Can a bank charge sales tax on a returned/insufficient-funds check fee?

Subject

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

Plain-English Summary

A constituent was charged sales tax by her bank on a fee for a returned (insufficient-funds) check. The Texas Comptroller's Tax Administration division confirmed that this was wrong: no sales tax is owed on a bank's returned-check charge. The reasoning is simple — the charge isn't payment for a taxable service performed for the customer. It's an overdraft charge, and overdraft charges are not subject to Texas sales tax.

What This Means For You

Bank customers

If your bank charges you a fee for a bounced or returned check due to insufficient funds, that fee should not include sales tax. It's treated as a nontaxable overdraft charge rather than a taxable service charge.

Banks and financial institutions

Do not add sales tax to returned-check or insufficient-funds fees charged to customers. Doing so is inconsistent with this Comptroller guidance, since the fee is not consideration for a taxable service.

Accountants and tax professionals

This letter illustrates the Comptroller's distinction between fees for actual services performed for a customer (potentially taxable) versus penalty/overdraft-type charges that merely compensate for a customer's own insufficient funds (not taxable). Note this is a 1994 STAR letter addressed to a specific constituent inquiry; it is old guidance and, per STAR's reliance rules, can only be relied upon by the original recipient.

Q&A

Q: Can a bank legally charge sales tax on a returned/bad-check fee in Texas?
A: No. The Comptroller ruled there is no sales tax owed on charges by a bank for returned checks, because the charge is not for a service performed for the customer.

Q: Why isn't a returned-check fee taxable?
A: Because the customer isn't buying a service — the fee is only an overdraft charge, and overdraft charges are not subject to Texas sales tax.

Citations

No statutes or rules were cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408L1310G14

Original ruling text

August 2, 1994

Dear**:

Recently, you asked whether a bank could charge sales tax on a fee for a
returned check. As I understand the problem, one of your constituents was
charged sales tax by her bank for a returned check.

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.

Should you have any further questions, please write me at 111 E. 17th Street,
Austin, Texas, 78774, or call me at 1-800-531-5441, extension 3-4004.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

NOTE: Previous Accession Number 9408510L