Is a service that negotiates with creditors on behalf of a debtor business to settle past-due accounts payable a taxable debt collection service in Texas?

Plain-English summary

A taxpayer planned to start a business providing negotiation services to other businesses. The service would negotiate with creditors to settle a client's past-due accounts payable. The taxpayer noted that this was not a traditional collection service, because the client paying for the service would be the debtor business, not the creditor business seeking to collect.

The Comptroller rejected the idea that this distinction matters for sales tax purposes. The ruling states that any activity performed for consideration to collect or settle a delinquent debt is a taxable debt collection service — it does not matter whether the person paying for the service is the creditor trying to collect the money or the debtor trying to settle what is owed. Because the taxpayer's negotiation service exists to affect settlement of delinquent (past-due) accounts, it falls within the taxable debt collection service category described in Rules 3.291 and 3.354.

What this means for you

Businesses offering debt-negotiation or debt-settlement services

If your service involves negotiating with creditors to settle delinquent accounts on behalf of a debtor client, this ruling indicates you are providing a taxable debt collection service in Texas, even though you are not collecting money for a creditor. You should charge sales tax on these services and consult Rules 3.291 and 3.354 for the specific scope of taxable debt collection services.

Businesses that owe past-due accounts payable

If you hire an outside company to negotiate settlements with your creditors, expect the fee for that service to be subject to Texas sales tax, since the Comptroller treats it as a taxable debt collection service regardless of who is paying for it.

Accountants and tax professionals

This letter is a useful, narrow precedent for the proposition that "debt collection service" is not limited to services hired by creditors — services aimed at settling debts on behalf of debtors are swept into the same taxable category under Rules 3.291 and 3.354.

Common questions

Q: Does it matter that my client is the debtor, not the creditor?
A: No. The Comptroller specifically addressed this argument and concluded that any activity performed for consideration to collect or settle a delinquent debt is taxable, regardless of which party (creditor or debtor) is paying for the service.

Q: What made this different from a typical debt collection service in the taxpayer's view?
A: The taxpayer argued the service was not a "collection service" because it was hired by the debtor business to negotiate settlements, rather than by the creditor business to collect money owed to it. The Comptroller did not accept that this distinction takes the service outside the taxable category.

Q: Where can I find the specific rules on debt collection services referenced in this letter?
A: The letter references Rules 3.291 and 3.354, which the Comptroller enclosed for the taxpayer as requested.

Citations and references

• 34 Tex. Admin. Code § 3.291 (debt collection services)
• 34 Tex. Admin. Code § 3.354 (debt collection 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/9405L1305A10

Original ruling text

May 18, 1994

Dear *****:

Thank you for your letter dated May 10, 1994, regarding
sales tax as it applies to your business activities.

FACTS: Your business will consist of providing negotiation
services to businesses. The negotiations are aimed at
affecting settlements of past due accounts payable. The
service is not a collection service since the client will
be the debtor business rather than the creditor business.

RESPONSE: Any activity performed for consideration to
collect or bust a delinquent debt will be considered a
taxable debt collection service.

Rules 3.291 and 3.354 are enclosed as you requested.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If
you have any questions or need more information, please
write or call me toll free at 1-800-531-5441, extension
50330, or 512-475-0330.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9405405L