How did Texas tax title-company purchases of property-tax searches, customer reimbursements, and tax-search services between affiliated corporations?

Plain-English summary

A title company bought property-tax search information for use in real-estate closings. The Comptroller said the title company had to pay sales tax to the tax-search provider when it purchased the information. A later reimbursement collected from the parties to a completed closing was not taxable, even when the reimbursement exceeded the title company's purchase cost.

The letter also addressed affiliated corporations filing one consolidated federal income-tax return. Services that had become taxable on October 1, 1987, or January 1, 1988, were exempt when provided between qualifying affiliates if at least one was a corporation. The affiliate providing the service could not buy its own inputs tax-free for resale.

For the described tax-search affiliate, the intercompany information service was exempt only if the provider paid tax on taxable services and tangible property used or transferred in providing it. The title company's later reimbursement from closing parties remained nontaxable.

What this means for you

Under this 1988 guidance, the taxable event was the title company's acquisition of tax-search information, not its recovery of that cost through a closing reimbursement. The affiliate exemption shifted tax to the service provider's inputs rather than allowing both the intercompany service and its inputs to escape tax.

Common questions

Did the title company pay tax when buying a third-party tax search? Yes.

Was the closing-party reimbursement taxable? No, even if it exceeded the title company's cost.

Were qualifying affiliate services exempt? Yes, when the entities met the consolidated-return conditions described in the letter.

Could the affiliate provider buy inputs for resale? No. It had to pay tax on taxable services and tangible property used to provide the information.

Citations and references

The letter did not cite a rule or statute by number. It stated that the affiliate exemption covered specified services that became taxable on October 1, 1987, and January 1, 1988.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8804L0891G05

Original ruling text

April 26, 1988

Dear ***:

Thank you for your letter concerning sales tax on tax searches. Your
examples and questions are outlined below with responses:

Example:

If COMPANY A pays $10,000 each for ten tax searches it secures from a
non-related real estate tax service then it must pay the Real Estate
Tax Service $100 plus sales tax for such amount. The title company
will not be able to close all transactions because some purchasers
cannot secure financing or because of defects in title or default by
a party to the transaction. Therefore, COMPANY A in closing only eight
of the ten transactions would have to secure reimbursement from the
parties to the transaction for the tax search in excess of the original
$10.00 amount (plus sales tax) paid. For example, the title company
might collect $13.50 (hypothetically) from the seller in each on the
eight transactions that have closed. In securing reimbursement, does
the title company have to collect sales tax for such reimbursement on
the transaction that it closes?

Response:

No. The tax information is to be used as part of the real estate
closing activities and COMPANY A must pay tax to the Tax Service at
the time of purchase. Subsequent reimbursement from the parties to the
real estate transaction is not taxable even though the "reimbursement"
is above the amount COMPANY A paid for the information.

Example:

The title company and the tax search service are affiliated companies,
both of which are corporations that report their income to the IRS on a
single consolidated return for the tax year in which the transactions
occur. The tax search service through its employees collects the tax
information, and sells same to the title company. Would you please
confirm that because these are intercorporate activities of such
affiliated entities, there is an exemption from collection of sales tax
by the tax search service in selling to the related title company.
Furthermore, the title company will then close a transaction and
require reimbursement for the costs it incurred in paying the tax
search service for the tax information. Please confirm that, since the
title company is simply being reimbursed for its costs (as in the first
scenario) there is no sales tax that the title company has to collect
from the purchaser or sell in the transaction.

Response:

Services that became subject to sales tax on October 1, 1987, and on
January 1, 1988, are exempt form tax when provided between affiliated
entities, at least one of which is a corporation, that file a
consolidated federal tax return for the income tax year in which the
transaction occurs. The entity that provides these services to its
affiliated companies may not purchase them tax free for resale.

In the situation you describe, the tax search service is exempt from
collecting tax on information provided to the title company if the tax
search service paid sales tax on any taxable services it purchased to
provide the information to the title company. Sales tax must also have
been paid on any tangible personal property (i.e., forms, paper, etc.)
transferred to the title company as part of the information service.

The reimbursement charge by the title company to the parties to the
real estate closing would not be taxable.

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 our
toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may
write me at the Tax Policy Division.

Sincerely,

(Mrs.) Jo Ann Dieck
Tax Policy Division