When did a bank exclude interest from the former earned-surplus receipts factor, and how did Texas source other bank interest before and after January 1, 2000?

Plain-English summary

Federal-obligation interest excluded from earned surplus was also excluded from that component's Texas and everywhere receipts, while other bank interest followed a sourcing rule that changed for reports due in 2000.

The Comptroller explained the general relationship between a tax base and its receipts factor: if interest was excluded from the relevant base component, it was also excluded from Texas receipts and receipts from everywhere for that component. Rule 3.555(k) applied that treatment to interest from federal obligations for earned-surplus purposes.

The same exclusion did not apply to taxable capital.

If interest remained in the tax base, it generally entered the gross-receipts factor and then required a sourcing rule:

• For reports due before January 1, 2000, a bank's interest was a Texas receipt if the bank's commercial domicile was in Texas under Section 171.1031(a).
• For reports due on or after January 1, 2000, a bank sourced interest and dividends to the legal domicile of the payor.

Currency note: These are historical rules for the former two-component franchise tax. Texas replaced that regime with the margin tax effective January 1, 2008.

What this means for you

Banks holding federal obligations

Under the former earned-surplus component, qualifying federal-obligation interest left both the base and the associated receipts factor. It was not excluded from taxable capital by the rule discussed.

Tax professionals

First determine whether the interest belongs in the relevant tax base. Only then apply the correct receipts-sourcing rule and report-period effective date.

Common questions

Q: Was federal-obligation interest excluded from earned surplus?
A: Yes, and from both Texas and everywhere receipts for that component.

Q: Was it also excluded from taxable capital?
A: No. The letter expressly says there was no such exclusion for taxable capital.

Q: What changed for reports due in 2000?
A: Bank interest and dividends moved from commercial-domicile sourcing to the payor's legal domicile.

Citations and references

• 34 Tex. Admin. Code Sec. 3.555(k)
• Texas Tax Code Sec. 171.1031(a)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9911324L

Original ruling text

November 3, 1999

Dear **:

Thank you for your Tax Help inquiry concerning the exclusion of certain
investment interest income from a bank's Texas gross receipts.

If the interest is excluded from the gross receipts factor, then it will also
be excluded from Texas receipts. For example, Franchise Tax Rule 3.555(k)
provides an exclusion for interest received from federal obligations. The rule
specifies that the interest is excluded from the earned surplus component and
gross receipts for earned surplus purposes (i.e., Texas receipts and receipts
from everywhere). Please note that there is no such exclusion for taxable
capital.

As a general rule, if interest is included in the tax base component, it should
also be included in the gross receipts factor. Once it is established that the
interest is a gross receipt, we then have to apply the specific apportionment
rule to determine if it is a Texas receipt. For reports due before January 1,
2000, interest receipts of a bank are Texas receipts if the bank's commercial
domicile is in Texas. Section 171.1031(a), Texas Tax Code.

During the past legislative session, the Legislature amended this provision.
For reports due on or after January 1, 2000, a bank must apportion its interest
(and dividends) to the legal domicile of the payor.

You can access information regarding the franchise tax and other state taxes
through the Comptroller's Web Site. The URL for our home page is
www.window.state.tx.us. Once our page is displayed on your screen, click on
"Texas Taxes."

If you have any questions, my internet address is
[email protected], or you may call toll free at 1-800-531-5441,
extension 3-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division