When did a Texas private investigative firm have to tax work performed inside or outside Texas, subcontracted services, expenses, and exempt-customer jobs?

Plain-English summary

The Comptroller answered 18 questions from a Texas private investigative firm after its services became taxable on October 1, 1987. The central sourcing rule in the letter was:

• Investigations performed in Texas were taxable even for an out-of-state client.
• Investigations conducted outside Texas for an out-of-state client were not subject to Texas tax.
• Work performed wholly outside Texas was still taxable when done for the benefit of a Texas client, whether the firm or another firm did the work.
• For monthly engagements mixing locations, tax applied if the work was done in Texas or for a Texas client, and the firm's records had to document the work.

The firm's only office was in an MTA area. The Comptroller approved its stated 8% rate both for services there and for work elsewhere in Texas billed from that office.

Subcontracted investigative services could qualify for resale treatment if they met Rules 3.285 and 3.333(f). When the firm itself worked for another provider, it could accept a fully completed resale certificate in good faith from a licensed security-service provider without charging tax.

The letter also resolved billing and compliance details. A pre-July 22, 1987 contract qualified for the prior-contract exemption if it specified the services, time frame, and set price; the newly taxed services had a January 1, 1990 limitations date. A cash-basis taxpayer reported tax when payment was received. Sellers owing at least $1,500 in state tax per quarter filed monthly. Reimbursed incidental expenses were taxable when the underlying security service was taxable and exempt when the service fit the out-of-state exemption.

Governmental and other exempt customers required supporting documentation. A governmental purchase order or exemption certificate was acceptable; another exempt entity could provide a completed exemption certificate when the service furthered its exempt purpose. For attorney-directed work, the Comptroller agreed only where the invoice, use, payment, and purchase order tied the service to the governmental entity. An invoice could say "tax included," but the customer still had to receive a tax-paid receipt.

What this means for you

The historical letter did not source investigation services solely by where the investigator stood. It also looked to the client's location and benefit. It required strong records and properly completed resale or exemption documents, and treated pass-through expenses consistently with the underlying service.

Common questions

Was work for an out-of-state client taxable when performed in Texas? Yes.

Was out-of-state work for an out-of-state client taxable? No, if the investigation was conducted outside Texas and the records clearly showed that.

Was out-of-state work for a Texas client taxable? Yes. The same answer applied whether the Texas firm or another firm performed it.

Could one investigative or security provider buy another provider's service for resale? Potentially. The transaction had to meet Rules 3.285 and 3.333(f), and a seller accepting a resale certificate needed a completed certificate from a licensed security-service provider.

Were airfare, hotels, meals, parking, telephone calls, copies, and informant fees taxable when passed through at cost? Yes when the security service was taxable; no when the service qualified for the out-of-state exemption described in the letter.

Could the invoice simply state "tax included"? Yes, but the customer had to receive a tax-paid receipt.

Citations and references

• 34 Tex. Admin. Code Rule 3.333(d), (f) (security services)
• 34 Tex. Admin. Code Rule 3.285 (resale certificates)
• 34 Tex. Admin. Code Rule 3.302 (cash-basis reporting)
• 34 Tex. Admin. Code Rule 3.286 (sales-tax returns)
• 34 Tex. Admin. Code Rules 3.322 and 3.287 (governmental and exempt entities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8711L0850E04

Original ruling text

November 23, 1987

Dear Mr. **:

Thank you for your recent letter which is restated in part with responses
below.

We are a private investigative firm and we understand we will be required as of
October 1, 1987, to collect and pay sales tax on services rendered by us within
the state of Texas.

Could you please confirm our understanding of each point set out below? Correct
any information which we are operating under based on our attempts to determine
facts which may not be totally correct and furnish us information where we have
not yet been able to obtain a clear answer.

(1) We have only one office which is located in **, Texas. We are
located in an MTA area and we understand we should tax our services at the rate
of 8%. Is this correct?

