Is a $15 fee a business charges customers for a check returned due to insufficient funds subject to Texas sales tax as a debt/claim collection service?

Plain-English summary

A business that charges customers $15 when a check bounces due to insufficient funds asked whether this fee is taxable. The requester had seen on the Comptroller's FAQ page that "debt and claim collection" is a taxable service, and their own bank's returned-check fee didn't list sales tax, so they wanted clarity.

The Comptroller's answer: no sales tax is owed on charges by a bank, or by a business, for a returned/insufficient-funds check. The reasoning is that this charge isn't payment for a service performed for the customer — it's essentially an overdraft-type charge, not a purchased service, so it doesn't fall under the taxable debt/claim collection category the requester had read about. The letter draws a clear line, though: if the business instead hires a third-party collection agency to collect on a bad check or unpaid debt, the collection agency's charge for that collection service IS subject to tax.

What this means for you

Businesses that charge customers for bounced/insufficient-funds checks

You do not need to collect sales tax on your own insufficient-funds or returned-check fee — it's treated as an overdraft-type charge, not a taxable service.

Businesses that outsource bad-check or debt collection to a collection agency

If you (or your customer) hire a collection agency to pursue a bad check or unpaid debt, the collection agency's fee for that collection service is taxable — that's a different transaction from simply assessing your own returned-check fee.

Accountants and tax professionals

This letter draws a useful line for advising clients: assessing your own insufficient-funds fee is nontaxable, but paying a third party specifically to collect on a bad check or debt triggers the taxable debt/claim collection service category.

Common questions

Q: Do I need to charge sales tax on my own bounced-check fee?
A: No — this letter concludes such a fee is not a taxable service; it's treated like an overdraft charge.

Q: What if I hire a collection agency to go after a bad check?
A: The collection agency's charge for that collection service is taxable.

Q: Does this apply to banks specifically, or any business?
A: The letter addresses both — it says there's no sales tax on charges by a bank for returned checks, and confirms the same conclusion applies to the requester's own business-to-customer insufficient-funds fee.

Citations and references

• No specific Tax Code section or Comptroller rule number is cited in the body of this letter; it distinguishes a business's own returned-check fee (nontaxable, not a service performed for the customer) from a third-party collection agency's debt/claim collection charge (taxable) without naming a supporting statute or rule for either.

Subject

Check — Bad Check — Returned/Insufficient Funds Fee Charged By Bank/Retailer/Business

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9711925L

Original ruling text

November 18, 1997

Subject: Insufficient funds fees charged by banks or businesses

Dear **:

This is in response to your request for a ruling about whether the $15.00
charge you assess for checks returned from the bank due to insufficient funds
is a taxable item.

You checked our FAQ page and saw that "debt and claim collection" is indeed
taxable. However, your bank does not list state sales tax when assessing the
monthly service charge, and frequently included in this charge is an extra fee
if one of your customers' checks is returned to you.

You are asking for an explanation of this issue and whether you are required to
be charging tax when you charge your customers an "insufficient funds fee?"

Response: There is no sales tax owed on charges by a bank for returned checks.

Essentially, the charge is not for a service performed for the customer. The
customer is not buying a service but is only paying an overdraft charge which
is not subject to tax.

Similarly, your charge to your customer for an insufficient check is not
taxable.

If you were to hire a collection agency to collect on a bad check or debt, the
charge by the collection agency for collecting on the bad check or debt would
be subject to tax.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please
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. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division