Does Farm Credit Bank of Texas have to charge and collect Texas sales tax on the payroll, appraisal, marketing, and other administrative support services it provides to farm credit associations across the state?

Plain-English summary

Farm Credit Bank of Texas asked whether it must charge and collect Texas sales tax on the support services (payroll, appraisal, marketing, and other administrative services) it provides to farm credit associations across the state.

The Comptroller ruled that Farm Credit Bank of Texas and the associations it charters are instrumentalities of the United States Government, exempt under Tax Code § 151.307(a), which exempts the U.S. Government and its instrumentalities from state taxation. As a result, the Comptroller cannot require Farm Credit Bank to charge and collect Texas sales and use tax on these services. On the underlying services themselves: marketing services are not taxable at all, and appraisal services are not taxable when performed for loan purposes -- though the letter noted that some elements of payroll and administrative services described in general terms could, in principle, constitute taxable data processing services.

Importantly, the exemption travels with the federal instrumentality's own purchases/services, not automatically downstream: if Farm Credit Bank charges OTHER institutions (banks, trust companies, or other financial institutions) for these services, those recipient institutions are liable for accruing and paying Texas sales and use tax directly to the state on any taxable services they receive, since they are not themselves federal instrumentalities.

What this means for you

Farm Credit System entities (Farm Credit Bank, farm credit associations)

As federal instrumentalities, you're exempt under § 151.307(a) from having to charge and collect Texas sales tax on services you provide within the System. But watch the underlying service type -- appraisal work is only automatically nontaxable when done for loan purposes, and generic "administrative services" could shade into taxable data processing depending on what's actually performed.

Banks, trust companies, and other financial institutions receiving services from Farm Credit Bank

If you purchase taxable services (like data processing) from Farm Credit Bank of Texas, you are responsible for accruing and paying Texas use tax directly to the state yourself -- the federal instrumentality exemption doesn't shield your own purchase.

Accountants and tax professionals

This letter is a clean illustration of how a federal instrumentality exemption applies to the seller's collection obligation but doesn't excuse a non-exempt buyer's own use tax liability on taxable services purchased from that seller.

Common questions

Q: Is Farm Credit Bank of Texas exempt from collecting Texas sales tax on its support services?
A: Yes, per this letter -- as a U.S. Government instrumentality, it's exempt under § 151.307(a) and cannot be required to charge and collect the tax.

Q: Are appraisal and marketing services taxable in this context?
A: Marketing services are not taxable, and appraisal services are not taxable when performed for loan purposes, per this letter.

Q: If a non-exempt bank buys these services from Farm Credit Bank, does it owe tax?
A: Yes, per this letter -- the receiving institution is liable for accruing and paying Texas sales and use tax directly to the state on any taxable services received.

Citations and references

Statutes:

• Tex. Tax Code § 151.307(a) (exemption for the United States Government and its instrumentalities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9708642L

Original ruling text

August 9, 1997

Dear ***:

Thank you for your letter of August 5, 1997, asking about the taxation of
support services Farm Credit Bank of Texas provides farm credit associations
across the State of Texas.

The support services include payroll, appraisal, marketing and other
administrative services. These services as described are very general;
however, there could be elements of payroll and administrative services that
could constitute taxable data processing services. Marketing services are not
taxable. Appraisal services are not taxable when performed for loan purposes.

The Farm Credit Bank of Texas and the associations chartered by it are
instrumentalities of the United States Government. Texas Tax Code Section
151.307(a) exempts the United States Government and its instrumentalities from
state taxation. Thus, we cannot require Farm Credit Bank of Texas to charge
and collect Texas sales and use tax. However, if Farm Credit Bank of Texas
charges other institutions (banks, trust companies or other financial
institutions), those institutions will be liable for accruing and paying Texas
sales and use tax on any taxable services directly to the State of Texas.

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 Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division