Did a city owe tax on garbage pickup, its 10% late-payment penalty, and a debt-collection company's services?

Plain-English summary

The Comptroller said the city was responsible for collecting tax on garbage pickup beginning October 1, 1987.

A 10% late charge was nontaxable if it was genuinely a penalty and not the forfeiture of an early-payment discount. The letter said tax separation should not be a problem under accrual accounting but could be a problem under cash-basis accounting if the city could not keep the tax separate.

An outside debt-collection service was taxable. The city could issue an exemption certificate to the debt-collection company.

What this means for you

The historical answer depended on the substance of the late charge. Calling it a penalty was not enough if it actually represented loss of an early-payment discount, and the accounting method affected the practical tax-separation issue.

Common questions

Was city garbage pickup taxable? Yes, effective October 1, 1987 under the letter.

Was the 10% late charge taxable? Not if it was an actual penalty rather than forfeiture of an early-payment discount.

Why did cash versus accrual accounting matter? The letter warned of a cash-basis problem if the city could not keep tax separate, while saying accrual treatment should not present the same problem.

Was outside debt collection taxable? Yes. The city could issue the collector an exemption certificate.

Citations and references

• 34 Tex. Admin. Code Rule 3.356 — historical rule enclosed with the letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8712L0846A05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

December 1, 1987

Dear **:

Thank you for your telephone call October 30, 1987, concerning trash
collections and late payment charges.

In our conversation you asked various questions surrounding your
collection of tax on garbage pick-up, and that you didn't get fair warning.
Your questions are:

1) Is the city responsible for collection of the tax effective October 1,
1987?

2) We will charge a ten (10) percent late charge which will be calculated
on the service fee and the tax because we can't keep the tax separate, is that
a problem?

3) If we turn the late charges over to a debt collection service, will
that be taxable?

Answers:

1) Yes. Sales tax permit application and Rule 3.356 enclosed.

2) If the 10% late charge is actually a penalty and not a forfeiture of
an early payment discount, tax is not due on the 10% late charge. If you are
on an accrual basis of accounting, it should not be a problem but it can be a
problem on the cash basis of accounting if you cannot keep the tax separate.

3) The debt collection is a taxable service. The city may issue an
exemption certificate to the debt collection service company.

I am enclosing a form letter and brochure that the Comptroller mailed to
prospective taxpayers about the October 1, 1987 law changes.

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 any where in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
(Mrs.) Jo Ann Dieck
Tax Policy Division