339 
‘‘Subchapter H—Tax-Exempt Organizations 
‘‘Sec. 1671. Exemption for governmental entities. 
‘‘Sec. 1672. Tax-exempt organizations. 
‘‘Sec. 1673. Tax on unrelated business activity. 
‘‘Sec. 1674. Unrelated business activity. 
‘‘SEC. 1671. EXEMPTION FOR GOVERNMENTAL ENTITIES. 
‘‘(a) STATES.—Except as provided in section 1672, 
a state, political subdivision thereof and the District of 
Columbia shall be exempt from taxation under this chap-
ter on any gross profits derived from the exercise of any 
essential governmental function. 
‘‘(b) POSSESSIONS.—The government of any posses-
sion of the United States shall be exempt from taxation 
under this chapter on any gross profits earned by the pos-
session. 
‘‘SEC. 1672. TAX-EXEMPT ORGANIZATIONS. 
‘‘(a) EXEMPTION FROM TAXATION.—An organiza-
tion described in subsection (c) or (d) of section 501 and 
exempt from tax under section 501(a) shall be exempt 
from taxation under this chapter. 
‘‘(b) TAX ON UNRELATED BUSINESS ACTIVITY.—An 
organization exempt from taxation under subsection (a) 
shall be subject to tax to the extent provided in sections 
1675 and 1676, but shall be considered a tax-exempt orga-
nization for purposes of any law that refers to tax-exempt 
organizations. 
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‘‘SEC. 1673. TAX ON UNRELATED BUSINESS ACTIVITY. 
‘‘(a) IN GENERAL.—Each organization described in 
subsection (b) shall be subject to the Business Consump-
tion Tax under section 1601 on its gross profits from its 
unrelated business activity. 
‘‘(b) ORGANIZATIONS SUBJECT TO TAX.—This sec-
tion shall apply to— 
‘‘(1) organizations exempt from the business 
tax under section 1672, other than instrumentalities 
of the United States, and 
‘‘(2) colleges and universities which are instru-
mentalities of any government and corporations 
owned by one or more such colleges or universities. 
‘‘SEC. 1674. UNRELATED BUSINESS ACTIVITY. 
‘‘(a) IN GENERAL.—‘Unrelated business activity’ 
means any trade or business the conduct of which is not 
substantially related (aside from the need of such organi-
zation for income or funds or the use it makes of the prof-
its derived) to the exercise or performance by such organi-
zation of its charitable, educational, or other purpose or 
function constituting the basis for its exemption under 
section 501, except that such term does not include any 
trade or business— 
‘‘(1) in which substantially all the work in car-
rying on such trade or business is performed for the 
organization without compensation; or 
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‘‘(2) which is carried on, in the case of an orga-
nization described in section 501(c)(3) or in the case 
of a college or university described in section 
1673(b), by the organization primarily for the con-
venience of its members, students, patients, officers, 
or employees, which is the selling by the organiza-
tion of items of work-related clothes and equipment 
and items normally sold through vending machines, 
through food dispensing facilities, or by snack bars, 
for the convenience of its members at their usual 
places of employment; or 
‘‘(3) which is the selling of merchandise, sub-
stantially all of which has been received by the orga-
nization as gifts or contributions. 
‘‘(b) ADVERTISING, ETC., ACTIVITIES.—For purposes 
of this section, ‘trade or business’ includes any activity 
which is carried on for the production of income from the 
sale of goods or the performance of services. For purposes 
of the preceding sentence, an activity does not lose identity 
as a trade or business merely because it is carried on with-
in a larger aggregate of similar activities or within a larger 
complex of other endeavors which may, or may not, be 
related to the exempt purposes of the organization. Where 
an activity carried on for profit constitutes an unrelated 
trade or business, no part of such trade or business shall 
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be excluded from such classification merely because it does 
not result in profit. 
‘‘(c) TRADE OR BUSINESS.— 
‘‘(1) CERTAIN BUSINESS ACTIVITIES.—An ac-
tivity shall not be considered a ‘trade or business’ 
solely because the activity is a business activity 
(such as certain passive rental activity) that would 
be subject to the business tax if conducted by a busi-
ness entity other than a tax-exempt organization. 
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe regulations defining a ‘trade or business.’ 
