Is a production credit association, a federal instrumentality under the Farm Credit System, immune from Texas franchise (state) tax?

Plain-English summary

A production credit association - a lending cooperative designated as a federal instrumentality under the Farm Credit System - asked the Texas Comptroller to exempt it from state tax on the theory that federal instrumentalities are immune. The Comptroller denied the request, relying on a brand-new U.S. Supreme Court decision.

• The Supreme Court settled the question. On February 20, 2001, in Director of Revenue of Missouri v. CoBank ACB, the Court unanimously reversed the Missouri Supreme Court, which had held that certain Farm Credit System cooperatives were immune from state tax.
• Farm Credit instrumentalities are taxable. The Court noted a split among state courts over whether banks for cooperatives and production credit associations - both Farm Credit System instrumentalities - were immune, and resolved it against immunity. It observed that the statutory history for taxing the two is "virtually identical," so the ruling covers both.
• Result: exemption denied. Because the requesting entity was a production credit association, its request for a Texas state tax exemption was denied.

Currency note: This 2001 letter applies the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The Supreme Court's holding on federal-instrumentality immunity still controls; confirm how the current margin tax reaches these entities.

What this means for you

Farm Credit System lenders operating in Texas

Being a federal instrumentality under the Farm Credit System does not shield a production credit association or bank for cooperatives from Texas state tax. After CoBank, the immunity argument these entities had used in some states was foreclosed.

Tax professionals

The letter is essentially the Comptroller applying CoBank the week it came down. If you advise Farm Credit lenders, note that the immunity defense was rejected at the Supreme Court on statutory-construction grounds (Congress did not grant these instrumentalities tax immunity), and re-verify treatment under the current margin tax rather than the pre-2008 franchise tax discussed here.

Common questions

Q: Are production credit associations immune from Texas tax because they are federal instrumentalities?
A: No. The U.S. Supreme Court held in CoBank (2001) that Farm Credit System instrumentalities are not immune from state taxation, and the Comptroller denied the exemption request on that basis.

Q: Does the ruling apply only to production credit associations?
A: No. The Court said the taxation history for production credit associations and banks for cooperatives is "virtually identical," so the decision applies to both.

Q: Is this still current law?
A: The immunity holding still controls, but Texas replaced the pre-2008 franchise tax analyzed here with the margin tax effective January 1, 2008. Confirm current treatment.

Citations and references

Authorities:

• Director of Revenue of Missouri v. CoBank ACB, 531 U.S. 316 (2001) - Farm Credit System instrumentalities (production credit associations and banks for cooperatives) are not immune from state taxation
• Production Credit Association of Southeastern Missouri v. Director of Revenue, 10 S.W.3d 142 (Mo. 2000) - the Missouri Supreme Court decision reversed by CoBank

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200102081L

Original ruling text

February 28, 2001

Dear **:

On February 20, 2001, the U.S. Supreme Court (Court) issued its decision in
Director of Revenue of Missouri v. CoBank ACB, 2001 U.S. Lexis 963.
Unanimously, the Court reversed the Missouri Supreme Court's holding in
Production Credit Association of Southeastern Missouri, et al. v. Director of
Revenue, 10 S.W.3d 142 (2000), that certain cooperatives, designated as federal
instrumentalities under the federal Farm Credit System, are immune from state
tax.

In its decision, the Court noted a conflict among some state courts concerning
whether banks for cooperatives and production credit associations, both of
which are designated federal instrumentalities under the Farm Credit System,
were immune from state tax. The Court then said: "Since the statutory history
and provisions regarding the taxation of production credit associations and
banks for cooperatives are virtually identical, . . . we granted certiorari to
resolve this conflict." The Missouri Supreme Court decision the Court reversed
addressed the taxation of production credit associations as well as banks for
cooperatives holding both institutions were immune from state taxation.
Manifestly, the Court's decision thus applies to both production credit
associations and banks for cooperatives.

The request of COMPANY A, formerly COMPANY B, a production credit association,
for state tax exemption is therefore denied.

If you have any questions, please call me toll free at 1-800-531-5441,
extension 3-4931, or directly at 512/463-4931.

Sincerely yours,

William E. York
Tax Policy Division