Is a tree/plant examination and disease-treatment consultation service (arborist services) taxable under Texas sales tax, and can a referral fee paid to another business reduce the tax base?

Subject

Arborist Services — Consultation, Disease Identification, and Treatment Are Taxable; Referral Fees Do Not Reduce the Tax Base

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9311169L

Plain-English Summary

A company that examines landscape plants and recommends insect and disease treatment-control asked the Comptroller three questions about how sales tax applies to its business. Sometimes the company can diagnose a problem on the spot, and sometimes it has to run laboratory cultures to identify the disease and the needed treatment. It charges for this examination/consultation service separately from any actual treatment work, because it doesn't always perform the treatment itself, and it sometimes does the examination for other companies.

The Comptroller answered as follows:

1. Are the examination/consultation services taxable? Yes. Arborist services — consultation, diagnosis, and treatment — are taxable, and the company must collect tax on the entire charge to its customer. Products and supplies transferred to the customer as part of the taxable service can be bought tax-free by the arborist using a resale certificate. If the arborist is instead performing the examination for another company that resells arborist services to its own customers (the letter's example: the arborist examines a plant for Company A, and Company A does the treatment and bills its customer for both the exam and the treatment), the arborist may accept a resale certificate from Company A instead of charging tax — Company A then charges tax on its full bill to its own customer.

2. Are referral fees taxable? A retail plant outlet had begun referring prospective clients to the arborist for a fee based on the work performed. The referral fee/cost paid to the referrer is not itself taxable. However — critically — the arborist may not subtract the referral fee from the tax base. The full charge to the customer remains taxable even though part of that revenue is paid out to the referrer. The letter cites Rule 3.356(b) for this point.

3. Was the company handling its taxes correctly? No. The company had been paying sales tax on the work it did (net of the referral fee), rather than collecting the tax from its customers. The Comptroller corrected this: the company should be collecting tax from its customers based on the entire charge for the arborist services, including the portion that covers the referral cost.

What This Means For You

If you provide plant/tree consultation, disease diagnosis, or treatment services in Texas: These services are taxable as arborist services. Tax is due on the full amount you charge the customer, whether that charge is for consultation alone, treatment alone, or both together.

If you buy supplies or products to use in performing a taxable arborist service: You can purchase those items tax-free from your vendor by issuing a properly completed resale certificate, since they're being transferred to your customer as part of a taxable service.

If you perform examination work for another business that then resells arborist services to its own customers: You may accept a resale certificate from that business instead of charging it tax; the reselling business is then responsible for charging tax on its full bill to the end customer.

If you pay a referral fee to a business that sends you customers: The fee you pay is not separately taxed, but you cannot reduce your taxable receipts by that amount — you must still collect and remit tax on the full amount charged to the customer.

If you've been paying tax "out of pocket" instead of collecting it from customers: This letter is a reminder that sales tax is meant to be collected from the customer on the full charge, not absorbed by the business and computed net of costs like referral fees.

Q&A

Q: Do I need to charge sales tax on arborist consultation and disease-diagnosis services, even if I don't perform any treatment?
A: Yes. The Comptroller stated that arborist services — consultation, diagnosis, and treatment — are all taxable, and tax is due on the entire charge to the customer regardless of whether treatment is included.

Q: I pay a referral fee to a plant outlet that sends me clients. Can I subtract that fee from the amount I charge tax on?
A: No. The referral fee itself isn't taxable, but per Rule 3.356(b) as cited in this letter, you cannot reduce your taxable base by the amount paid to the referrer — tax is still due on the full charge to the customer.

Q: I do plant examinations for another company that then bills its own customers for both the exam and the treatment. Do I have to charge that company tax?
A: Not necessarily — you may accept a resale certificate from that company in lieu of charging tax, since it is reselling your examination as part of its own taxable arborist service. The other company then charges tax on the full amount it bills its customer.

Q: My company has been paying sales tax on the work itself rather than collecting it from customers. Is that correct?
A: No, per this letter. The Comptroller told the taxpayer that its company should instead be collecting the tax from its customers, based on the entire charge for the arborist services (including the referral cost portion), not paying tax itself net of that cost.

Original ruling text

November 24, 1993

Dear **:

I have received your letter regarding the taxability of services performed by
your company and referral costs. Your facts and questions are restated below,
followed by responses.

FACTS: Your company examines landscape plants and makes recommendations as to
insect and disease treatment-control. Sometimes you can make an on-the-spot
decision, and sometimes you must make laboratory cultures to identify the
diseases and the treatment needed. You charge for this service, separate from
any treatment done, as you do not always treat the plants, or you do the
examinations for others.

QUESTION 1: You ask if you need to pay sales taxes on this service.

RESPONSE: Arborist services (consultation, diagnosis and treatment) are
taxable. You should collect tax on the entire charge to your customer. Products
and supplies that are transferred to the customer as part of the taxable
service your client provides may be purchased tax free by issuing a properly
completed resale certificate to the vendor at the time of purchase. If you are
performing a service for another company that is reselling arborist services
[e.g., you perform the examination for your customer (Company A) who in turn is
performing the treatment and charging his customer for both the examination and
treatment], you may accept a resale certificate from your customer in lieu of
tax. Company A will in turn charge tax on the entire amount charged its
customer.

FACTS: One company (retail plant outlet) has started referring prospective
clients to your company for a fee based on the work done, treatment or
consultation. You state that your company has been paying sales taxes on the
work done less this fee paid the referrer.

QUESTION 2: You ask if sales tax is applicable to the referral costs.

RESPONSE: The referral fee/cost you pay to the referrer is not taxable;
however, you may not reduce the tax base by the amount paid to the referrer
[see Rule 3.356(b)].

QUESTION 3: You also asked if your company is handling the taxes correctly.

RESPONSE: Twice in your letter you indicated that your company is paying sales
tax on the work it does. Your company should be collecting the tax from its
customers, based on the entire charge to the customer for the arborist
services, including the referral costs.

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

If you have any questions, please don't hesitate to write the Tax
Administration Division or call one of our tax specialists toll free at
1-800-252-5555.

Sincerely,

Joan Hale
Tax Administration Division