Is a resident-screening company's charge to its clients for credit checks, background checks, and risk analysis taxable as a credit reporting service, or exempt as a non-taxable information service?

Subject

Resident Screening Service (Credit Check, Background Check, Risk Analysis) — Taxable As Credit Reporting Service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1275C05

Plain-English Summary

A company that sells "resident screening services" asked the Comptroller whether its charges to clients were taxable. The company's service bundled three things: (1) a credit check, actually performed by a credit reporting agency that itself collects sales tax; (2) a background check, actually performed by a licensed private investigator who also collects sales tax; and (3) a "risk analysis," which the company itself performed by compiling and manipulating data supplied by its clients to gauge the risk of financial loss from non-payment and safety risks to tenants and employees (this risk analysis was not related to insurance coverage). The company itself performed no investigative or credit-reporting work directly — it purchased those services from others and resold them as part of its package, and it argued that because its output was a proprietary compilation used only by that one client (not resold to the public), the whole package should qualify as a non-taxable "information service" under 34 TAC Sec. 3.342(d)(1).

The Comptroller disagreed. Looking at "the essence of the transaction" between the company and its customers, the Comptroller found it was credit reporting, which Texas Tax Code 151.0034 defines as "assembling or furnishing credit history or credit information relating to any person." The risk analysis was viewed as just an analysis of that same underlying information, not a separate non-taxable service. As a result, the Comptroller held that the total charge to the company's customers is taxable. The Comptroller also rejected the "proprietary information service" characterization: the underlying credit reports and private investigation services could be purchased by many different people, and the information obtained would be the same "regardless of the purchaser" — meaning it did not meet the exemption's proprietary-information test.

Because the company was itself purchasing taxable credit reporting and private investigator services and reselling them as an integral part of its own credit reporting service, the Comptroller told it to apply for a sales tax permit (one was enclosed with the letter) so that, once issued, it could give a properly completed resale certificate to its vendors instead of paying tax on those purchased services — tax would then be collected once, on the company's total charge to its own customers.

What This Means For You

If you resell or bundle credit checks, background checks, or similar screening services: This letter indicates the Comptroller looks at "the essence of the transaction" as a whole, not at how the pieces are sourced. Even though the credit check and background check here were performed by outside vendors (who already collected their own sales tax), and even though the company added its own risk-analysis layer on top, the Comptroller still treated the company's total charge to its customers as one taxable credit reporting service.

If you're relying on the "proprietary/non-taxable information service" exemption: This letter shows that argument failing where the underlying information (credit history, background-check results) is the kind of data that could be obtained by any purchaser and would come out the same regardless of who asked for it. A risk-analysis layer built on top of that same information did not change the outcome.

If you purchase taxable services (like credit reports or PI services) and resell them as part of your own taxable service: The letter describes the standard fix for avoiding double taxation — get a sales tax permit, then issue a resale certificate to your vendors so you don't pay tax on your own purchases, since tax is ultimately collected on your total charge to the end customer.

Note on scope: This letter references a prior accession number ("Previous Accession Number 9311140L.3 and/or 9311140L"), indicating it continues or updates an earlier exchange with the same taxpayer; the text of that earlier letter is not included here, so this summary is based solely on the facts and reasoning stated in this letter.

Q&A

Q: Is the resident screening company's charge to its clients taxable, even though it doesn't perform the credit check or background check itself?
A: Yes. The Comptroller found the essence of the transaction was credit reporting under Tex. Tax Code 151.0034, so the company's total charge to its customers is taxable, regardless of the fact that the credit check and background check were performed by outside vendors.

Q: Does adding a "risk analysis" on top of the credit check and background check change the taxability?
A: No. The letter treats the risk analysis as "an analysis of the information obtained" — part of the same taxable credit reporting transaction, not a separate non-taxable service.

Q: Why did the Comptroller reject the company's argument that this was a non-taxable "proprietary information service"?
A: Because the credit reports and private investigation services underlying the company's product could be purchased by many people, and the information obtained would be the same regardless of who purchased it — so it did not qualify as proprietary information exempt under 34 TAC Sec. 3.342(d)(1).

Q: How does the company avoid paying tax twice — once to its vendors and again when it bills its own customers?
A: The letter instructs the company to obtain a sales tax permit (one was enclosed) and then issue a properly completed resale certificate to the credit reporting agency and private investigator, so it isn't charged tax on those purchased services since it will collect tax on its total charge to its own customers instead.

Original ruling text

December 15, 1993

Dear *:

Thank you for the fax transmittal dated December 14, 1993, providing
additional information regarding services provided by *.

FACTS: The resident screening services and background checks we mentioned
provided by * will consist of a credit check and background check. The
credit check is performed by a credit reporting agency which collects sales
tax. The background check is performed by a licensed private investigator who
also collects sales tax* performs no investigative or credit reporting
services directly. The risk analysis performed by * consists of
compilation and manipulation of client provided data to define risks of
financial loss from non-payment and safety risks to tenants and employees. The
risk analysis is not related to insurance coverage.

*'s primary function is to compile information obtained from it's
clients or other information services for the sole use of it's client.
This data is of a proprietary nature and no data is maintained for resale to
the public. Based on this information, it is our belief that the services
represent non-taxable information services within the meaning of 34 TAC
Sec.3.342(d)(1).

RESPONSE: The essence of the transaction between * and it's
customers or clients is credit reporting. Texas Tax Code 151.0034 defines
"credit reporting service" as "assembling or furnishing credit history or
credit information relating to any person".
(Emphasis added.)

The risk analysis appears to be an analysis of the information obtained.
The total charge to *'s customers is taxable. An application for a sales
tax permit is enclosed. After the sales tax permit has been issued, * may
then issue a properly completed resale certificate in lieu of paying tax on
credit reporting and private investigator services that are resold as an
integral part of *'s credit reporting services.

The service is not a proprietary information service. The credit reports
and private investigation service may be purchased by many people and the
information obtained will be the same regardless of the purchaser.

This opinion is based on the facts presented. Different facts, though
similar might lead to different answers. If you have any questions or need more
information, please write or call me toll free at 1-800-531-5441, extension
5-0330, or 512-475-0330.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9311140L.3 and/or 9311140L