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Ezel / Tax Rulings / TX
TX 200604621L Franchise Tax (PRIOR TO 01/01/2008) 2006-04-21

For a mortgage banker, how are loan-servicing receipts sourced for Texas franchise-tax apportionment?

Short answer: By where the mortgaged property sits. The Comptroller advised a mortgage banker that receipts from loan-servicing activities, where the loans are secured by real property, should be sourced based on the location of the underlying real property. The taxpayer had argued that the existing treatment of loan-servicing receipts put it at a disadvantage against competitors; after reviewing its alternative proposals, the Comptroller adopted the location-of-the-real-property sourcing rule for these receipts.

Apply this to your situation

This page answers the general question as of 2006. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 2006
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This letter applies the Texas franchise tax as it existed before January 1, 2008; the 2007 legislation (House Bill 3 and House Bill 3928) later restructured the tax into the current margin tax, which has its own receipts-sourcing rules, so treat this sourcing as historical. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A mortgage banker — a diversified financial-services company that originates, sells, and services single-family residential mortgage loans — asked how its loan-servicing receipts should be apportioned for the (pre-2008) Texas franchise tax. It argued the existing treatment disadvantaged it against its main competitors.

After reviewing the company's alternative proposals, the Comptroller determined that receipts from loan servicing, where the loans are secured by real property, should be sourced based on the location of the underlying real property.

Important currency note: This letter applies the pre-2008 franchise tax. The 2007 legislation (House Bills 3 and 3928) replaced it with the current margin tax, which has its own receipts-sourcing rules (revised again for reports due on or after January 1, 2021). Treat this sourcing conclusion as historical and confirm current law.

What this means for you

Mortgage servicers and financial-services companies

For the pre-2008 tax, loan-servicing income on real-property-secured loans followed the property, not the servicer's location or the borrower's. That kept Texas receipts tied to Texas-situated collateral.

Accountants and tax professionals

This is a receipt-characterization and sourcing point specific to real-property-secured loan servicing. The margin tax's financial-receipts sourcing differs, so re-verify before applying.

Common questions

Q: How were mortgage loan-servicing receipts sourced for Texas franchise tax?
A: Based on the location of the underlying real property securing the loans.

Q: Did the taxpayer's competitive-disadvantage argument change the rule?
A: The Comptroller reviewed the taxpayer's alternative proposals and adopted the location-of-the-real-property sourcing for these receipts.

Citations and references

The letter set sourcing by the location of the underlying real property without citing a specific numbered Tax Code section. See the verbatim text below.

Source

Original ruling text

April 21, 2006

Dear **:

Thank you for your April 4, 2006, letter regarding the franchise tax
apportionment for your client, COMPANY.

You stated in your letter that COMPANY is a diversified financial service
provider servicing consumers and institutions worldwide. The client, as a
mortgage banker, originates, sells, and services single-family residential
mortgage loans.

COMPANY has had an impressive record of growth in Texas and represents the
strong business friendly environment the state offers. You also noted that it
appears that one feature of the Texas franchise tax, the apportionment of
receipts related to loan servicing activities, treats your client differently
from its chief competitors and could result in a disproportionate tax burden.

Upon review of your alternative proposals, we have determined the receipts from
loan servicing, where the loans are secured by real property, should be sourced
based on the location of the underlying real property.

If you have any additional questions, please contact me at 463-4444. Thanks
for all that you do for Texas.

Sincerely,

Carole Keeton Strayhorn
Texas Comptroller

c: Mike Reissig, Director, Tax Administration

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