Was collecting accounts receivable bought without recourse a taxable debt-collection service?

Plain-English summary

Collecting accounts receivable that a business truly purchased without recourse was not a taxable debt-collection service. The result did not depend on whether the buyer had previously collected receivables for that client.

For sales-tax purposes, factoring treated the client that sold the receivables as paid. If the receivables arose from taxable sales and the client had already paid the tax to the state, the client could not claim a bad-debt deduction. If the client had not paid the tax, it had to pay tax on the original taxable selling price when it sold or factored the receivables.

Common questions

Was collection of the purchased receivables a taxable service? No, when the transfer was a true purchase without recourse.

Could the original seller claim a bad-debt deduction after factoring? No, if it had already paid the sales tax.

When did unpaid sales tax become due? When the taxable receivables were sold or factored, based on the original selling price.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8905L0935B08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

May 2, 1989

Dear *:

Your April 27, 1989 letter to Ms. Debbie Angus was forwarded to me
for response. You asked about applicability of Rule 3.354 to the
following transactions:

FACTS: A domestic corporation, ABC, Inc., provides marketing, con-
sulting, compliance and accounts receivable management services to
professionals located in Texas. ABC has an existing client base
that it periodically expands with the addition of new clients. ABC
is contemplating the discontinuance of accounts receivable collec-
tion services for its present clients, as well as not offering this
service to future clients. ABC is further contemplating the purchase
of existing and future client receivables for its own account, under
which program ABC would take title to and own such receivables on a
noncourse basis to the clients from whom acquired. ABC would acquire
the receivables for a price discounted from the face amount of the
receivables.

In response to the questions outlined in your letter, ABC's collection
of its own accounts receivable acquired from its existing clients or
future clients is not a debt collection service if the contract with
the client is for a true purchase of the accounts receivable without
recourse to the client. It would not make any difference if ABC had
never performed any accounts receivable services for a client whose
receivables are purchased or whether ABC had never performed services
to collect its own accounts receivable acquired from a client.

When a client sells or factors the accounts receivable to ABC, the
state will consider the client to have been paid for the transaction
for sales and use tax purposes. If the accounts receivable include
transactions subject to sales or use tax, the client will not be al-
lowed any bad debt deductions if the tax has been paid to the state.
If the tax has not been paid, the client will be required to pay it
on the original selling price of the taxable item at the time the
accounts receivable are sold or factored to ABC.

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

If you have any questions or need additional information, please
call 463-4600 or the toll-free number 1-800-252-5555 from outside
Austin. My number is 463-4666. You may write to Tax Correspon-
dence, Comptroller of Public Accounts.

Sincerely,
Jo Ann Dieck
Tax Correspondence