Which receivables-management activities were taxable, and when did the 5% rule make a mixed lump-sum charge fully taxable?

Plain-English summary

The receivables-management contract included insurance-claim filing, debtor counseling, delinquency monitoring, limited collection calls, correspondence, charity write-offs, and forwarding serious delinquencies to a collection agency.

The proposed debt-collection rule excluded collection of current credit accounts from tax. Processing insurance claims was a taxable insurance service, and computerized accounts-receivable billing was taxable data processing.

When taxable and unrelated nontaxable services were billed as one lump sum, the entire charge was taxable if taxable services represented more than 5% of the total. If charges were separately stated, tax applied to each taxable service.

What this means for you

Under the 1988 guidance, identifying the actual activity and separating charges mattered. A broad management label did not remove tax from claims processing or computerized billing.

Common questions

Was collection of current accounts taxable? No, under the proposed rule cited.

Was insurance-claim processing taxable? Yes.

Was computerized billing taxable? Yes.

When was the entire lump sum taxable? When taxable services exceeded 5% of the total.

Citations and references

• Proposed 34 Tex. Admin. Code Rule 3.354(a)(4) and (b)(2), quoted for debt collection and current accounts.
• Rules 3.355 and 3.330, cited for insurance and data-processing 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/8802L0868B07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
COMPTROLLER February 4, 1988

Dear *:

On behalf of Mr. Bullock, I hope you'll accept my apology for the delay
in answering your question involving changes in the sales tax law. This isn't
the way we normally do business.

Our people were, and still are, swamped by a deluge of inquiries as they
attempted to interpret provisions of the new law and draft rules which would
not adversely impact businesses. In many instances, an answer to a question
just wasn't available when the question arrived.

In your letter, you stated that your duties under a receivables
management contract include, but are not limited to, filing insurance claims,
counseling with debtors on charges, credit, adjustments and future visits, as
well as monitoring delinquency, making limited collection calls, handling
incoming correspondence and determining charity write off. The final step
usually includes preparing serious delinquency for write off and forwarding to
a debt collection agency.

Comptroller's Proposed Rule 3.354(a)(4) defines debt collections service
as, "An activity performed for consideration to collect or adjust a debt or
claim, or to repossess property subject to a claim, including any activity
performed in furtherance of the satisfaction or compromise of a debt or claim."
Section (b)(2) of that rule states that collection of current credit accounts
is not subject to tax.

Processing insurance claims is a taxable insurance service. If you
perform accounts receivables billings on a computer, the charge for that
service is a taxable data processing service. Please refer to Rules 3.355 and
3.330 enclosed.

If you perform taxable services and nontaxable unrelated services and the
taxable service represents more than 5% of the total lump sum charge, the total
charge is taxable. If charges are separately stated, tax is due on any taxable
services provided. Each of the above rules addresses unrelated services.

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

Please feel free to contact me if you have additional questions. You may
write me, call toll free 1-800-252-5555 from anywhere in Texas or phone
512/463-4600.

Sincerely,
Jo Ann Dieck
Tax Policy Division