Debt collection services are taxable. A debt collection service is any activity to collect or adjust a delinquent debt, to collect or adjust a claim, or to repossess property subject to a claim. For example, charges to perform any of the following services are subject to tax:
The definition of debt collection does not require that you, the service provider, actually collect the claim or delinquent debt from the debtor. For example, if you make telephone calls and send letters in your customer's name to its delinquent debtors, you are providing a debt collection service. Even if the delinquent debtors responding to your calls and letters send payments directly to the creditor, you should collect tax on your charge to your customer.
As another example, you may be repossessing vehicles for a bank, and the bank's customer may contact the bank to bring the note current. The bank may make arrangements with the customer and notify you to close the account. Your charges to the bank are taxable even though you did not actually have to repossess the vehicle from the debtor.
The term "debt collection service" does not include the collection of court-ordered child support or medical child support. Charges for these services are not taxable.
The fee you charge to collect a returned check is subject to sales tax as a debt collection service. You should add the tax to your fee and collect both from the person who wrote or endorsed the check.
Fees paid directly to retailers as service fees for insufficient checks, however, are not debt collection fees and are not taxable.
If your business includes both taxable and nontaxable services, you need to collect tax only on taxable services if you bill them separately and if the nontaxable services satisfy certain requirements. The nontaxable service must be distinct and identifiable, and it must be a type of service that you commonly provide by itself without another service. The charge for the taxable service must be reasonable.
If you do not bill your customer separately for the taxable service and it represents 5 percent or less of the overall contract price, you do not have to collect tax.
If you do not bill your customer separately for the taxable service and it represents more than 5 percent of the overall contract price, you should collect tax on the entire charge.
If you do not bill your customer separately for the taxable service at the time of the transaction, however, you or the purchaser can later establish through documentary evidence the percentage of the total charge that relates to taxable service.
Collect 6.25 percent Texas state tax plus any local taxes from your customer on the charge for your taxable service. The taxable charge includes all expenses connected with providing the service. For example, if you travel in connection with your taxable service, charges for airfare, meals, and hotel expenses that you pass on to your customer are part of your taxable sales price.
For more information concerning local taxes, see the Guidelines for Collecting Local Sales and Use Tax (PDF).
If you are engaged in business in Texas, you should collect Texas state tax, plus any local (city, county, special purpose district or transit) tax, on the total amount you bill for the debt collection service.
If the debtor is not located in Texas at the time the debt is placed with you for collection, you do not have to collect Texas tax on the charge to collect that debt. If the charges for debtors located in Texas are not separately stated from the charges for debtors located out-of-state, your client may give you an exemption certificate claiming multi-state benefit. Your client must then report and pay Texas tax on the portion of the charges relating to the Texas debtors.
If you separately state the charges for debtors located in Texas from those located out-of-state, you should only collect Texas tax on those charges for debtors located in Texas. Keep records showing those debtors located outside Texas at the time the accounts are placed with you for collection, to show why the service for those debtors is exempt.
If the creditor is engaged in business in Texas at the time the account is placed with you for collection, and if the debtor (based on last known address) is located in Texas, Texas tax is due, even if you perform the service from a location outside Texas or outside the United States. If you are not engaged in business in Texas or in a specific local taxing jurisdiction and are not required to collect Texas tax, it is the Texas creditor's responsibility to report and pay the state and local use tax to the Comptroller's office.
You should pay tax on all materials, supplies and equipment you buy and use to perform debt collection services. For example, you must pay tax on paper and envelopes and office equipment.
You can give your supplier a resale certificate instead of paying tax on goods that are transferred to the care, custody, and control of your customer as part of your service. For example, if you purchase a blank CD to transfer the results of your debt collection services to your customer, you can purchase the blank CD tax-free with a resale certificate.
If you buy collection services from a third-party vendor and resell those services to your customer, you can give the third party a resale certificate instead of paying tax. You will then collect tax from your customer on your total charge.
You don't need to charge tax when you provide debt collection services for a government agency. Some nonprofit organizations are also exempt from tax. A nonprofit organization exempt from sales tax must give you an exemption certificate (PDF) and must also have a letter from the Comptroller's office exempting it from sales tax. Other nonprofit organizations must pay sales tax. If you have a question about a customer's exempt status, check our online search or give us a call.
See Rule 3.354 Debt Collection Services.