A debt collection company collects on behalf of a client operating both inside and outside Texas, and has been charging Texas sales tax on ALL debtors regardless of where the debtor is actually located. Is that correct, or should Texas tax only apply to debtors located in Texas?

Plain-English summary

A debt collection company collects accounts on behalf of a client that operates both inside and outside Texas. The company had been charging Texas sales tax on ALL of its client's debtors, regardless of whether the individual debtor was located in Texas.

The Comptroller corrected this: if the debtor is not located in Texas at the time the debt is placed with the company for collection, no Texas sales tax is due on the charge to collect that particular debt. How the collector handles this depends on its billing:

• If the collector separately states the charges for Texas-located debtors from those for out-of-state debtors, it should collect Texas sales tax only on the Texas-debtor charges. Debt collection charges for out-of-state debtors are not subject to Texas tax at all.
• If the charges are NOT separately stated, the client can instead give the collector a multistate-benefit exemption certificate. In that case, the client itself becomes responsible for remitting Texas sales tax on the portion of the charges actually representing use in Texas.

Either way, the collector should keep records showing the debtor was located outside Texas at the time the account was placed for collection, to document why that portion of the charge was treated as exempt.

What this means for you

Debt collection agencies working multistate client accounts

Don't default to charging Texas tax on every account just because your client does business in Texas — the tax turns on where the individual DEBTOR was located when the account was placed with you, not where your client operates. Track and document debtor location at intake to support any exemption you claim.

Businesses (clients) hiring collection agencies for a mixed in-state/out-of-state debtor base

If your collector doesn't separately bill Texas vs. out-of-state debtor charges, you can provide a multistate-benefit exemption certificate — but that shifts the burden to YOU to remit Texas tax on the Texas-use portion, so make sure your own accounting captures that split.

Accountants and tax professionals

This is a clean example of debtor-location sourcing for a service (debt collection) combined with the multistate-benefit exemption certificate mechanism as an alternative to line-item billing — useful whenever a service provider bills a single client for work that spans in-state and out-of-state recipients.

Common questions

Q: Is a debt collection charge always taxable in Texas if the CLIENT operates in Texas?
A: No — the taxability turns on where the individual DEBTOR was located when the account was placed for collection, not where the client operates.

Q: What if the collector doesn't separately bill Texas vs. out-of-state debtor charges?
A: The client can give the collector a multistate-benefit exemption certificate, and the client then bears responsibility for remitting Texas tax on the Texas-use portion.

Q: What records should a collector keep to support this exemption?
A: Records showing the debtor was located outside Texas at the time the account was placed for collection.

Q: Can I rely on this letter for my own debt collection billing practices?
A: No. This opinion is based on the facts presented, and additional or different facts may yield different results; it can be relied on only by the taxpayer it was issued to.

Citations and references

No specific statutes or rule numbers 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/200001952L

Original ruling text

January 3, 2000

Dear Mr. **:

Thank you for your recent letter regarding debt collection services and Texas
sales and use tax.

You stated that your company is providing debt collection services for a
company that operates inside and outside Texas. You further stated that you
have been collecting Texas sales tax for all of your client's debtors, whether
or not the debtor is located in Texas.

If the debtor is not located in Texas at the time the debt is placed with your
company for collection, no Texas sales tax is due on the charge to collect that
debt. If the charges for debtors located in Texas are not separately stated
from the charges for debtors located out-of-state, your client may give you an
exemption certificate claiming multi-state benefit. Your client is then
responsible for remitting Texas sales tax on the portion of the charges for use
in Texas.

If you separately state the charges for debtors located in Texas from those
located out-of-state, you should only collect Texas sales tax on those charges
for debtors located in Texas. Debt collection services for debtors located
outside Texas are not subject to Texas sales tax. Keep records showing the
debtor was locate outside Texas at the time the account is placed for
collection to show why the service is exempt.

This opinion is based on the facts presented. Additional or different facts
may yield different results.

You may call me toll free 1-800-531-5441, extension 5-9787, if you have any
questions or need more information. The direct line is 512/305-9787. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Philip Knisely
Tax Policy Division