According to Texas's recent Tax Policy News and STAR document 201008847L, a company may charge customers a separately stated fee as a way to recover Texas franchise tax imposed on the company (seller).
The Texas franchise tax is imposed on most companies that are chartered or organized in Texas or that are doing business in this state. Taxes, like other business expenses such as payroll and insurance, are part of a company's overhead cost of doing business. Many companies incorporate this cost into the prices they charge for their services or goods. A company may, however, choose to charge customers a separately stated fee as a way to recover this cost.
STAR document 201008847L addresses such a charge made by a phone company on billing invoices sent to customers. The Comptroller determined that such a charge, referred to as a "Recovery Charge," is permissible as long as certain parameters are maintained.
A company choosing to bill customers a Recovery Charge may explain to its customers that the charge is made in order to recoup money paid by the company for taxes imposed on it. The company may not, however, represent the charge as a tax imposed directly on the customer. To this end, the Recovery Charge must not appear in the "Government Fees and Taxes" (or similar section) of the customer's bill, invoice or contract. Further, the company should disclose that the Recovery Charge is not a tax the company is required to collect from its customers by law.
If a company collects amounts that are represented to the customer as being a tax on the customer, then those amounts must generally be paid to the state. See Texas Tax Code Section 111.016(a) which provides that, "any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected."
The company may use the term "State Cost-Recovery Fee" to describe any charge it assesses to recoup costs of the Texas franchise tax.
It should avoid using any of the following terms (or variations of them) to describe its Recovery Charge:
- Texas Margin Fee Reimbursement;
- Texas State Margin Fee Reimbursement;
- Gross Receipts;
- Franchise Tax;
- Margin Fee; or
- Texas Margin Fee.
Although the matter is not addressed in the STAR letter mentioned above, the Recovery Charge is part of the total sales price of a taxable item sold by the company. Therefore, it is subject to sales tax in the same manner as the item sold.
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