When was a debt-collection service taxable in Texas, what charge was taxed, and when did an agency report the tax?

Plain-English summary

The total charge for debt-collection service was taxable when both parts of the letter's test were met: the debtor's address was in Texas when the account was placed for collection, and the seller behind the debt was located in Texas or doing business in Texas.

Collecting a current credit account was not a taxable debt-collection service. The letter defined a current account as one that had not passed the later of its payment due date or the date when a penalty or other contractual sanction attached.

The agency collected sales tax from its client on the total taxable service charge, even when the debtor paid the creditor directly. An accrual-basis agency reported tax when it billed the client, whether or not it had been paid; a cash-basis agency reported when it received payment.

What this means for you

The historical analysis looked beyond where the collection agency was located. It tested the debtor's address and the underlying seller's Texas connection, then tied reporting time to the agency's accounting method.

Common questions

Who paid the sales tax to the collection agency? Its client, on the total taxable service charge.

Did direct payment by the debtor to the creditor avoid tax? No. Tax was still due on the agency's charge to its client.

When did an accrual-basis agency report tax? In the period when it billed the client.

When did a cash-basis agency report tax? In the period when it received payment.

Citations and references

• 34 Tex. Admin. Code Rule 3.354(d) (debt collection and unrelated services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8711L0846A11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

November 5, 1987

Dear ****:

Your letter requesting information about sales tax on debt collecting
services was forwarded to me for response.

Debt collection service is defined as, "any activity performed for
consideration, to collect or adjust a debt or claim, or to repossess property
subject to a claim, including any activity performed in furtherance of the
satisfaction or compromise of a debt or claim".

The total charge for the service is taxable when (1) the address of the
debtor is in Texas at the time the account is placed for collection; and (2)
the seller of the service or tangible personal property or transaction from
which the debt arose is located in Texas or is doing business in Texas.

Collection of a current credit account/transaction is not a taxable debt
collection service. This is one which has not exceeded the later of the due
date of the payment or the date on which a penalty or other contractual
sanction attaches.

Your specific questions are listed below with response:

(1) Who pays the sales tax and how is collected?

Answer: The tax is collected from your client on the total charge for the
service.

(2) When delinquent accounts are paid directly to creditor instead of
collection agency, is there a sales tax due?

Answer: Yes, tax is due on the charge to your client for whom you are
providing the service.

(3) Date sales tax is due to state we close our previous months receipts
out on approximately the 15th of the following month and bill our client
(creditor). We do not receive payment from them for approximately 2 weeks, if
they are prompt in paying.

Answer: If you are on the accrual basis of accounting, the tax is due in
the reporting period in which you bill your client, whether or not payment is
received.

If you are on the cash basis of accounting, the tax is due in the
reporting period in which you receive payment.

Our records show that you are set up to file sales tax returns on a
monthly basis. Your return for the month of October is due on or before
November 20. Taxable services are to be reported and tax paid based on your
method of accounting.

(4) How do we determine out of state debts in order to collect sales tax?

Answer: Please apply the "two-prong" test outlined in paragraph 3 above
to determine if the debt collection service is subject to Texas tax.

(5) How do we charge our client (creditor) the tax and on what basis?

Answer: The tax must be calculated on the taxable charge(s) and
identified as sales tax on the billing to your customer. Please refer to item
(d) on page 5 of Rule 3.354 regarding taxable and nontaxable unrelated services
and services connected with the provision of a taxable service.

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from any where in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
(Mrs.) Jo Ann Dieck
Tax Policy Division