When did taxable debt-collection and insurance services make a bundled accounts-receivable management charge taxable in Texas?

Plain-English summary

An accounts-receivable management provider used computerized billing and reports as part of a broader management service. The Comptroller said the overall service was not taxable data processing because the provider was hired for its management skills and expertise and merely used data processing to facilitate that work.

Parts of the service were taxable, however. Personal letters or telephone reminders on past-due accounts were debt-collection services, and preparing insurance claims was a taxable insurance service. A separately billed charge for either service was taxable.

When those taxable services were not separately billed, the entire bundled charge became taxable if the taxable services exceeded 5% of the provider's overall service charges.

What this means for you

Under this 1988 letter, using computers inside a professional management service did not automatically turn the whole engagement into taxable data processing. The provider still had to identify taxable components and either bill them separately or apply the stated 5% test to a bundled charge.

An outside collection agency's charge was also a debt-collection service. The provider could buy that service for resale with a resale certificate only when it separately charged the client and collected tax. If not separately billed, the outside agency's charge counted toward the 5% calculation; when taxable services were 5% or less, that purchased collection service could not be bought tax-free.

Common questions

Was the overall accounts-receivable management service taxable data processing? No. The letter said the computers facilitated a broader management service requiring skills and expertise.

Which components were taxable? Follow-ups on past-due accounts were debt collection, and preparation of insurance claims was a taxable insurance service.

When was the entire bundled charge taxable? When the taxable services exceeded 5% of the provider's overall service charges.

Could the provider buy outside collection work for resale? Yes, if it separately billed that amount to the client and collected sales tax.

Citations and references

The letter applied a 5% bundled-service test but did not cite a rule or statute by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8805L0889C05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

May 4, 1988

Dear **:

Thank you for your letter asking whether the "accounts receivable
management
and billing services" provided by your client are taxable data processing
or
debt collection services.

Based on the description in Exhibit A of your client's service, the
overall
service provided in not taxable data processing services. although the
computerized billings and reports would be taxable data processing
services
on a stand-alone basis, it appears that your client is employed to
provide an
overall management service which requires certain skills and expertise
and
merely uses data processing to facilitate the service.

You stated that your client handles the initial collection of accounts
for
certain customers. The accounts are not subject to a past due penalty or
late charge. Your client follows up on the accounts by personal letter
or
telephone reminders. After a certain period of time the unpaid accounts
are
submitted to an outside collection agency after approval is obtained from
the
client.

The charge for "follow-ups" on the past due accounts is a debt collection
service. The charge for preparation of insurance claims is a taxable
insurance service. The charge for these services is taxable if
separately
billed. If your client does not separately bill for these services, the
entire charge for the overall service will be taxable if the charge for
these
taxable services exceeds 5% of the overall charges for services provided
by
your client.

The charge by the outside collection agency is a debt collection service.
If
your client purchases debt collection services for resale to the client,
a
resale certificate can be issued to the collection service in lieu of the
tax.
Your client must then collect sales tax on the separate charge billed to
the
client. If your client does not separately bill this amount, it must be
included to determine whether taxable services exceed 5% of the overall
service. If taxable services are 5% or less, the debt collection service
could not be purchased tax free.

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