Texas Letter Ruling 9211L1204G09: Out-of-State Client — Investigation Performed Out-of-State by Texas Firm

Plain-English summary

This is an internal Texas Comptroller memo (not a letter to a taxpayer) answering a question from an auditor: if a Texas-based private investigator conducts an investigation entirely by phone from a Texas office — investigating a person located outside Texas, for a client located outside Texas — does the investigator owe Texas sales tax on the fee?

The Tax Policy Division answered that no Texas tax is due in that situation, as long as two conditions are met:

1. The investigator delivers the results of the investigation (for example, the written report) outside Texas, and
2. The customer gets no benefit from and makes no use of the investigative services in Texas.

The memo explains that this isn't fully spelled out in Rule 3.333 (Security Services) itself. Earlier STAR letters (9002L0979B09, 9002L0979C01, and 8711L0850E04) had said investigations conducted inside Texas for an out-of-state client are taxable — which is still true in some circumstances — but this memo clarifies that the key exemption is Texas Tax Code Sec. 151.330(e), which exempts services performed in Texas for use outside the state. The investigator should get an exemption certificate from the customer to document the exempt sale.

By contrast, Texas tax is due if the customer takes delivery of the report in Texas, or if the object of the investigation (the person or thing being investigated) is located inside Texas, per Rule 3.333(d).

What this means for you

Private investigators and security service firms

If you perform investigative services from a Texas office by phone (or otherwise without physically leaving the state) on a subject located outside Texas, for a client located outside Texas, you don't have to charge Texas sales tax — but only if you deliver your report/results outside Texas and the client makes no use of the service in Texas. Get an exemption certificate from the customer to support the exempt treatment. If the subject of the investigation is in Texas, or the client receives the report in Texas, the sale is taxable regardless of where the client is based.

Accountants and tax professionals advising security/investigative businesses

This memo doesn't change Rule 3.333, but it clarifies how the "for use outside this state" exemption under Tax Code Sec. 151.330(e) applies to investigative security services when the physical work is performed from a Texas location. It also flags that earlier STAR letters (9002L0979B09, 9002L0979C01, 8711L0850E04) addressed a related but different fact pattern — investigations conducted inside Texas for an out-of-state client — so don't assume those letters control when the investigation's subject is also out-of-state.

Common questions

Q: My firm is based in Texas and I call an out-of-state subject to investigate them for an out-of-state client. Do I owe Texas sales tax?
A: No, as long as you deliver the results of the investigation outside Texas and the client gets no benefit from or use of the service in Texas.

Q: What if the client takes delivery of my report while in Texas?
A: Then Texas sales tax is due, even if the subject of the investigation and the client's normal location are both outside Texas.

Q: What if the person or thing I'm investigating is located in Texas?
A: Texas sales tax is due. Rule 3.333(d) specifies that tax applies if the object of the investigation is located inside Texas.

Q: What documentation should I keep to support not charging tax?
A: The memo says the service provider should obtain an exemption certificate from the customer.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 151.330(e) (exemption for services performed in Texas for use outside the state)
• Rule 3.333 (Security Services)
• Rule 3.333(d) (tax due if the object of the investigation is located inside Texas)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9211L1204G09

Original ruling text

DATE: November 6, 1992

TO: James M. Hilliard, III, Auditor Group Supervisor, *** Audit

FROM: John Christian, Tax Administration Division

SUBJECT: Security Services; Investigations of OO5 persons for OO5 clients

Thank you for your recent FAX. You asked the following:

Question: If a taxpayer (private investigator) is performing investigative
security services in Texas, exclusively using the telephone from his Texas
location, on an individual located outside of Texas, for a client located
outside of Texas, is the taxpayer responsible for Texas taxes on the amounts
received for those services?

Response: Your question is not clearly addressed in Rule 3.333 (Security
Services). The letters on this subject (9002L0979B09, 9002L0979C01, and
8711L0850E04) say that investigations conducted inside Texas for an out-of-state
client are subject to tax. That's true in some circumstances, but this
memorandum slightly clarifies those letters.

No Texas tax is due on investigative security services conducted inside Texas
when the object of the investigation and the purchaser both are located outside
Texas, if:

1. The service provider delivers the results of the investigation outside
   Texas, and

2. The customer derives no benefit from and makes no use of the investigative
   services in Texas.

The applicable exemption is found in Texas Tax Code Sec. 151.330 (e), which
provides that services performed (in Texas) for use outside this state are
exempt from sales tax. The service provider should obtain an exemption
certificate from the customer to document the exemption.

Texas sales tax is due if the customer takes delivery of the service (for
example, the written report of the investigator) in Texas. Also, Rule 3.333
(d) specifies that Texas sales tax is due if the object of the investigation is
located inside Texas.