Does a law firm that performs background investigations for its clients have to charge sales tax like a licensed private investigator would?

Plain-English summary

A licensed private investigator (or someone in a similar line of work) wrote to the Comptroller's office, concerned about a law firm advertising that it provides "protected background investigations" — worried the firm was competing unfairly by not charging sales tax the way a licensed investigator would have to.

The Comptroller's Tax Policy Division explained that attorneys are not required to collect sales tax on their legal fees, because legal services are not on the list of taxable services in Texas Tax Code Sec. 151.0101. That does not mean attorneys are tax-exempt, though: an attorney is treated as the consumer of taxable items and services — like copies, faxes, and background investigations — bought and used while providing legal services to a client. Attorneys must pay sales tax on those purchases themselves and cannot use a resale certificate to avoid it, even if the cost is separately itemized and billed to the client. If a client reimburses the attorney for such a cost, any mention of tax on the bill must be labeled a "reimbursement," not a tax collected from the client.

Separately, Texas Tax Code Sec. 151.0075 defines taxable "security services" as those requiring a license under the Private Investigators and Private Security Agencies Act. Services that don't require that license are not taxable as security services. The letter also pointed to Attorney General Opinion JM-823 (1987), which addressed a related issue — whether an attorney doing debt collection work is providing nontaxable legal services or taxable debt-collection services — and held that a lawyer's services aren't taxable under Chapter 151 unless the Comptroller determines the lawyer isn't really practicing law but is instead acting solely as a debt collector.

Applying that same reasoning here, the Comptroller concluded that an attorney would have to be licensed under the Private Investigators and Private Security Agencies Act and be acting as a licensed private investigator (not as a lawyer) before the attorney's background-investigation work would count as a taxable security service. The letter closes by noting the conclusion is based on the facts submitted and that other, similar facts could yield a different result, and states that a copy of the letter and the advertisement were forwarded to the Board of Private Investigators & Private Security Agencies.

What this means for you

Licensed private investigators and security agencies

If you're a licensed investigator competing with law firms that advertise background-investigation services, this letter confirms the Comptroller's general position: an attorney performing background checks as part of legal representation is not thereby providing a taxable security service, because the attorney isn't required to be licensed under the Private Investigators and Private Security Agencies Act to practice law. The distinguishing factor is whether the person is acting as a licensed private investigator, not simply doing similar-sounding work.

Attorneys and law firms

You don't collect sales tax on your legal fees, but you are the taxable consumer of items and services (copies, faxes, background investigations, etc.) you purchase and use for a client's matter — you owe sales tax on those purchases and can't issue a resale certificate to your vendor, even where you itemize and bill the cost through to the client. If you're reimbursed by the client, label it a "reimbursement" on the bill rather than something that looks like tax collected from the client.

Accountants and tax professionals

The letter draws a clean line between two separate taxability questions: (1) whether the service being sold to the end client is a taxable service (legal services are not, per Sec. 151.0101), and (2) whether the person or firm performing a specific task (like a background investigation) needs a license under the Private Investigators and Private Security Agencies Act, which would trigger taxable "security services" under Sec. 151.0075. An attorney who is also a licensed investigator and is acting in that capacity could cross into taxable territory; one who is simply practicing law does not.

Common questions

Q: Does a law firm have to charge sales tax on background investigations it performs for its own clients as part of legal representation?
A: Based on this letter, no — the firm's legal services (including background investigations performed while representing the client) are not on the list of taxable services in Sec. 151.0101, so no sales tax is collected from the client on the legal fee itself.

Q: If an attorney doesn't charge sales tax to the client, does that mean no sales tax is ever paid on the background investigation?
A: No. The attorney is treated as the consumer of the background investigation (and other taxable items/services used in the representation) and must pay sales tax on that purchase, even if the cost is separately itemized to the client.

Q: Can an attorney avoid paying sales tax on a background investigation by giving the vendor a resale certificate?
A: No. The letter states attorneys cannot give a resale certificate to vendors for these purchases.

Q: When would an attorney's background-investigation work actually be a taxable security service?
A: Only if the attorney is licensed under Section 13 of the Private Investigators and Private Security Agencies Act (Article 4413(29bb), Vernon's Texas Civil Statutes) and is acting as a licensed private investigator, rather than as a lawyer providing legal services.

Q: Can another business rely on this letter for its own situation?
A: No. STAR letters generally can be relied on only by the taxpayer to whom they were issued, and the Comptroller expressly noted this opinion was based on the facts submitted — other, similar facts could produce a different result.

Citations and references

Statutes, rules, and opinions:

• Texas Tax Code Sec. 151.0101 (list of taxable services — legal services not included)
• Texas Tax Code Sec. 151.0075 (definition of taxable security services, tied to licensing under the Private Investigators and Private Security Agencies Act)
• Attorney General Opinion JM-823 (1987) (attorney debt-collection services: taxable only if the Comptroller determines the person isn't providing legal services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9512100L

Original ruling text

December 14, 1995

Dear **:

Thank you for your letter concerning a law firm that is advertising it provides
"protected background investigations."

I can understand your concern about competition from attorneys performing
background investigations for clients. First, let me explain how attorneys are
treated for sales tax purposes.

Attorneys are not required to collect sales tax on their legal fees to their
clients because legal services have not been included in the listing of taxable
services found in Texas Tax Code Sec. 151.0101. However, this does not mean
that an attorney is exempt when purchasing taxable items or taxable services
used in providing legal services for their client. For example, even if
separately itemized as a cost to the client, an attorney is considered the
consumer of the copies, faxes, background investigations, and other taxable
items used in providing their nontaxable legal services. Attorneys must pay
sales tax on all such purchases and cannot give a resale certificate to
vendors. Therefore, these costs (including sales tax) will be reflected either
directly or indirectly in the legal fees to their clients. If an attorney is
getting reimbursed from a client for these costs, then any mention of tax on
the billings must be shown as a "reimbursement."

Security services are defined in Texas Tax Code Sec. 151.0075 as services for
which a license is required under Section 13, Private Investigators and Private
Security Agencies Act (Article 4413(29bb), Vernon's Texas Civil Statutes.
Services performed that do not require a license under this provision, would
not be taxable as security services. The Board of Private Investigators &
Private Security Agencies licenses private investigators doing background
investigations. I have forwarded a copy of your letter and the advertisement
you enclosed for their information.

We had a previous issue concerning attorneys and debt collection services.
Attorneys are often paid by clients for the purpose of recovering debts. The
issue of whether an attorney is providing nontaxable legal services or taxable
debt collection services was addressed in Attorney General Opinion JM-823
(1987). That opinion stated that the services of a lawyer are not taxable
services under Chapter 151 of the Tax Code unless the comptroller determines
that the lawyer is not providing legal services and is acting solely as a debt
collector.

Applying the AG opinion to your situation, an attorney would have to be
licensed by the Board of Private Investigators & Private Security Agencies
under Section 13, Private Investigators and Private Security Agencies Act
(Article 4413(29bb), Vernon's Texas Civil Statutes and acting as a licensed
private investigator to be considered as providing taxable security services
for their clients.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

cc: Board of Private Investigators & Private Security Agencies