Can a private investigation firm exclude reimbursed overhead costs — rent, phone lines, payroll, management fee — from the taxable price it charges a debt-collection client for its investigation services?

Plain-English summary

A private investigation firm had a contract with a debt-collection business under which the collection business reimbursed the investigation firm monthly for: half the rent, a monthly accounting fee, charges for two phone lines, gross wages plus all payroll taxes, a management fee, and a per-"search" charge for locating debtors. The Comptroller's own Tax Assistance Section had already advised the firm that the total charge, including all of these itemized reimbursements, was taxable — but the collection-business customer refused to pay the sales tax on those amounts.

The Comptroller's written response confirmed the investigation firm must collect sales tax on the entire charge. Tax Code § 151.007(a)(2) defines the taxable "sales price" as the total amount charged, "without a deduction for the cost of the materials used, labor or service employed, interest, losses or other expenses." Separately, 34 TAC § 3.333(h)(3) (the Security Services rule) specifically requires the provider to include charges for expenses directly related to and incurred while providing the taxable service, and does not allow the provider to break those expenses out separately in order to exclude them from tax. Every itemized charge here — rent, accounting, phone lines, payroll, management fee, per-search fee — was an expense the firm incurred in searching for and locating debtors for its client, so all of it rolls into the one taxable investigation-service charge.

The letter also reminds both parties of two enforcement mechanics: under § 151.052, once tax is properly added to a sales price, it becomes a debt owed by the purchaser to the seller and is recoverable at law like the original price if unpaid (citing Hearing No. 29,827 (1993) and letter 9104L1097G10); and under 34 TAC § 3.282(l), both sellers and purchasers are subject to audit and assessment for any transaction on which tax was due but not paid.

What this means for you

Private investigation and security services firms

Reimbursed overhead costs you bill through to a client as part of providing your investigation/security service — rent, staffing, phone lines, management fees — are part of your taxable sales price, not separable nontaxable pass-through expenses. Itemizing them on the invoice doesn't remove them from tax.

Debt collection agencies and other clients of security/investigation services

If your investigator's invoice breaks out expenses like rent or payroll reimbursement, that doesn't mean those line items are tax-free — the whole charge for the taxable investigation service is subject to sales tax, and refusing to pay the properly charged tax exposes you to being pursued for it as a debt, since it's recoverable at law like the underlying price.

Accountants and tax professionals

This is a clean example of the "total charge, no deduction for costs" rule under § 151.007(a)(2) combined with the security-services-specific rule (3.333(h)(3)) that forecloses unbundling overhead expenses from the taxable service price — worth citing whenever a client tries to carve out "just reimbursement" line items from a taxable service invoice.

Common questions

Q: Can a private investigator exclude reimbursed overhead expenses (rent, payroll, phone) from the taxable charge for its services?
A: No — the total charge, including all itemized expense reimbursements, is taxable as the price of the security/investigation service.

Q: Does it matter that the expenses are separately itemized on the invoice?
A: No — 34 TAC § 3.333(h)(3) specifically disallows separating expense charges for the purpose of excluding them from sales tax.

Q: What happens if the customer refuses to pay the sales tax that was properly charged?
A: Under Tax Code § 151.052, the tax becomes a debt of the purchaser to the seller once added to the price, and is recoverable at law in the same manner as the original sales price if unpaid.

Q: Are both the investigation firm and its client at audit risk?
A: Yes — 34 TAC § 3.282(l) subjects both sellers and purchasers to audit and assessment for transactions where tax was due but not paid.

Q: Can any private investigation firm rely on this exact answer?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own contract and billing structure with a tax professional.

Citations and references

Statutes, rules, and prior guidance:

• Tex. Tax Code § 151.007(a)(2) (sales price; no deduction for costs/expenses)
• 34 Tex. Admin. Code § 3.333(h)(3) (Security Services)
• Tex. Tax Code § 151.052 (seller's collection responsibility)
• 34 Tex. Admin. Code § 3.282(l) (audit of both sellers and purchasers)
• Comptroller's Hearing No. 29,827 (1993); letter 9104L1097G10

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200009760L

Original ruling text

September 29, 2000

Dear **:

Thank you for your recent letter concerning your client's Texas sales tax
responsibilities as a provider of security services (investigation service).

Your client, a private investigation firm, has a contract with a collection
business. The contractual arrangement is for the collection business to
reimburse the private investigation firm the following items on a monthly
billing invoice: one-half of the rent $**; the monthly accounting fee
$*; $* for each of the two telephone line; $*,
gross wages plus all payroll taxes; management fee $*; and
$**** for each "search" performed to locate debtors.

Lavonne Key of our Tax Assistance Section advised your client that the total
charge, including the charges listed above, for performing the investigation
service is taxable. Your client's customer refuses to pay sales tax.

The investigation company is required to collect sales tax on the total charge
for performing the investigation service. Texas Tax Code Section 151.007(a)(2)
defines the sales price of a taxable items to mean "the total amount for which
a taxable item is sold, leased or rented, valued in money, without a deduction
for the cost of the materials uses, labor or service employed, interest, losses
or other expenses..." Rule 3.333(h)(3) concerning Security Services requires
the investigation company to include the charges for expenses directly related
to an incurred while providing a taxable service and disallows the
investigation company to separate the charges for the purpose of excluding
those charges from the sales tax.

All of the itemized charges, are expenses your client incurs in searching for
and locating debtors for the debt collection company.

Texas Tax Code Section 151.052 requires a seller who makes a sale that is
subject to sales tax to add the amount of the tax to the sales price, and when
the tax is added, the tax becomes part of the sales price and is a debt of the
purchaser to the seller until paid and, if unpaid, the tax is recoverable at
law in the same manner as the original sales price. See the enclosed Hearing
No. 29,827 (1993) and letter 9104L1097G10.

Finally, I want to point out that Rule 3.282(l) concerning auditing taxpayer
records states that both sellers and purchasers are subject to audit and
assessment of tax on any transactions on which tax was due but has not been
paid.

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. My email address is
. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825.

Sincerely,

Eddie C. Washington
Tax Policy Division

cc: Debra Kress