Such regulations shall be consistent with the provi-
sions under sections 511 through 513, except to the 
extent such provisions are inconsistent with other 
principles of the business tax. 
‘‘(3) TRADE
SHOWS.—The conduct of trade 
shows and conventions shall not be excluded from 
the definition of trade or business. 
‘‘Subchapter I—Cooperatives 
‘‘Sec. 1681. Patronage dividends of cooperatives. 
‘‘SEC. 1681. PATRONAGE DIVIDENDS OF COOPERATIVES. 
‘‘(a) PATRONAGE DIVIDENDS PAID BY SUPPLY CO-
OPERATIVES.—A qualified patronage dividend paid by a 
supply cooperative to a patron shall be treated as if it is 
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a refund of a portion of the amounts paid by the patron 
for goods, services, or use of capital. 
‘‘(b) PATRONAGE DIVIDENDS PAID BY MARKETING 
COOPERATIVES.—A qualified patronage dividend paid to 
a patron by a marketing cooperative shall be treated as 
an upward price adjustment in the amount received by the 
patron for its goods marketed by the cooperative. 
‘‘(c) DIVIDEND TREATMENT.—Only the portion of a 
patronage dividend that is not a qualified patronage divi-
dend shall be treated as a dividend under this chapter. 
‘‘(d) REGULATIONS.—The Secretary shall prescribe 
regulations for the application of this section. The regula-
tions shall generally be consistent with subchapter T of 
chapter 1 except to the extent that such rules are incon-
sistent with provisions of this chapter. 
‘‘Subchapter J—Sourcing Rules 
‘‘Sec. 1691. Exports of property or services. 
‘‘Sec. 1692. Imports of property or services. 
‘‘Sec. 1693. Import or export of services. 
‘‘Sec. 1694. International transportation services. 
‘‘Sec. 1695. International communications. 
‘‘Sec. 1696. Insurance. 
‘‘Sec. 1697. Banking services. 
‘‘SEC. 1691. EXPORTS OF PROPERTY OR SERVICES. 
‘‘(a) GENERAL RULE.—Taxable receipts do not in-
clude amounts received by the exporter thereof for prop-
erty or services exported from the United States for use 
or consumption outside the United States. 
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‘‘(b) EXPORT THROUGH NONBUSINESS ENTITY.— 
For purposes of subsection (a), if property or services are 
sold to a governmental entity or a tax-exempt organization 
for export and are exported other than in an activity of 
such entity which is subject to the business tax, then the 
seller of such property or services is deemed to be the ex-
porter thereof. 
‘‘SEC. 1692. IMPORTS OF PROPERTY OR SERVICES. 
‘‘(a) IN GENERAL.—The import of property or serv-
ices for consumption in the United States shall constitute 
a business purchase if such property or service is to be 
used in a business activity in the United States. Property 
being held for sale or retail by a business entity that is 
in the business of selling goods shall be considered held 
for ‘use in a business activity’. 
‘‘(b) AMOUNT OF BUSINESS PURCHASE.— 
‘‘(1) IN GENERAL.—The cost of business pur-
chases with respect to the import of property or 
services for use or consumption in the United States 
is the customs value, price or other amount used for 
purposes of determining the import tax under sec-
tion 1701 or section 1702. 
‘‘(2) IMPORT TAX.—The cost of business pur-
chases does not include any import tax paid. No de-
duction shall be allowed with respect to property or 
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service imported by a business entity unless the im-
port tax is paid with respect to such import. 
‘‘SEC. 1693. IMPORT OR EXPORT OF SERVICES. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this subchapter or in rules prescribed under subchapter 
G (relating to financial intermediation business), services 
shall not be treated as imported or exported from the loca-
tion in which they are performed. 
‘‘(b) IMPORT OF SERVICES.—A business entity shall 
be treated as importing a service if— 
‘‘(1) the entire benefit of the service will be re-
alized in the United States, and 
‘‘(2) the benefit will be realized in connection 
with the United States business activities of the 
business entity. 
‘‘(c) EXPORT
OF SERVICES.—A business will be 
treated as exporting a service if— 
‘‘(1) the entire benefit of the service will be re-
alized outside of the United States, and 
‘‘(2) the benefit will be realized solely in con-
nection with the activities of the purchaser occurring 
outside the United States. 
