Does an escort referral service have to collect and pay Texas sales tax on its referral fees?

Subject

Escort 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/9403167L

Plain-English Summary

An attorney asked the Comptroller to rule that his client's escort referral business did not have to collect and pay Texas sales tax. The business ("ESCORT SERVICE") matched potential clients with escorts and collected a referral fee from the escort whenever a match resulted in a date. The escorts were not employees of the referral service — they made their own decisions about accepting dates and also worked for other escort services. The attorney argued that because the escorts weren't employees, the business fell outside Tex. Tax Code §§ 151.045 and 151.010(a)(3) (the provisions his letter said tax escort services with employees), and he pointed to maid referral services not being taxed as a comparable, untaxed model.

The Comptroller disagreed. The ruling explains that Tex. Tax Code §§ 151.0005 and 151.010(a)(3) make taxable those "personal services" listed under Group 721, Major Group 72 of the Standard Industrial Classification Manual (1972) — and that group includes escort services. Separately, 34 Tex. Admin. Code § 3.317(a)(1) (the Massage Parlors rule) defines an escort service as "a business that provides for a fee an employee as an escort, date, or body guard." Because the referral service's business fell under Group 721, the Comptroller invoked Tex. Tax Code § 151.024, which lets the agency treat the escorts as agents of the referral business and the referral business as the seller of the service, for purposes of efficiently administering the tax chapter.

The practical result: if the referral service knows how much an escort charges a customer, it must report and collect tax on that full charge, including its own referral fee. If it doesn't know what the escorts charge, its referral fee is still taxable, and the escorts themselves must be permitted and must collect and report tax on their own charges to customers. The Comptroller also told the business to keep records of referrals made to, and amounts received from, each escort.

What This Means For You

If you run an escort referral service in Texas: Your referral fees are taxable, and the fact that the escorts aren't your employees does not get you out of collection responsibility. The Comptroller can deem the escorts your agents and you the seller under Tex. Tax Code § 151.024.

If you know what your escorts charge customers: You must report and collect sales tax on the full charge to the customer, not just on your referral fee.

If you don't know what your escorts charge: Your referral fee is still taxable, but in that case the individual escorts must obtain a tax permit and collect and report tax on their own charges directly.

Either way: The ruling directs the business to maintain records of referrals to, and amounts received from, each escort — expect that kind of recordkeeping to matter if the Comptroller ever audits.

Q&A

Q: Does it matter that the escorts aren't employees of the referral service?
A: No. The taxpayer argued that because escorts weren't employees, the business fell outside the statutes taxing escort services with employees. The Comptroller rejected that reasoning, ruling that the referral service's activity falls under Group 721 of the Standard Industrial Classification Manual regardless, and that § 151.024 lets the Comptroller treat the escorts as the referral service's agents and the referral service as the seller.

Q: Is only the referral fee taxable, or the escort's whole charge to the customer?
A: It depends on what the referral service knows. If it's aware of what the escort charges the customer, it must report tax on that entire charge, including its referral fee. If it isn't aware of the escort's charge, its own referral fee is still taxable, but then the escorts themselves must be permitted and collect/report tax on their charges to their customers.

Q: Does the "maid referral services aren't taxed" comparison work here?
A: The taxpayer raised that comparison, but the ruling doesn't adopt it — it responds instead by pointing to the specific statutory and rule language classifying escort services (Group 721 of the SIC Manual, and 34 Tex. Admin. Code § 3.317(a)(1)'s definition of "escort service") as taxable personal services.

Citations

• Tex. Tax Code § 151.0005 (identifies taxable "personal services" under SIC Group 721)
• Tex. Tax Code § 151.010(a)(3)
• Tex. Tax Code § 151.024 (Comptroller may treat agents as sellers for efficient tax administration)
• 34 Tex. Admin. Code § 3.317(a)(1) (Massage Parlors rule; defines "escort service")

Original ruling text

March 22, 1994

Dear Mr. **:

Thank you for your letter requesting ruling on whether your client,
** (ESCORT SERVICE), is responsible for collecting and paying sales
tax.

ESCORT SERVICE is a referral service, putting together a match between a
potential client and an escort. If the potential client and escort agree to a
date ESCORT SERVICE collects a referral fee from the escort. The escorts are
not employees of ESCORT SERVICE, therefore you contend that ESCORT SERVICE does
not fall under Subsection 151.045 and 151.010(a)(3) of the Texas Tax Code. The
escorts also work for other escort services. Based on maid referral services
not being taxed, your client is taking the position that his referral fee is
not subject to sales tax.

RESPONSE: Subsection 151.0005 and 151.010(a)(3) only identify as taxable,
"personal services" listed as personal services under Group 721, Major Group 72
of the Standard Industrial Classification Manual, 1972. This group includes
escort services. Section (a)(1) of Rule 3.317 - Massage Parlors defines an
escort service as "a business that provides for a fee an employee as an escort,
date, or body guard."

Your client's service falls under Group 721. Under Subsection 151.024 of the
Tax Code, the comptroller is authorized to regard escorts as agents of your
client and your client as the seller of this service for the efficient
administration of this chapter. If your client is aware of how much the escort
is charging his or her customer, your client is responsible for reporting tax
on these charges (including the referral charge). If your client is not aware
of the amounts charged by the escorts, the referral charge is still taxable and
the escorts will be required to be permitted and to collect and report tax on
their charge to their customers. Your client should maintain records reflecting
referrals to and amounts received from each escort.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. If you have other questions or need more
information, you may call me at 1-800-531-5441, extension 3-4402. The regular
number is 512/463-4502. You may also write to Tax Administration Division at
the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

March 5, 1994

Mr. John Sharp
Comptroller of Public Accounts
Austin, Texas 78774-0100

RE: **
ID No.: **

Dear Sir:

With this letter, we are seeking a ruling on whether the above named business
is responsible for collecting and paying sales tax to the State of Texas.

ESCORT SERVICE is a referral service. Basically, ESCORT SERVICE advertises its
referral service and puts together a match between a potential client and a
escort. If the potential client and escort agree to a date, ESCORT SERVICE
collects a referral fee from the escort.

The escorts are not employees of ESCORT SERVICE. Therefore, they do not fall
under Section 151.0045 and Section 151.010(a) (3) of the Texas Tax Code which
taxes escorts services if they have employees. The escorts make their own
decisions as to whether and when they will accept a date with the potential
client. The escorts also work for other services and are not exclusively tied
to ESCORT SERVICE.

Based on maid referral services not being taxed, my client is taking the
position that his referral fee is not subject to sales tax.

Therefore, ESCORT SERVICE is seeking a ruling stating that their business is
not subject to collection of sales tax for the State of Texas.

Sincerely yours,

Attorney at Law