Does a bank have to include 'credit amounts' used to reduce its service charges in its gross receipts for Texas franchise tax purposes?

Plain-English summary

A bank asked the Texas Comptroller whether "credit amounts" it used when calculating its service charges should be counted as revenue (receipts) for Texas franchise tax purposes. The Comptroller ruled no: these credit amounts simply reduce the size of a service-charge expense — they don't generate any income to the bank under either generally accepted accounting principles (GAAP) or federal income tax accounting. Because they never show up as revenue under those methods, they are not treated as receipts to the bank for franchise tax purposes. The ruling draws a clear line, though: any interest the bank actually earns (the letter gives the example of interest on interest-bearing checking accounts) is still included in the bank's receipts.

What this means for you

Banks and financial institutions

If your bank uses "credit amounts" as an offset that lowers a service charge you assess to customers (rather than as a payment of income to you), those credit amounts are not automatically treated as revenue you have to report as receipts for Texas franchise tax. The Comptroller's reasoning here turns on whether the amount is recognized as revenue under GAAP or federal income tax rules — if it isn't revenue under either of those methods, it isn't a receipt either. Separately, remember that interest income you do actually earn (such as interest on checking accounts) is still counted in your receipts regardless of how service-charge credits are treated.

Accountants and tax professionals

This is a narrow, facts-specific letter ruling (issued to one taxpayer, referred to as "Company A") rather than a general rule, and it explicitly says the opinion could change if the underlying facts differ. The key analytical hook is simple: receipts follow revenue recognition under GAAP or federal income tax (FIT) methods — an item that nets against an expense calculation without ever being recognized as income under either standard does not become a franchise-tax receipt just because it factors into a service-charge computation.

Common questions

Q: Are "credit amounts" used to calculate a bank's service charges counted as franchise tax receipts?
A: No, according to this ruling — because the credits reduce a service-charge expense and do not result in revenue under GAAP or federal income tax accounting, they are not receipts to the bank.

Q: Does this mean banks never have to count anything related to these accounts as receipts?
A: No. The ruling specifically notes that interest actually earned (for example, on interest-bearing checking accounts) is still included in the bank's receipts.

Q: Can another bank rely on this exact ruling for its own franchise tax reporting?
A: Not directly. The Comptroller's letter is based on the specific facts presented by the requesting taxpayer, and it says its own conclusion "may change" if the facts are different. It illustrates the Comptroller's reasoning but was issued to one taxpayer only.

Citations and references

No statutes or regulations are cited in this letter; the Comptroller's answer relies on general GAAP and federal income tax revenue-recognition concepts rather than a specific Tax Code citation.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9304L1265D05

Original ruling text

April 22, 1993

Dear **:

In your letter of April 6 you requested a determination regarding the inclusion
of credits used in computing bank service charges on receipts for franchise tax
purposes.

My response is based on my understanding that the "credit amounts" used in the
bank's calculations reduce the service charge assessed but do not result in
revenue under any circumstances for either generally accepted accounting
principles or federal income tax purposes.

The "credit amounts" will not be considered receipts to Company A because the
credits are merely used in calculating the amount of an expense (service
charges). The credits do not result in any income to Company A.

However, any interest earned (such as on interest bearing checking accounts)
would be included in Company A's receipts.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions, please contact Tax Administration Division. You may
call toll free 1-800-531-5441, or our regular number is 512/463-4600. My
extension is 3-4662. You may write me at Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat

NOTE: Previous Accession Number 9304168L