Response: Yes

(2) We often perform work in other parts of the state which we bill from our
** office. We understand we would charge 8% sales tax. Is this
correct?

Response: Yes

(3) Where we do not perform work in parts of the state, but rely on their
individuals or companies to perform work for us, and where this work is done
for us for the benefit of our client whom we thereafter bill, we understand we
should furnish these other individuals and companies a tax exempt certificate
for services rendered as such and that we are not to be taxed by those entities
doing the work for us, but we do tax our client upon billing the work to them.
Is this correct?

Response: Please refer to Section (f) of the enclosed Rule 3.333 and Rule 3.285
regarding resale certificates.

(4) Similarly, we often do work for other individuals or companies elsewhere in
the state of Texas. We understand that in those situations where our work is
done as part of services which are rendered to those individuals or companies,
that they are to furnish us with a tax exempt certificate and that we do not
charge them sales tax, but rather they in turn charge their customer the tax on
the work done.

Response: If you accept a resale certificate in good faith, you will not be
required to charge tax. The certificate must be completely filled out and
issued by a licensed security service provider.

(5) With respect to points #3 and #4 above, we are to treat situations as goods
or services rendered or purchased for resale and therefore, they are not
taxable. Is that correct?

Response: If the situations meet the criteria set out in Rule 3.285 and 3.333
(f) you are correct.

(6) We also do work for clients outside the state of Texas, but which work is
performed within the state of Texas. We understand that such work is to be
taxed to the client when the work is performed in Texas. Is this correct?

Response: Yes. See Section (d) of Rule 3.333.

(7) We perform services for clients who are located outside the state of Texas
with the work being done outside the state of Texas. We understand that
services provided for clients in such instances are not taxed to the client? Is
this correct?

Response: Charges for investigations conducted outside Texas for persons
outside Texas are not subject to Texas tax. Your records should clearly reflect
what you are doing.

(8) We also render services to Texas based clients but the work is done for
them completely and wholly outside the state of Texas. We understand that when
the work is done outside the state of Texas by other firms for us that the work
is not taxed to the client. Is this correct?

Response: If the work is done for the benefit of a Texas client, Texas tax is
due.

(9) We perform services to Texas clients where we do the work completely
outside the state of Texas ourselves. Similarly we understand that the work
rendered outside the state of Texas is not taxable to our client. Is this
correct?

Response: Same as for number 8.

(10) We perform services for some clients on a monthly basis, both inside and
outside the state of Texas. We understand that with respect to our billing to
our clients on a monthly basis in such cases, that we must charge sales tax for
work performed within Texas but do not charge sales tax for work done outside
the state of Texas. Is this correct?

Response: If the work is done in Texas or for a Texas client, Texas tax is due.
Your records should fully document what you are doing.

(11) We have some contracts with clients which pre-date July 21, 1987. We have
been told that with respect to such contracts which spell out fixed billing
charges that:

(a) Wherein the contract was in existence prior to July 21, 1987; and

(b) Where there has been no modification to the contract since July 21, 1987 or
during the duration of the contract; and

(c) Where the contract extends to 1990 but not beyond; then we are exempted
during the period of such contracts from charging or collecting sales tax. Is
this correct?

Response: A contract entered into prior to July 22, 1987 which calls for
specific services to be performed in a specific time frame and for a set price
will qualify for the prior contract exemption. The statute of limitations for
the newly taxed services is January 1, 1990.

(12) We are on a cash basis accounting system. We have been told that cash
basis accounting systems are responsible to pay sales taxes to the state upon
the receipt of payments by us on our accounts receivables, not at the time of
our billing for services rendered. Is this correct?

Response: Yes. See Rule 3.302 enclosed.

(13) We have been told that if our receipts on a month to month basis exceeds
an amount which will generate in excess of $3,000 per month in taxes, we are
obliged to pay the sales tax collected by us the 20th of the month following
the month wherein the receipts are collected. Is this correct?

