For the Texas franchise tax, when are dividends and interest a corporation receives from a bank counted as Texas gross receipts?

Plain-English summary

A taxpayer asked how dividends and interest received from banks are sourced for the pre-2008 Texas franchise tax. The answer turns on where the bank is based, because these amounts feed the gross-receipts apportionment factor.

• National banks. Dividends and interest from a national bank are Texas receipts only if the bank's principal place of business is in Texas (Rules 3.549(e)(13)(B), 3.557(e)(13)(D)).
• What "principal place of business" means. It is the location of the bank's day-to-day operations. If those operations are spread fairly evenly across more than one state, it is the bank's commercial domicile - the principal place from which the business is directed (Rule 3.549(b)(2)).
• Applying it. A national bank whose commercial domicile is outside Texas produces non-Texas receipts. But a separately chartered Texas-only bank (the letter's "Bank A Texas") produces Texas receipts.
• State banks. Dividends and interest from a state bank chartered in Texas are Texas receipts; from a state bank chartered outside Texas, they are not.

Currency note: This describes the pre-2008 franchise tax and its apportionment rules (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax computes receipts and apportionment differently; confirm present law.

What this means for you

Corporations holding bank stock or receiving bank interest (pre-2008)

Where you earned the income did not control - the bank's home base did. To decide whether a dividend or interest payment was a Texas receipt, you had to identify the bank's charter type and its principal place of business or commercial domicile.

Tax professionals

The letter applies the standard money-receipts sourcing rule for banks: national-bank amounts follow the bank's principal place of business (day-to-day operations, or commercial domicile when spread evenly); state-bank amounts follow the charter state. A separately chartered Texas subsidiary is treated on its own footing.

Common questions

Q: Are dividends from an out-of-state bank Texas receipts?
A: Generally no. For a national bank, they are Texas receipts only if its principal place of business (or commercial domicile) is in Texas; for a state bank, only if it is chartered in Texas.

Q: What is a bank's "commercial domicile"?
A: The principal place from which the trade or business is directed - used when day-to-day operations are spread fairly evenly across more than one state.

Q: What about a Texas-chartered subsidiary of a national bank?
A: Interest and dividends from a separately chartered Texas-only bank are Texas receipts.

Citations and references

Rules and statutes:

• Franchise Tax Rules 3.549(e)(13)(B) and 3.557(e)(13)(D), 34 Tex. Admin. Code - national-bank dividends and interest apportioned to Texas if the bank's principal place of business is in Texas
• Franchise Tax Rule 3.549(b)(2), 34 Tex. Admin. Code - principal place of business is day-to-day operations, or commercial domicile if spread evenly
• Texas Tax Code Chapter 171 - the franchise tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200109381L

Original ruling text

September 6, 2001

To:

From: Jerry Bobbitt

Thank you for your Tax Help inquiry concerning dividends and interest received
from banking institutions. While we don't have information concerning the
specific banks you referenced, the following franchise tax apportionment
guidelines are applicable to dividends and interest from banks.

Dividends and interest that are received from a national bank are apportioned
to Texas if the bank's principal place of business is in Texas. Franchise Tax
Rules 3.549(e)(13)(B) and 3.557(e)(13)(D).

In determining the bank's "principal place of business", we look to the
location of the bank's day-to-day operations. Where the day-to-day operations
are conducted fairly evenly in more than one state, the principal place of
business is the bank's commercial domicile. "Commercial domicile" is defined
as the principal place from which the trade or business is directed. Rule
3.549(b)(2).

If a national bank (e.g., Bank A) has operations spread fairly evenly over more
than one state, then we'd look to the bank's commercial domicile. If Bank A's
commercial domicile was outside Texas, then the dividends and interest would
not be Texas receipts.

Some national banks may have a separate charter (e.g., Bank A Texas) with
operations exclusively in Texas. Interest and dividends from Bank A Texas
would be Texas receipts.

Also, dividends and interest from a state bank (i.e., chartered in Texas) would
be Texas receipts. Dividends and interest from a state bank chartered outside
Texas would not be Texas receipts.

You may access the franchise tax statutes and rules through this agency's
website at www.window.state.tx.us. At that site, click on "Texas Taxes", which
appears in the middle column of information. On the ensuing screen, select
"Franchise Tax" which provides access to the statutes and rules as well as
certain other information. Chapter 171 of the Tax Code contains the franchise
tax statutes.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

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