Which charges on a repossession/debt-collection company's invoice are taxable, and can the company or its creditor-clients use resale certificates for repossession-related expenses?

Plain-English summary

A repossession/debt-collection company (TP) asked the Comptroller how to handle several types of charges that show up on its invoices to creditors, and whether resale certificates could be used for any of them. The letter addresses three related situations:

• Miscellaneous expense line item (Situation 1): TP's invoices to creditors include a "miscellaneous expenses" line covering auto repair costs, vehicle storage costs, long-distance calls made while locating a vehicle, payments to informants, payments to have keys made, payments to other repossession companies, and vehicle transport costs. TP had been excluding this whole line item from tax.
  • Separately stated motor vehicle repair charges are not taxable. Rule 3.354(d) and (e) excludes motor vehicle repair services from taxation as part of debt collection services.
  • Everything else on that line item is taxable as part of the charge for the (taxable) debt collection service — including storage fees and long-distance calls.
  • Resale certificates: TP may issue a valid resale certificate to other repossession companies it hires to repossess a client's vehicle, and for keys, but only if the keys are resold to the vehicle owner. If TP uses the keys itself to repossess the vehicle, TP owes sales tax on them.
• Costs paid before invoicing (Situation 2): Sometimes TP asks the creditor to send money up front to pay off a repair/storage bill so TP can repossess the car, and TP never separately invoices for that amount. The Comptroller applied the same answer as Situation 1 — the taxability doesn't change just because the amount is collected before billing rather than invoiced afterward.
• Creditor's attempted resale certificate (Situation 3): A creditor tried to give TP a resale certificate in lieu of paying tax, describing the purchase as a "[s]ervice which includes but is not limited to the recovery of secured property which will be resold to liquidate account balance." The Comptroller said no — TP cannot accept this. The debt collection/repossession service is not being resold by the creditor, and the repossession service is not "incorporated" into the vehicle being sold.

What this means for you

Repossession and debt-collection service providers

Break out motor vehicle repair charges as a separately stated line item — those are not taxable. But bundle in your other pass-through costs (storage, long-distance calls, informant fees, key-making, vehicle transport, other repo companies' services) as part of your taxable debt collection charge; the Comptroller treats these as part of the taxable service rather than as exempt reimbursed expenses. You can only accept resale certificates from other repossession companies for the resale of their repossession services, or for keys that will actually be resold to the vehicle owner rather than used by you.

Creditors who hire repossession companies

You cannot give your repossession company a resale certificate to avoid paying sales tax on its fees, even if you describe the service as recovering property that will be resold to liquidate a debt. The repossession service itself is not incorporated into the vehicle, so it does not qualify for resale treatment — you owe tax on the taxable portions of the repo company's invoice.

Common questions

Q: Can a repossession company avoid charging tax on storage fees and long-distance calls by putting them in a "miscellaneous expenses" line item?
A: No. Per this ruling, those charges (along with informant fees, key-making costs paid by the repo company for its own use, payments to other repo companies not resold, and transport costs) remain part of the taxable debt collection service charge, regardless of how they're labeled on the invoice.

Q: Are motor vehicle repair charges ever exempt?
A: Yes — if separately stated, motor vehicle repair charges are not taxable under Rule 3.354(d) and (e), which excludes them as nontaxable unrelated services from debt collection taxation.

Q: Does it matter if the creditor pays for a repair/storage bill directly instead of the repo company invoicing for it later?
A: No. The ruling states the same answer applies whether the amount is invoiced normally or the creditor sends funds up front before the repossession and no separate invoice is issued for that amount.

Q: Can a creditor issue a resale certificate for repossession services?
A: No. The letter is explicit that a creditor cannot issue a resale certificate to the debt collector because the repossession service is not being resold and is not "incorporated" into the vehicle being sold.

Citations and references

Rules cited:

• 34 Tex. Admin. Code Rule 3.354(d) and (e) (debt collection services — defines and excludes nontaxable unrelated services, including motor vehicle repair)

The letter also references "microfiche document 1214G04" as a related prior ruling, but does not provide further citation detail for it.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302L1222A03

Original ruling text

DATE: February 11, 1993

TO: Karen Bylo, **

FROM: Eddie C. Washington, Tax Administration Division

SUBJECT: Expenses Associated with Debt Collecting Activities

Situation 1: Taxpayer (TP) has a line item on its invoice to the creditor
called miscellaneous expenses. Items billed on this line item include:
amounts paid to auto repair shops for repairs on the vehicle; amounts paid
to storage lots or auto repair shops for storage costs on the vehicle;
long-distance calls made while trying to locate a vehicle; amounts paid to
informants; amounts paid to have keys made; amounts paid to other
repossession companies; and amounts paid for transport of the vehicle. The
amounts due for repairs and/or storage on the vehicle have already
occurred prior to TP locating the vehicle. TP is required to pay these
amounts before the repairman or the storage lot owners will allow TP to
repossess the vehicle. TP excludes this line item from the taxable total
on its invoice.

Question 1. Is the total amount billed for the debt collecting activities
subject to tax or can TP exclude any of the above amounts? Can TP issue
resale certificates for any of the above services or is TP also required
to pay tax when TP purchases these services in the normal course of debt
collecting activities?

Answer: Rule 3.354(d) and (e) concerning debt collection services define
and exclude from taxation nontaxable unrelated services. services to
repair motor vehicles are not taxable under the tax code. Separately
stated charges for motor vehicle repairs are not taxable. The remaining
line item charges are taxable as part of the charge for debt collection
services.

TP may issue a valid and properly completed resale certificate to other
repossession companies that repossess TP's client's vehicle and for keys
made if the keys are resold to the vehicle owner. If the keys are used by
TP to repossess the vehicle, TP is required to pay sales tax on the keys.

TP is required to pay sales tax on the motor vehicle storage fees and
long-distance calls.

Situation 2: Occasionally, TP locates a vehicle for a creditor and the
vehicle has a large outstanding repair and/or storage bill owed on it.
Due to the possible cash flow problems or for some other reason, TP
contacts the creditor and asks the creditor to send the amount due for
the bill so that TP can pay it and repossess the car. The creditor sends
the amount asked for to TP and TP pays the repair and/or storage bill and
repossesses the vehicle. TP usually sends the creditor a copy of the
repair and/or storage bill that was paid on the vehicle. No invoicing from
TP to the creditor occurs. In other words, this amount that would normally
appear on the miscellaneous line item on TP's bill to the creditor is
never invoiced if these funds are received prior to the repossession.

Question 1. In the normal course of TP's business, TP would invoice for
these repair/storage costs. If tax is due on TP's total invoice to the
creditor, is tax due on these repair/storage costs that TP did not
invoice for, but instead, collected prior to billing for repossession
services.

Answer: See the answer to Situation 1.

Situation 3: A creditor issues a resale certificate in lieu of paying
sales tax to the debt collector an describes the items to be purchased
as: "Service which includes but is not limited to the recovery of
secured property which will be resold to liquidate account balance."

Question: Can a resale certificate be accepted by TP from a creditor?

Answer: No, the debt collection service is not being resold by the
creditor. The repossession service is not "incorporated" into the
vehicle being sold. See microfiche document 1214G04.