If a company becomes a co-plaintiff to help a plaintiff collect a court judgment, and its compensation comes out of the judgment itself rather than a separate invoiced fee, does Texas sales tax still apply to that arrangement?

Plain-English summary

A company asked, by e-mail, whether Texas sales tax could apply to an unusual fee structure: rather than billing a plaintiff a separate fee for helping collect a court judgment, the company would become a co-plaintiff in each judgment, and its compensation would simply be built into (part of) the original judgment amount itself. No standalone invoice, no separately stated charge — just a share of the judgment.

The Comptroller's answer: tax still applies. Texas Tax Code § 151.0036(a) defines "debt collection service" broadly as an activity to collect or adjust a delinquent debt or claim, or to repossess property subject to a claim — collecting a court judgment on someone else's behalf fits squarely within that definition. Section 151.0101(a)(8) makes debt collection a taxable service, and § 151.005(3) and § 151.010 confirm that performing a taxable service counts as a "sale" of a "taxable item." Critically, § 151.007(a) defines "sales price" as the total amount for which a taxable item is sold, without any deduction for costs, labor, or other expenses — so structuring compensation as a share of the judgment rather than a line-item fee doesn't take it outside the tax base; the value received for the collection service is still taxable.

The letter does flag one specific carve-out that doesn't apply to this company: § 151.0036(b) excludes from "debt collection" the collection of a judgment by the attorney, law firm, or professional corporation that actually represented the plaintiff in the lawsuit that produced the judgment. That narrow exception is for the litigating attorney collecting their own client's judgment — not for an unrelated third party (like this company) that steps in afterward as a co-plaintiff to help with collection.

What this means for you

Companies offering judgment-collection or debt-recovery services

Being paid through a share of the recovered judgment, rather than a standalone invoice, does not exempt you from Texas sales tax on debt collection services. The tax applies to the full value you receive for the collection activity, regardless of how the compensation is structured or labeled.

Attorneys and law firms

If you represented the plaintiff in the underlying lawsuit, your own collection of that same judgment falls outside the "debt collection service" definition under § 151.0036(b). But if you (or another company) step in to collect a judgment from a case you didn't litigate, that activity is a taxable debt collection service like any other.

Accountants and tax professionals

This letter is a useful reminder that Texas's broad "sales price" definition (§ 151.007(a)) forecloses structuring around sales tax by avoiding a separately stated fee — value received for a taxable service is taxable regardless of how it's paid out, including as a percentage or share of a recovery.

Anyone needing a Texas sales tax permit for a new debt-collection business

The letter also points to the relevant Comptroller rules (34 Tex. Admin. Code Rules 3.286 and 3.354) and permit application resources for getting properly registered to collect and remit this tax.

Common questions

Q: Does Texas sales tax apply to debt or judgment collection services?
A: Yes. Debt collection — including collecting or adjusting a delinquent debt or claim, or repossessing property subject to a claim — is a taxable service under Tax Code § 151.0101(a)(8).

Q: Can I avoid the tax by taking a share of the judgment instead of charging a separate fee?
A: No. "Sales price" under § 151.007(a) is the total value received for the taxable service, with no deduction for how it's structured — a share of a judgment award is taxed the same as a standalone fee.

Q: Is there any exception for attorneys collecting a judgment?
A: Yes, but a narrow one — § 151.0036(b) excludes only the attorney, partnership, or professional corporation that represented the person in the underlying lawsuit from "debt collection" when collecting that same judgment. It doesn't extend to other third parties helping collect.

Q: Can I rely on this letter for my own collection arrangement?
A: No. This opinion is based on the facts presented, and additional or different facts may change the result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• Tex. Tax Code § 151.0036(a) (definition of debt collection service)
• Tex. Tax Code § 151.0036(b) (exception for the litigating attorney/firm collecting its own client's judgment)
• Tex. Tax Code § 151.0101(a)(8) (debt collection as a taxable service)
• Tex. Tax Code § 151.005(3) (sale includes performance of a taxable service)
• Tex. Tax Code § 151.010 (taxable item includes taxable services)
• Tex. Tax Code § 151.007(a) (sales price — total amount received, no deductions)
• 34 Tex. Admin. Code Rule 3.286 (seller's and purchaser's responsibilities)
• 34 Tex. Admin. Code Rule 3.354 (debt collection services)

Subject

Court Judgment Awarded To Person — Collection By Third Party Is Debt Collection 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/9801129L

Original ruling text

January 28, 1998

Subject: Tax Question

Dear ***:

Thank you for your e-mail of January 27, 1998, concerning the taxability of
collecting a judgment awarded to a plaintiff in a court of law.

Your company will become a co-plaintiff in each judgment when a plaintiff wants
help collecting this debt. Your company will not charge a fee and your payment
will be part of the original judgment.

Question: Does any of this sound like state taxes could apply to any of the
exchanges of money?

Answer: Yes, tax does apply. Texas Tax Code Section 151.0036(a) defines a
"debt collection service" as an "activity to collect or adjust a delinquent
debt, to collect or adjust a claim, or to repossess property subject to a
claim." Section 151.0036(b) states that "debt collection" does not include
"the collection of a judgment the attorney, partnership, or professional
corporation of attorneys if the attorney, partnership, or corporation
represented the person in the suit from which the judgment arose."

Texas Tax Code Section 151.0101(a)(8) defines debt collection as a taxable
service. Texas Tax Code Section 151.005(3) defines a sale to include the
performance of a taxable service.
Texas Tax Code Section 151.010 defines a taxable item to include tangible
personal property and taxable services. Texas Tax Code Section 151.007(a)
defines sales price as the total amount for which a taxable item is sold valued
in money without a deduction for the cost of the materials used, labor or
service employed, interest, losses, or other expenses.

See Rules 3.286 concerning seller's and purchaser's responsibilities and 3.354
concerning debt collection services.

You may download the referenced rules at the following website:
http://www.sos.state. tx.us/tac/34/I/3/0/.

You may view or down load the sales tax law at . You
would then click on the following:

1. State Government
2. Texas Statutes
3. Tax Code
4. Chapter 151
5. Scroll down to the referenced statutory section

You may download a sales tax permit application at .
You would then click on the following:

1. Texas Taxes
2. Tax Forms On-Line, and
3. Texas Application for Sole Owner, Sales/Use Tax Permit

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

You may call me toll free 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts. My e-mail address is
.

Sincerely,

Eddie C. Washington
Tax Policy Division