Does a company that performs pre-employment psychological testing, drug testing, and background-check services still have to collect Texas sales tax on those services?

Subject

Pre-Employment Psychological Testing, Drug Testing, and Background-Check Services — Taxability Turns on Private Investigator Licensing Requirement

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9311L1267D09

Plain-English Summary

A business that performs pre-employment and post-employment screening services followed up a phone call with the Comptroller's office about the repeal of sales tax on pre-employment psychological testing services. The letter confirms that, effective August 30, 1993, the Private Investigators and Private Security Agencies Act was amended so that people who do psychological testing or other testing/interviewing for attitudes, honesty, intelligence, personality, and skills for preemployment purposes no longer need a license from the Board of Private Investigators and Private Security Agencies — as long as they don't also perform some other service that requires a license under the Act. Because Texas sales tax on these services was tied to whether the service required that board license, this change means preemployment psychological testing is no longer taxable.

The letter also addresses the taxpayer's other service lines:

• Drug testing, if separately stated, is not taxable.
• Other pre-employment services — verifying driver's license, Social Security number, personal credit history, educational background, county criminal conviction histories, professional state-issued licenses, and job/personal reference checks — may still be taxable, and the taxpayer is told to check with the Board of Private Investigators to see whether a license is still required for those specific services.
• Post-employment services performed when an employee is being considered for another position, or when there's been an accident or reasonable suspicion of drug use, are also part of the taxpayer's business.
• Any investigation done because of an accident that relates to an insurance policy claim or settlement is taxable as an insurance service, regardless of whether a board license is needed for it.

The bottom line the letter gives: if the taxpayer no longer needs a license for a given service, that service isn't taxable and no permit is needed for it; if a license is still needed for a service, tax should still be collected on it. The taxpayer was also told they could refund any tax already collected on now-nontaxable services back to the effective date of the law change.

What This Means For You

If you perform pre-employment psychological or honesty/attitude testing: As of the August 30, 1993 amendment described in this letter, that testing service does not require a Private Investigators and Private Security Agencies Board license (unless you also perform another licensed service), and this letter treats it as no longer subject to Texas sales tax on that basis.

If you bundle multiple screening services (psychological testing, drug testing, background checks) for employers: This letter draws a service-by-service line. Drug testing is untaxed only if separately stated on the bill. Background-check-type services (driver's license, SSN, credit, education, criminal history, reference checks) remain taxable if a board license is still required for them — you're told to confirm licensing status directly with the Board of Private Investigators for those specific services.

If your investigations relate to insurance claims: This letter flags that accident-related investigations tied to an insurance claim or settlement are taxable as insurance services no matter what the licensing status is — that's a separate basis for taxability that doesn't depend on the private-investigator licensing question at all.

Note on scope: This letter doesn't cite a specific statute or rule by number — it only describes the effective date (August 30, 1993) and substance of an amendment to the Private Investigators and Private Security Agencies Act. It's a fact-specific response ("based on the facts presented") to one taxpayer's mix of services, not a general pronouncement covering every possible screening service.

Q&A

Q: Is pre-employment psychological (paper-and-pencil) testing subject to Texas sales tax?
A: According to this letter, no — not since August 30, 1993, when the Private Investigators and Private Security Agencies Act was amended to exclude psychological/attitude/honesty/intelligence/personality/skills testing for preemployment purposes from the board's licensing requirement, as long as the tester doesn't also perform another licensed service.

Q: Is drug testing taxable?
A: No, according to this letter, as long as it is separately stated from other services.

Q: Are background checks like credit history, criminal history, or reference checks taxable?
A: It depends. The letter says these may still be taxable, and directs the taxpayer to check with the Board of Private Investigators to determine whether a license is still required for each of these specific services — taxability tracks the licensing requirement.

Q: What about investigations tied to an insurance claim after an accident?
A: The letter states those are taxable as an insurance service regardless of whether a board license is needed for the investigation.

Q: Can the taxpayer refund sales tax already collected on services that are no longer taxable?
A: Yes — the letter says the taxpayer may refund tax collected on now-nontaxable services back to the effective date of the law change.

Original ruling text

November 2, 1993

Dear *****:

Thank you for following up your telephone call with your regarding the
repeal of sales tax on pre-employment psychological testing services.

As you read in the September 1993 Legislative Update, preemployment
psychological testing is no longer taxable. The sales tax raw taxes
services that require a license issued by the Board of Private
Investigators and Private Security Agencies. Effective August 30,
1993, the Private Investigators and Private Security Agencies Act was
amended to exclude from the licensing requirements, persons engaged in
the business of psychological testing or other testing and
interviewing services to include attitudes, honesty, intelligence,
personality, and skills for preemployment purposes, if the person does
not perform any other service that requires a license under the act.

Besides that service, you perform other services. The drug testing
that you do is not taxable if separately stated. You should check with
the Board of Private Investigators to determine whether you are still
required to have a license to perform the other pre-employment
services such as verification of driver's license, Social Security
number, personal credit history, and educational background; county
criminal conviction histories, and professional state issued licenses,
job, and personal reference confirmations.

You also perform post-employment services when employees are being
considered for other positions within the company and when a person is
in an accident or there is reasonable suspicion of drug use.

If any investigation performed as the result of an accident is related
to an insurance policy claim or settlement, it is taxable as an
insurance service and is taxable regardless of whether you need a
license from the board.

If you no longer need a license for any of these service, then you do
not have to collect tax and do not need to have a permit. If you still
need your license for some of your services, then you should collect
tax on those services. Whether your service is taxable depends
entirely on whether you need the license from the Board of Private
Investigators (unless the service is taxable under another provision
such as insurance service). You may refund any tax you have collected
on non taxable services from the effective date of the law change.

This opinion is based on the facts presented. Additional or different
facts may produce a different result.

If you have any questions or need more information, please call or
write. The toll free number is 1-800-531-5441, extension 3-4675. My
direct line number is (512) 463-4675.

Sincerely,

Tom Soto
Tax Administration Division

NOTE: Previous Accession Number 9311001L.4 and/or 9311001L