Which seller-financed mortgage-servicing activities were taxable in Texas when billed through setup and monthly service fees?

Plain-English summary

The requester planned to charge a one-time setup fee and a monthly fee to real-estate sellers who financed part or all of their buyers' purchase price. The Comptroller classified seven mortgage-servicing activities separately:

1. Safe storage of original security instruments was not taxable.
2. A payment coupon and statement book was taxable tangible personal property; the agency could issue a resale certificate for printing, paper, and other production costs.
3. Verifying the buyer's check and remitting principal and interest to the seller, less the service fee, was not taxable.
4. Mailing delinquency notices was taxable debt collection.
5. Year-end or requested reports of principal, interest, and tax and insurance impounds were taxable data processing if produced by computer.
6. Computer-produced IRS Forms 1098 and 1099-INT were taxable data processing.
7. Recording a release of lien after full payment was not taxable.

The letter also applied the mixed-service rule: if taxable and nontaxable services were sold for one lump-sum fee and the taxable portion exceeded 5% of the total, the entire charge was presumed taxable.

What this means for you

Mortgage servicing was not treated as one all-or-nothing service. Tangible coupon books, collection work, and computer-produced reports were taxable, while custody, payment remittance, and lien-release recording were not on the stated facts.

Bundled pricing created risk. Separating and documenting each charge was important because a taxable portion above the stated 5% threshold could make a lump-sum fee presumptively taxable.

Common questions

Was storing the original mortgage documents taxable? No.

Were payment coupon books taxable? Yes, as tangible personal property.

Were delinquency notices taxable? Yes, as debt-collection services.

Were account statements and IRS forms taxable? Yes, if a computer was used to produce them.

Was recording a release of lien taxable? No.

What happened with a lump-sum setup or monthly fee? If taxable items exceeded 5% of the total, the entire charge was presumed taxable under the rules cited in the letter.

Citations and references

• 34 Tex. Admin. Code Rule 3.354(e)(2) — mixed debt-collection and unrelated services.
• 34 Tex. Admin. Code Rule 3.330(a) and (d)(2) — data processing and mixed-service treatment.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1125G12

Original ruling text

August 5, 1991

Dear ***:

Thank you for your letter concerning the services that you will
provide for "a one time set-up fee and a monthly service fee to
the sellers of real estate, who have agreed to finance all or a
portion of the purchase price."

The taxability of the items that you listed is as follows:

1. "Safe storage of the executed original security instruments."
   -- Not taxable.

2. "A coupon statement book will be provided to the mortgagor,
   detailing the total payment amount, late charge amount, the
   next due date, and their share of the service fee." -- Taxable
   sale of tangible personal property.' A resale certificate may
   be issued in lieu of paying sales tax on the cost of printing,
   paper, etc. used to produce the books.

3. "The Agency will verify that the check received from the
   mortgagor for the payment due is valid and represents good
   monies. Whereupon, the Agency will remit to the Seller the
   principal and interest less the Sellers' share of the service
   fee." -- Not taxable.

4. "The Agency will mail a delinquent notice to the buyer, if
   the payment is not received by the expected due date. Additional
   delinquent notices may be sent for an additional fee. The Agency
   will only provide this limited collection service." -- Debt
   collection services are taxable. Please review Rule 3.354-Debt
   Collection Services.

5. "The Agency will account and report all principal and interest
   and impounds for taxes and insurance paid at each year-end and
   upon request to all parties." -- Taxable data processing service
   if a computer is used to produce the reports. See section (a) of
   Rule 3.330-Data Processing services.

6. "The Agency will prepare annually, IRS 1098 forms for the
   mortgagors, and IRS 1099-INT forms for the sellers." -- Taxable
   data processing service if a computer is used to produce the forms.

7. "Upon payment in full of the deferred principal balance, the
   Agency will have the Release of Lien recorded with the proper
   County Clerk's office." -- Not taxable.

Please refer to section (e)(2) of Rule 3.354 and section (d)(2)
of Rule 3.330. If taxable and nontaxable services are provided
for a lump-sum fee, the total charge will be presumed taxable if
the taxable portion exceeds 5% of the total.

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

Please feel free to contact me if you have any additional
questions. You may write me, call toll free 1-800-252-5555, ext.
34685, from anywhere in the United States or phone 512/463-4685.

Sincerely,

Julie Pesl
Tax Administration Division