Texas Franchise Tax:  Reimbursed Costs Excluded from Total Revenue

June 2015

Recently, the Texas Comptroller determined a taxpayer properly excluded fuel surcharge reimbursements in its Revised Texas Franchise Tax (RTFT) calculation of total revenue because it first excluded such reimbursements properly from its federal gross receipts. The taxpayer’s federal exclusions were deemed proper because they constituted ordinary and necessary business expenses and reasonably expected repayment from customers at the expenses incursion. Since the fuel surcharge reimbursements were properly excluded from the federal gross receipts, those reimbursements were properly excluded from the computation of revenue under RTFT.


The taxpayer, a transportation company that hauls freight on a contract basis, charged its customers a reimbursement of fuel costs—a fuel surcharge—based on mileage, cost of fuel or average miles per gallon and stated it separately on customer invoices. The taxpayer removed the fuel surcharge reimbursement from its total revenue calculation and requested a refund. The Tax Division denied the refund; the taxpayer appealed the decision, and an Administrative Law Judge (ALJ) ruled for the taxpayer. The comptroller reviewed the ALJ’s decision and agreed.

Fuel surcharges allow a carrier to recover excess fuel costs during periods of high volatility in fuel prices, a normal practice in the transportation industry. The taxpayer pays other fees upfront and invoices its customers for reimbursement, which the Tax Division did not contest. Those reimbursements include lumper fees, stop-off fees, escort fees and shuttle fees. Federal rules prohibit federal income tax deductions based on expenses made with a right or expectation of reimbursement, which disallows for reimbursement amounts to be included in gross income. As the Texas comptroller stated in its ruling,

“The ‘reimbursement theory’ has developed under the principle that a taxpayer is not allowed a Section 162 deduction for expenditures that are made with a right or expectation of reimbursement since they are in the nature of loans or advancements and are not ordinary and necessary business expenses.”

If those deductions are disallowed, reimbursement amounts are not included in gross income. Again, according to the Texas comptroller,

“‘Reimbursement theory’ prohibits the deduction of certain reimbursed expenses as ordinary and necessary business expenses and requires the exclusion of the reimbursement payments from gross income.”

The comptroller determined the fuel costs constituted “ordinary business expenses” and were deductible. With reasonable expectation of repayment from customers, the comptroller determined that excluding the fuel surcharge reimbursements was correct and held the taxpayer is not required to include such reimbursement in total revenue computations. Likewise, the comptroller could find no rationale for treating this reimbursement differently from uncontested accessorial charges.

Refund claims may be available to taxpayers that included cost reimbursements in federal gross income when they constitute ordinary and necessary business expenses and are reasonably expected to be repaid at the time of the incurred expense. A taxpayer must amend its corresponding federal return and remove such reimbursements to benefit from this ruling. 

To learn more about how this ruling could affect your organization, contact your BKD advisor.

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