Are ATM transaction fees, home banking service fees, pay-by-phone charges, and free software given to bank customers taxable in Texas -- for both a bank's own customers and non-customers using its ATMs?

Plain-English summary

A bank asked the Comptroller to rule on sales and use tax treatment for several transactions: (1) software shipped free of charge to Texas bank customers, (2) a home banking service fee for electronic bill pay, fund transfers, and viewing balances/transactions online, (3) ATM transaction fees charged to the bank's own customers, (4) ATM transaction fees charged to people who are NOT the bank's customers, (5) monthly service charges for pay-by-phone capability, and two more scenarios involving a Texas resident who banks at an out-of-state institution (home banking fees and pay-by-phone charges).

The Comptroller ruled all of these charges are not taxable to whoever pays them. The free software isn't taxed to the customer (since it's free), though the bank itself owes use tax on the software under Rule 3.346. All the banking-service fees -- home banking, ATM transactions (for both customers and non-customers), and pay-by-phone -- are nontaxable, including for the Texas-resident-banking-elsewhere scenarios. The legal basis: Tax Code § 151.0101 defines exactly fifteen categories of "taxable services," and "banking services" is not one of them. While a bank CAN be a seller of taxable items in other contexts (e.g., selling repossessed tangible personal property), in these described transactions the bank is providing nontaxable banking services and is instead the CONSUMER of all the taxable items it purchases to provide them -- ATM machines, telecommunications services, data processing services, etc. -- meaning the bank itself pays sales/use tax on those inputs rather than passing tax through to its customers.

What this means for you

Banks and financial institutions

None of your core banking service fees -- ATM fees (customer or non-customer), home banking fees, pay-by-phone fees -- are taxable to your customers, because "banking services" isn't one of the Tax Code's fifteen enumerated taxable service categories. But you're the consumer of the taxable inputs (ATM hardware, telecom, data processing) used to deliver these services, so budget for sales/use tax on those purchases yourself.

Bank customers and non-customers using ATMs

Expect no Texas sales tax on ATM fees, home banking fees, or pay-by-phone charges, regardless of whether you're a customer of that particular bank or your home bank is located outside Texas.

Accountants and tax professionals

This letter is a clean, general-purpose reference for "banking services are not taxable services under § 151.0101, and the bank is the consumer of its own taxable inputs" -- useful whenever a client bank asks about a new fee type that functions as a banking service rather than one of the fifteen enumerated taxable categories.

Common questions

Q: Are ATM transaction fees taxable in Texas?
A: No, per this letter -- neither for the bank's own customers nor for non-customers using the ATM.

Q: Is a home banking service fee (bill pay, transfers, balance viewing) taxable?
A: No, per this letter -- banking services are not among the fifteen taxable services defined in § 151.0101.

Q: Who pays tax on the equipment and services (like ATM machines and telecom) used to provide these banking services?
A: The bank itself, per this letter -- as the consumer of those taxable inputs, not the bank's customers.

Q: Is free software shipped to a customer taxed?
A: Not to the customer, since it's free -- but per this letter, the bank owes use tax on that software under Rule 3.346.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101 (fifteen defined taxable services; banking services not included)
• 34 Tex. Admin. Code Rule 3.346 (use tax on the bank's own software purchases)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9706530L

Original ruling text

June 20, 1997

Dear ***:

Thank you for your letter regarding sales and use tax on several transactions.

1) Software is shipped free of charge to Bank customers in Texas.

Response: Bank customers do not owe tax because the software is free.
However, the Bank owes use tax on software delivered to customers located in
Texas. See enclosed Rule 3.346 regarding use tax.

2) A home banking service fee is charged to Bank customers in Texas for the
ability to pay bills electronically, transfer funds, view posted transactions
and account balances by means of their computer.

Response: Banking services (home banking service fee) are not taxable
to Bank customers. However, the Bank is the consumer and must pay sales/use
tax to vendors when purchasing taxable items used to provide nontaxable banking
services.

3) An ATM transaction fee is assessed on usage of ATMs in Texas by Bank
customers.

Response: Banking services (ATM transaction fee) are not taxable to
Bank customers. However, the Bank is the consumer and must pay sales/use tax
to vendors when purchasing taxable items used to provide nontaxable banking
services.

4) An ATM transaction fee is assessed on usage of ATMs in Texas by persons who
are not Bank customers.

Response: Banking services (ATM transaction fee) are not taxable even
to persons who are not Bank customers. However, the Bank is the consumer and
must pay sales/use tax to vendors when purchasing taxable items used to
provide nontaxable banking services.

5) Monthly service charges assessed, for pay by phone ability.

Response: Banking services (monthly service charges for pay by phone
ability) are not taxable to Bank customers. However, the Bank is the consumer
and must pay sales/use tax to vendors when purchasing taxable items used to
provide nontaxable banking services.

Note: The next two transactions involve a customer who is a resident of Texas
that banks at a bank in a different state.

1) A home banking service fee is charged to Bank customers in Texas for the
ability to pay bills electronically, transfer funds, view posted transactions
and account balances by means of their computer.

Response: Banking services (home banking service fee) are not taxable
to Bank customers. However, the Bank is the consumer and must pay sales/use
tax to vendors when purchasing taxable items used to provide nontaxable banking
services.

2) Monthly service charges assessed, for pay by phone ability.

Response: Banking services (monthly service charges for pay by phone
ability) are not taxable to Bank customers. However, the Bank is the consumer
and must pay sales/use tax to vendors when purchasing taxable items used to
provide nontaxable banking services.

Basis of Response: Texas Tax Code Section 151.0101 does not include "banking
services" as one of the fifteen services defined as "taxable services" in the
Tax Code. Although a Bank can be a seller of taxable items (example: selling
repossessed tangible personal property), in the transactions you described, the
bank is providing nontaxable banking services and is the consumer of all
taxable items (e.g., ATM machines, telecommunications services, data processing
services, etc.) purchased to provide the nontaxable services.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division