Response: Sellers owing $1500.00 or more in state tax per quarter must file
monthly returns. I am enclosing Rule 3.286 for your reference.

(14) We have incidental expenses at times while performing services for
clients. These could include airfare, hotels, meals, parking, tolls, long
distance telephone calls, document reproductions, and informant fees which we
bill to our client at the actual cost of those incidental expenses. Virtually
all these expenses already have various sales or use taxes added to them at the
time we pay for them. Are we required to add sales tax to such items in
addition to the taxes already paid by us when those services were purchased?

Response: Yes

(15) We also incur such incidental expenses from time to time as described in
point #14 above, in connection with work performed for clients outside the
state of Texas. We have been told that such expense items, when incurred either
by individuals or companies on our behalf, or by us connected to work being
done outside the state of Texas is not taxable to our client. Is this correct?

Response: If the security service is subject to Texas tax, the expenses are
also taxable. If the service is exempt as in #7, the expenses are also exempt.

(16) From time to time we provide services to governmental or tax exempt
entities. We have been told that we need to have them furnish a tax exempt
certificate to us and that sales tax is not charged those entities in such
cases. Is this correct?

Response: You must collect the tax or have documentation to relieve you of that
responsibility. In the case of a governmental entity, either a purchase order
or exemption certificate would be acceptable. In the case of other exempt
entities, you may accept a completely filled out exemption certificate if the
services performed were in keeping with the exempt purpose of the organization.
I am enclosing Rule 3.322 and 3.287 for your reference.

(17) In connection with #16 above, on occasions such work is done at the
direction of an attorney representing such entities with respect to reports and
billings being directed to the attorney on behalf of such clients. We have been
told that as long as a municipality or other tax exempt entity pays the
statement rendered by us, that we are not to include sales tax on the invoice
which we present for work done. Is this correct?

Response: I would agree if the invoices were made to the governmental entity,
the services were for the use of the governmental entity and the governmental
entity issued a purchase order for the services. Otherwise, I would need a
specific fact situation to be able to respond.

(18) Finally, we have been told that it is not permissible to indicate on an
invoice that we are paying the customer sales tax. We have been told that we
can state "tax included" and a total of the invoice without specifically having
to calculate the tax on the face of the invoice so long as we pay the state the
tax on the gross amount of the billing where applicable. Is this correct?

Response: You must issue the customer a tax paid receipt. However, that receipt
may show "tax included" in the selling price.

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,

Al Van Allen
Tax Policy Division

September 30, 1987

Tax Policy Section
Comptroller of Public Accounts Office

Re: Application of State Sales Tax to **

Dear Sirs:

I am directing this letter to you to solicit answers to questions we still have
in confirmation of information furnished to us to date through our contact by
telephone with your ** office and inquiries of your **
and ** offices.

We are a private investigative firm and we understand we will be required as of
October 1, 1987, to collect and pay sales tax on services rendered by us within
the state of Texas.

Could you please confirm our understanding of each point set out below? Correct
any information which we are operating under based on our attempts to determine
facts which may not be totally correct and furnish us information where we have
not yet been able to obtain a clear answer.

(1) We have only one office which is located in **, Texas. We are
located in an MTA area and we understand we should tax our services at the rate
of 8%. Is this correct?

(2) We often perform work in other parts of the state which we bill from our
** office. We understand we would charge 8% sales tax. Is this
correct?

(3) Where we do not perform work in parts of the state, but rely on other
individuals or companies to perform work for us, and where this work is done
for us for the benefit of our client whom we thereafter bill, we understand we
should furnish these other individuals and companies a tax exempt certificate
for services rendered as such and that we are not to be taxed by those entities
doing the work for us, but we do tax our client upon billing the work to them.
Is this correct?

