Is drug testing/screening (pre-employment, random, or post-accident) subject to Texas sales tax?

Plain-English summary

A company asked the Comptroller about the taxability of three types of drug screening it performs for its business clients: pre-employment screening, random screening, and post-accident screening.

The Comptroller's answer turns entirely on the purpose of the screening, not the screening method or type:

• Pre-employment and random drug screenings performed for hiring or continuous-employment purposes are NOT taxable.
• The same kind of screening IS taxable when it's performed for the purpose of insuring an individual, or for determining whether someone is eligible for insurance coverage or insurance benefits — because that falls under Rule 3.355's taxable insurance services category (subsections (a)(2), (3), (5), and (b)).

So identical drug testing could be taxable or not, purely depending on why the client ordered it and how it's used — employment-related purposes stay untaxed, insurance-related purposes are taxed as an insurance service.

What this means for you

Drug testing labs and screening companies

Track WHY each screening is being performed, not just what kind it is. The same pre-employment or random drug test is untaxed when used for hiring/continued-employment decisions but becomes a taxable insurance service when it's used to determine insurance eligibility or benefits. If you serve both employer and insurer clients, you likely need separate tax treatment by client/purpose.

Employers and insurers ordering drug screening

Employers ordering screening purely for hiring or workplace-safety/employment-continuation purposes shouldn't be charged sales tax on that service. Insurers (or anyone using screening results to make coverage/eligibility/benefits determinations) should expect the same service to carry sales tax as a taxable insurance service.

Accountants and tax professionals

Rule 3.355(a)(2), (3), (5) and (b) governs taxable insurance services broadly — this letter is a useful, purpose-based application of that rule to drug testing specifically, and a good template for analyzing any service (medical, investigative, administrative) that can be performed for either an employment purpose or an insurance purpose.

Common questions

Q: Is pre-employment drug testing taxable in Texas?
A: No, per this letter, when performed for hiring purposes.

Q: Is drug testing ever taxable?
A: Yes, per this letter — when performed for insurance-related purposes, such as insuring an individual or determining insurance eligibility/benefits.

Q: Does random screening for ongoing employees get the same tax treatment as pre-employment screening?
A: Yes, per this letter — both are untaxed when performed for hiring or continuous-employment purposes.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.355(a)(2), (3), (5) and (b) (insurance 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/9808794L

Original ruling text

August 28, 1998

Dear Ms. **:

Thank you for your recent letter concerning your company's Texas sales and use
tax responsibilities.

You need to know the taxability of pre-employment screening, random screening
and post-accident screening for companies.

Response: Drug screening is not taxable unless it is performed for
insurance-related purposes. Pre-employment and random drug screenings are not
taxable when performed for hiring or continuous employment purposes. However,
the services are taxable when performed for purposes for insuring an individual
or for determining whether an individual is eligible for insurance coverage or
insurance benefits. See Rule 3.355(a)(2), (3), (5) and (b) concerning
insurance services.

I am sending a sales and use tax application packet under separate cover.

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. The direct line is 512/463-4683. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division