Which parts of a credit consultant's work were taxable debt collection, and which were nontaxable consulting services?

Plain-English summary

The requester worked as a part-time credit manager and consultant. About five hours of a typical eight-hour visit involved credit procedures and consultation, while about three hours involved reviewing and calling active past-due accounts. The requester did not handle money, compromise debts, make agreements with customers, work for a percentage, or present as an outside third party.

The Comptroller split the work into two categories. Time spent consulting on actual past-due accounts and contacting those accounts was taxable debt collection under Rule 3.354(a)(4). General credit procedures, staff training, and credit advice not connected to a specific past-due account were nontaxable "unrelated services" under Rule 3.354(e).

Because debt-collection services were more than 5% of the total charge, the entire charge was presumed taxable unless invoices or supporting documents clearly separated and documented the nontaxable unrelated services.

What this means for you

The letter focused on what the consultant actually did, not the job title. Advice tied to collecting a particular delinquent account was taxable; preventive credit-management advice and training detached from specific delinquent accounts was not.

For a mixed engagement, contemporaneous billing detail mattered. Without clear separation, the more-than-5% taxable component caused the whole charge to be presumed taxable under the rule described in the letter.

Common questions

Was general credit training taxable? No, when it was not related to a specific past-due account.

Were calls about actual delinquent accounts taxable? Yes. The Comptroller treated them as debt-collection activity.

Did it matter that the consultant did not compromise debts or handle payments? Those were part of the stated facts, but the letter still classified work on actual past-due accounts as taxable debt collection.

How could the consultant avoid tax on the nontaxable portion? By clearly separating and documenting debt-collection charges and unrelated-service charges on invoices or supporting records.

Citations and references

• 34 Tex. Admin. Code Rule 3.354(a)(4) — debt-collection activity.
• 34 Tex. Admin. Code Rule 3.354(e) — unrelated 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/9108L1125F09

Original ruling text

August 6, 1991

Dear ***:

Thank you for your recent letter, in which you requested our position on
the taxability of the services you provide. You generally characterize your
work as that of a "part-time credit manager/consultant". You describe your
specific work as follows:

I go to these businesses biweekly or as requested perform credit work and
consultation with their controllers and credit personnel. I usually work
eight hours of which approximately five hours is spent on credit procedures
and consultation. I review their A/R (accounts receivable] and follow-up
on previous visits. Approximately three hours is spent calling active
past due accounts with reference to invoice problems, payment & etc. At
no time do I handle currency or checks. I do not compromise old debts or
make agreements with their customers. I relay the information to my
employers and abide by their decisions. Never have I worked on a
contingency or percentage basis. When I contact their customers I always
say that this is ** with their company name. I do not act as
a third party.

Only part of what you do is taxable as a debt collection service.
Specifically, your charges to your customers for the time you spend consulting
on actual past-due accounts and contacting actual past-due accounts constitutes
"activity performed for consideration to collect or adjust a debt or claim. . .
including any activity performed in furtherance of the satisfaction or
compromise of a debt or claim." Rule 3.354 (a)(4).

The part of your work that you characterize as "credit procedures and
consultation", including training your clients' credit staff and giving general
credit advice not related to any specific past-due accounts, is properly
classified as an "unrelated service" under Rule 3.354 (e).

You are not required to collect tax on unrelated services that you perform.

If your bills to your customers (or additional supporting documentation)
clearly separate charges for debt collection services from charges for
unrelated services, then you would be required to collect tax only on the debt
collection services. Since the given facts indicate that debt collection
services constitute more than 5% of your total charge, your total charge is
presumed to be taxable unless the charges for unrelated services can be
documented and separated from the taxable charges.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions,
feel free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration