Does a company that drafts customers' bank accounts electronically (EFT/ACH) on behalf of its business clients have to charge Texas sales tax on its drafting fees?

Subject

Bank Drafting Services/Electronic Fund Transfers (Eft/Ach) Of Acct Receivable — Nontaxable Service — Fees And Charges Not Taxable To Customers

Plain-English summary

A company asked the Texas Comptroller about its sales and use tax responsibilities for a new kind of business: bank drafting services. The company contracts with other businesses to draft their customers' checking accounts each month for recurring fees those businesses collect. It's similar to an electronic fund transfer, except instead of moving money electronically, the company prints a paper draft that looks like a check but has no signature — it's pre-authorized by the customer, and the draft says so.

Here's how the process works: the company's business client gets its own customers' permission and banking details (bank name, account number, routing number), along with the draft amount, due date, and frequency. The client passes that information to the drafting company, which enters it into its software system. When a draft is due, the company prints the drafts and delivers them to its client, who then pays the company for the service until the next draft cycle.

The Comptroller ruled that the fee the company charges its business clients for the drafting service is not taxable. That said, because the company is providing a nontaxable service, it must still pay sales tax itself on any taxable items — tangible personal property and taxable services — that it buys to provide the drafting service (for example, its own equipment, supplies, or purchased services used in the business).

The Comptroller noted this opinion is based on the facts presented, and could change if the facts are different.

What this means for you

Bank drafting / EFT-ACH processing companies

If your business prints and delivers pre-authorized paper drafts (or otherwise handles electronic account-drafting) for other companies' recurring billing, the fee you charge those companies for the drafting service itself is not subject to Texas sales tax, and you should not collect sales tax from your business clients on those fees.

Purchasing side of the same business

Don't assume that because your service is nontaxable, everything you buy is tax-free too. The Comptroller specifically flagged that a provider of a nontaxable service still owes sales tax on the taxable goods and services it purchases to run that business (equipment, software, supplies, etc.), unless a separate exemption applies to those purchases.

Accountants and tax professionals advising similar businesses

This letter treats bank drafting as functionally similar to an EFT, and its "fee is nontaxable, but taxable inputs are still taxed" framework is a common pattern in Texas sales tax law for service providers. Since this letter turns on facts specific to one taxpayer's business model (and is nearly three decades old), verify current STAR guidance before relying on it for a client's identical or similar arrangement.

Common questions

Q: Does a bank drafting/EFT service company need to charge sales tax on its service fees?
A: Based on this letter, no — the Comptroller found the drafting fee is not a taxable service.

Q: Does that mean the company pays no sales tax at all?
A: No. The company still must pay sales tax on any taxable items (tangible personal property and taxable services) it purchases for use in providing the drafting service.

Q: Can another business rely on this letter for its own bank drafting operation?
A: Not directly. STAR letters generally may be relied on only by the taxpayer to whom they were issued, and the Comptroller noted this opinion is based on the specific facts presented — different facts could change the outcome.

Q: What kind of "draft" is described in this letter?
A: A paper draft that resembles a check but has no signature, pre-authorized by the customer (with that pre-authorization stated on the draft itself), used to pull recurring payments from a customer's checking account on behalf of the drafting company's business client.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9512L1392D08

Original ruling text

December 20, 1995

Dear ***:

Thank you for letter of December 11, 1995, about your Texas sales and use tax
responsibilities for the services you will provide.

The local bank drafting business is a new business industry. Your firm
contracts with other companies to draft their customers' checking accounts for
the recurring fees they collect from their customers each month. The new
business is similar to electronic fund transfers. Instead of transferring
funds electronically, your firm prints a paper draft. This paper draft looks
just like a check you would write except it has no signature. It is
pre-authorized by the customer and states that on the draft.

The process used for this is as follows: Your firm contracts with ***
(as an example) to draft its customers wishing to take advantage of this
service. ** then obtains the customer's permission along with the
required information for you to draft the customer's account (bank name,
account number, routing number, etc.). * then gives that
information to your firm, plus, information as to when the first draft will be
due, the amount of the draft and how often you will draft the customer. You
enter the information into your software system. When the due date occurs,
your company prints all the drafts due on this date and delivers them to
*. **** then pays your firm for your service until the
next scheduled draft date.

The fee paid to your firm for the drafting service is not taxable. However, as
the provider of a non-taxable service, your firm is required to pay sales tax
on all taxable items (tangible personal property and taxable services) bought
for use in providing this service.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683.The direct line is
512-463-4683. You may also write to TaxPolicy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9512935L