TX 200103126L Franchise Tax (PRIOR TO 01/01/2008) 2001-03-28

Is interest a bank earns on Federal Funds held at a Texas-domiciled correspondent bank a Texas gross receipt for franchise-tax apportionment?

Short answer: Yes, under the law as it stood. For franchise-tax reports due on or after January 1, 2000, interest a bank earns on Federal Funds held in a Texas-domiciled correspondent bank is apportioned based on the legal domicile of the payor. Because the payor is a Texas-domiciled national bank, that interest is a Texas gross receipt for both components of the franchise tax (taxable capital and taxable earned surplus), per Franchise Tax Rule 3.560(f)(2). The letter also flags then-pending legislation (House Bill 3143 and companion Senate Bill 1125, each Section 48, amending Tax Code Sec. 171.106) that would reclassify such interest as a non-Texas gross receipt for reports originally due on or after January 1, 2002 - verify whether that change was enacted.

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This page answers the general question as of 2001. Ezel answers yours, under current Texas tax law, with citations.

Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This letter describes the pre-2008 Texas franchise tax and references legislation then pending in the 2001 session that would have reclassified this interest; the 2007 legislation (House Bill 3 and House Bill 3928) later replaced the franchise tax with the current margin tax effective January 1, 2008, which has its own apportionment rules, so confirm both the outcome of the cited bills and current law. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A bank asked the Comptroller to confirm, in writing, how to apportion the interest it earns on Federal Funds held in a Texas-domiciled correspondent bank - i.e., whether that interest counts as a Texas receipt for the franchise tax.

It was a Texas gross receipt. For reports due on or after January 1, 2000, interest on Federal Funds held in a Texas-domiciled correspondent bank is apportioned by the legal domicile of the payor. Because the payor here is a Texas-domiciled national bank, the interest is a Texas gross receipt for both components of the franchise tax (taxable capital and taxable earned surplus). See Franchise Tax Rule 3.560(f)(2).
A change was pending. The letter notes then-pending legislation - House Bill 3143 and companion Senate Bill 1125, each Section 48, amending Tax Code Sec. 171.106 - that would treat such interest as a non-Texas gross receipt for reports originally due on or after January 1, 2002. The bank was told it could track the bills through Texas Legislature Online.

Currency note: This 2001 letter states the pre-2008 franchise-tax rule and references bills that were still in the legislature. Confirm whether those bills passed, and note that the franchise tax was later replaced by the margin tax (effective January 1, 2008 under House Bills 3 and 3928), which apportions receipts under its own rules.

What this means for you

Banks with correspondent-bank Federal Funds positions

Where your Federal Funds interest is sourced turned on who pays it - the payor's legal domicile - not where your bank sits. Interest from a Texas correspondent bank was a Texas receipt under the rule in effect for 2000-forward reports, increasing the Texas apportionment factor.

Tax professionals

This is a clean application of the location-of-payor rule in Rule 3.560(f)(2) to interbank Federal Funds. Watch the timing: the Comptroller expressly flagged proposed Section 171.106 amendments (HB 3143 / SB 1125) that would flip the result for post-2001 reports. Confirm the legislative outcome and then re-verify under the current margin tax, which does not use this framework.

Common questions

Q: Is interest on Federal Funds at a Texas correspondent bank a Texas receipt?
A: Under the rule for reports due on or after January 1, 2000, yes - it is sourced to the payor's legal domicile, and a Texas-domiciled national bank payor makes it a Texas gross receipt.

Q: Which franchise-tax components does it affect?
A: Both - taxable capital and taxable earned surplus.

Q: Did the law change after this letter?
A: The letter flags pending bills (HB 3143 / SB 1125, amending Sec. 171.106) that would have made the interest a non-Texas receipt for reports due on or after January 1, 2002. Verify whether they were enacted.

Citations and references

Rule and statute:

34 Tex. Admin. Code Sec. 3.560(f)(2) (Franchise Tax Rule 3.560) - interest apportioned by the legal domicile of the payor
Texas Tax Code Sec. 171.106 - gross-receipts apportionment provision that HB 3143 / SB 1125 (each Section 48) proposed to amend

Source

STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
Opinion: https://star.comptroller.texas.gov/view/200103126L

Original ruling text

March 28, 2001

Dear *****:

You have requested confirmation of franchise tax information I provided you by
telephone on March 15, 2001.

You asked about how to apportion interest that a bank earns on Federal Funds
held in a Texas-domiciled correspondent bank. For reports due on or after
January 1, 2000, the interest that a bank earns on Federal Funds held in a
Texas-domiciled correspondent bank would be apportioned based on the legal
domicile of the payor. Because the payor is a Texas-domiciled national bank,
the interest would be apportioned as a Texas gross receipt for both components
of the franchise tax. Please refer to Franchise Tax Rule 3.560(f)(2) for
additional information.

As I mentioned, legislation has been filed which would provide that such
interest would be a non-Texas gross receipt, beginning with reports originally
due on or after January 1, 2002. Please refer to House Bill 3143 and its
companion bill, Senate Bill 1125. For each bill, the section related to the
correspondent bank issue is Section 48, which would amend Section 171.106 of
the franchise tax law.

You can monitor the progress of these bills via the Texas Legislature Online.
Their website is .

If you have additional franchise tax questions, please write me or call me at
1-800-531-5441. My extension is 3-3958.

Sincerely,

Teresa Comer
Tax Policy Division

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