Are checks that a bank or credit union sells to its customers subject to Texas sales tax, and who has to collect it?

Subject

Check Sales By Banks/Credit Unions To Customers

Plain-English summary

A bank asked the Comptroller whether blank checks it sells to its customers are subject to Texas sales tax. The answer is yes: checks are tangible personal property, which is a taxable item under Tex. Tax Code Sec. 151.010, so the sale of checks delivered to a purchaser in Texas is taxable.

The letter goes further and explains that who has to collect and report the tax depends on how the bank structures the sale. The Comptroller identified three ways banks handle check sales:

1. The bank sells at a markup. If the bank sells the checks to its customers at a profit, the bank itself must collect and report the tax on the sale.
2. The bank passes the cost through, no markup. If the bank pays tax to the check vendor and simply recovers that tax from its customers without marking up the cost of the checks, the bank does not have to collect tax from the customer -- the check vendor is the one that collects and reports the tax.
3. The bank is just a conduit for the order. If the bank merely forwards the customer's check order to the vendor, the vendor delivers the checks directly to the customer, and the bank charges the customer's account the exact amount it paid the vendor, then the bank is acting as the vendor's agent. In that case, the check vendor -- not the bank -- must collect and report the tax (sales or use tax).

The Comptroller noted that the specific audit situation the requester described may have involved the second or third scenario, and enclosed a related edited letter on checks sold by banks for additional reference (that enclosure is not reproduced in this ruling).

What this means for you

Banks and credit unions selling checks to customers

The sale is taxable -- checks are tangible personal property under Sec. 151.010. Whether you need to collect the tax depends on your pricing model: if you mark up the price above what you paid the vendor, you must collect and report the tax yourself. If you charge customers only what you paid the vendor (no markup), you don't have to collect tax -- the vendor already did (or should have).

Banks acting purely as an order-forwarding conduit

If you simply relay a customer's check order to a vendor, the vendor ships directly to the customer, and you charge the customer's account the exact vendor cost, you're treated as the vendor's agent. In that structure, the responsibility to collect and report sales or use tax falls on the check vendor, not on you.

Check vendors selling through banks or credit unions

Depending on the arrangement, you (the vendor) may be the party responsible for collecting and reporting tax -- specifically in the cost-recovery (no-markup) and agent/conduit scenarios described above.

Common questions

Q: Are checks sold by a bank to its customers subject to Texas sales tax?
A: Yes. Checks are tangible personal property, which is a taxable item under Tex. Tax Code Sec. 151.010, so the sale of checks delivered to a purchaser in Texas is taxable.

Q: If my bank sells checks at a profit, who collects the tax?
A: The bank must collect and report the tax on the sale.

Q: If the bank just recovers its cost from the customer without marking it up, does the bank have to collect tax?
A: No. In that situation, the check vendor is the one that collects and reports the tax, not the bank.

Q: What if the bank only forwards the order and the vendor ships directly to the customer?
A: If the bank charges the customer's account the exact amount it paid the vendor, the bank is regarded as an agent of the vendor, and the check vendor must collect and report the sales or use tax.

Q: Does this ruling apply the same way to every bank's check-sale arrangement?
A: The Comptroller stated this opinion is based on the facts presented, and other facts, though similar, may produce a different result.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 151.010 (defines tangible personal property, including checks, as a taxable item)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701213L

Original ruling text

January 6, 1997

Dear **:

This is in response to your request for a ruling on the taxability of blank
checks sold by a bank.

Response: Checks are tangible personal property. Tangible personal property
is defined as a taxable item under Sec. 151.010. Therefore, the sale of checks
delivered to a purchaser in Texas is taxable. Banks are allowed to handle the
sale of checks using one of the following methods:

If the bank is selling the checks at a profit to its customers the bank must
collect and report tax on the sale.

If the bank pays tax to the check vendor and simply recovers the tax from its
customers without marking up the cost of the checks, the bank is not required
to collect tax from the customer. The check vendor would collect and report
the tax in this situation.

If the bank merely forwards the check order from a bank customer to the check
vendor, the check vendor delivers the checks to the bank customer and the bank
charges the customer's account the exact amount paid the vendor, the bank is
regarded as an agent from the vendor. The check vendor is required to collect
and report either sales or use taxes on the transaction.

The audit situation described by your client may have involved the second or
third situations noted above. I am enclosing a copy of an edited letter that
addresses checks sold by banks for your information.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. You may call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to Tax
Policy Division, Comptroller of Public Accounts. My Internet address is:
[email protected].

Sincerely,
Gilbert Zamora
Tax Policy Division