b$ paid on the basis of a percentage of admlasions. The opinion points out that the portion of Article 7047a-19 with which we are concerned uses the term “all the proceeds”, while the exemption applying to public fairs and exhibitions of live hook ueee the term "all the net proceeds.” Thla reasoning 10 not Bound. The Federal coiii%?uction, quoted above, is ‘to the effect that “all the proceeds” means net proceeds. In addition to thle, Article 7047a-19 provldrthat an exemption will be accorded where “al’1~the proceeds” Inure to the States, etch., “if no part of the ‘net earnings thereof inures to the benefit of any private stockholder or lndlvldual.” Therefore, WW-15 is overruled in 80 far as it implies that an exemption cannot be granted where an exempt organization pays an ex- pense on a percentage basis.

Attorney Qeneralfe Opinion No. WW-322 held that the State admlealon tax did not accrue on admissions charged to attend the Royal Ballet even thogh the, local manager of the show was to receive thirty per cent (30s) of the net receipts. Opinion No. WW-15 was reconciled on the basis that the-lan- #uage stressing the slgnifloance of the use’ of the phrase all the proceeds” was not neceesary to a determination of the question Involved. The opinion Implies that a dlstinc- tion exists in aituatlons where the exempt organization pro- vides the entertainment; and where the exempt organization sponsors or purchases the entertainment. No v,alld basis Opinion NO. ~~-322 ia clarl- :, 4 exlsts for such a distinction. fied to thls extent. , SUMMARY

In order to qualify for an exemption under Article 7047a-19 ‘all expense8 paid by, the exempt organization must be actually Incurred and-:jnuetbear ,a rkaeonable rela- tion to the service. re.t;\&red.; if such~ex- ‘: penees are In excess o@what is reasonable under the circumetanaqs; all the proceeds cannot be deemed to Inure exclusively to ,, the benefit of the exempt organization. This la true even though the service or en- tertainment 1s compensated by a.flat fee. . Where the amount to be received by a non-

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Hon. Robert 5. Calvert, Page 5 (Opinion NO. ~~-762)

exempt person or organization Is baBed on a peroentage of the net or gross proceeds, the organization shall, before eXemptIon may be allowed, eetabliah (1) that the maximum amount to be received on the percentage basis ie a reasonable sum and not more than would ordinarily be received on a flat-rate basis for the same or similar talent or servlcee, and (2) the contract actually operates to the benefit of the exempt organ- lzatlon. Where an alternative method of payment la provided, it must be shown that both alternatives conform to the rules set forth above. Whether or not these require- ments are met Is a fact question to be de- termined by your department. The burden is on tha ‘one claiming exemption to Mow that he is entitled thereto. All doubts murt be resolved againat the exemption and in favor of taxation.

Yours very truly,

wILLwILW# Attorney General

JNP: bet

APPROVED:

OPINION COMMITTEE: W. V. Qeppert, Chairman

Milton Richardson:’ Charles D. Cablness Richaed 0. Jones

REVIEWED FOR THE ATTORNEY GENERAL:

By: Leonard Passmore