(4) Similarly, we often do work for other individuals or companies elsewhere in
the state of Texas. We understand that in those situations where our work is
done as part of services which are rendered to those individuals or companies,
that they are to furnish us with a tax exempt certificate and that we do not
charge them sales tax, but rather they in turn charge their customer the tax on
the work done. Is this correct?

(5) With respect to points #3 and #4 above, we are to treat situations as goods
or services rendered or purchased for resale and therefore, they are not
taxable. Is that correct?

(6) We also do work for clients outside the state of Texas, but which work is
performed within the state of Texas. We understand that such work is to be
taxed to the client when the work is performed in Texas. Is this correct?

(7) We perform services for clients who are located outside the state of Texas
with the work being done outside the state of Texas. We understand that
services provided for clients in such instances are not taxed to the client. Is
this correct?

(8) We also render services to Texas based clients but the work is done for
them completely and wholly outside the state of Texas. We understand that when
the work is done outside the state of Texas by other firms for us that the work
is not taxed to the client. Is this correct?

(9) We perform services to Texas clients where we do the work completely
outside the state of Texas ourselves. Similarly we understand that the work
rendered outside the state of Texas is not taxable to our client. Is this
correct?

(10) We perform services for some clients on a monthly basis, both inside and
outside the state of Texas. We understand that with respect to our billing to
our clients on a monthly basis in such cases, that we must charge sales tax for
work performed within Texas but do not charge sales tax for work done outside
the state of Texas. Is this correct?

(11) We have some contracts with clients which predate July 21, 1987. We have
been told that with respect to such contracts which spell out fixed billing
charges that:

(a) Wherein the contract was in existence prior to 7/21/87; and

(b) Where there has been no modification to the contract since July 21, 1987 or
during the duration of the contract; and

(c) Where the contract extends to 1990 but not beyond; then we are exempted
during the period of such contracts from charging or collecting sales tax.

Is this correct?

(12) We are on a cash basis accounting system. We have been told that cash
basis accounting systems are responsible to pay sales taxes to the state upon
the receipt of payments by us on our accounts receivables, not at the time of
our billing for services rendered. Is this correct?

(13) We have been told that if our receipts on a month to month basis exceeds
an amount which will generate in excess of $3,000 per month in taxes, we are
obliged to pay the sales tax collected by us by the 20th of the month following
the month wherein the receipts are collected. Is this correct?

(14) We have incidental expenses at times while performing services for
clients. These could include airfare, hotels, meals, parking, tolls, long
distance telephone calls, document reproductions, and informant fees which we
bill to our client at the actual cost of those incidental expenses. Virtually
all these expenses already have various sales or use taxes added to them at the
time we pay for them. Are we required to add sales tax to such items in
addition to the taxes already paid by us when those services were purchased?

(15) We also incur such incidental expenses from time to time as described in
point #14 above, in connection with work performed for clients outside the
state of Texas. We have been told that such expense items, when incurred either
by individuals or companies on our behalf, or by us connected to work being
done outside the state of Texas is not taxable to our client. Is this correct?

(16) From time to time we provide services to governmental or tax exempt
entities. We have been told that we need to have them furnish a tax exempt
certificate to us and that sales tax is not charged those entities in such
cases. Is this correct?

(17) In connection with #16 above, on occasions such work is done at the
direction of an attorney representing such entities with respect to reports and
billings being directed to the attorney on behalf of such clients. We have been
told that as long as a municipality or other tax exempt entity pays the
statement rendered by us, that we are not to include sales tax on the invoice
which we present for work done. Is this correct?

(18) Finally, we have been told that it is not permissible to indicate on an
invoice that we are paying the customer sales tax. We have been told that we
can state "tax included" and a total of the invoice without specifically having
to calculate the tax on the face of the invoice so long as we pay the state the
tax on the gross amount of the billing where applicable. Is this correct?

Your prompt response in writing to us confirming our understandings or
correcting those which are in error, or answer questions which we have no
answers for would be greatly appreciated.

Very truly yours,

cc: Mr. **, Attorney