‘‘(d) SERVICES ACQUIRED FROM SERVICE PROVIDER 
THAT
PROVIDES
SERVICES
IN
AND
OUTSIDE
THE 
UNITED STATES.— 
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‘‘(1) IN
GENERAL.—If a business entity ac-
quires services from a service provider that provides 
services both in and outside the United States and 
the service provider shows on the invoice where the 
services are provided— 
‘‘(A) the business entity shall treat the 
services as provided where stated on the invoice, 
and 
‘‘(B) the service provider shall treat as tax-
able receipts any services listed as provided in 
the United States. 
‘‘(2) NO INVOICE.—If a business entity acquires 
services from a service provider that provides serv-
ices both in and outside the United States and the 
service provider does not show on an invoice where 
such services are provided— 
‘‘(A) the business entity shall treat the 
services as if provided in the location to which 
payment is sent, and 
‘‘(B) the service provider shall treat as tax-
able receipts any payments received in the 
United States. 
‘‘SEC. 1694. INTERNATIONAL TRANSPORTATION SERVICES. 
‘‘(a) TRANSPORTATION OF PROPERTY.— 
‘‘(1) TAXABLE RECEIPTS.— 
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‘‘(A) EXPORTS.—Taxable receipts do not 
include receipts from the transportation of 
property exported from the United States. 
‘‘(B) IMPORTS.—Taxable receipts include 
receipts from transportation of property im-
ported into the United States only if such costs 
are not taken into account in determining the 
import tax. 
‘‘(C) PRESUMPTIONS.—The Secretary shall 
prescribe regulations describing situations in 
which a transporter of property must presume 
that no import tax has been paid on the cost of 
its services. 
‘‘(2) BUSINESS PURCHASES.— 
‘‘(A) EXPORTS.—Business purchases do 
not include amounts paid or incurred for the 
cost of transportation of property exported from 
the United States. 
‘‘(B) IMPORTS.—Amounts paid or incurred 
for transportation of goods imported into the 
United States, shall constitute a cost of busi-
ness purchase only to the extent that they are 
taken into account in determining the customs 
value for purposes of section 1701(a) (relating 
to the import tax). 
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‘‘(b) TRANSPORTATION OF PASSENGERS.— 
‘‘(1) TAXABLE RECEIPTS.—Taxable receipts— 
‘‘(A) include receipts from the transpor-
tation of passengers from the United States to 
a destination outside the United States, but 
‘‘(B) do not include receipts from the 
transportation of passengers from outside the 
United States to a destination in the United 
States. 
‘‘(2) BUSINESS
PURCHASES.—Business pur-
chases— 
‘‘(A) include amounts paid or incurred in 
a business activity for the transportation of 
passengers from the United States to a destina-
tion outside the United States, but 
‘‘(B) do not include amounts paid or in-
curred for transportation of passengers from 
outside the United States to a destination in 
the United States. 
‘‘(3) SIMPLIFYING RULES.—The Secretary may 
provide rules that simplify this subsection, including 
rules under which— 
‘‘(A) half of receipts attributable to trans-
portation to or from the United States are 
treated as taxable receipts, 
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‘‘(B) half of the cost for business trips to 
and from the United States are treated as busi-
ness purchases, and 
‘‘(C) all transportation expenses of a busi-
ness entity that has no regular business outside 
the United States are treated as business pur-
chases. 
‘‘SEC. 1695. INTERNATIONAL COMMUNICATIONS. 
‘‘(a) IN GENERAL.—For purposes of section 1692, 
communications services shall be treated as provided at 
the point of origin of the communications and shall not 
be treated as imported or exported. 
‘‘(b) COMMUNICATIONS SERVICES.—Communications 
services include— 
‘‘(1) telephone communications services, 
‘‘(2) courier services (except in the case of 
transportation of property that is imported or ex-
ported), 
‘‘(3) satellite transmission services, 
‘‘(4) telegraph services, 
‘‘(5) facsimile transmission services, and 
‘‘(6) other similar services. 
‘‘SEC. 1696. INSURANCE. 
‘‘(a) IN GENERAL.—Insurance services will be treat-
ed as provided at the location of the insurance company 
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