If a company factors an exhibit-booth invoice and passes on a factoring fee (interest) to the client because the client can't pay the manufacturer up front, is that factoring fee subject to Texas sales tax?

Plain-English summary

A company that designs and sells custom-made exhibit booths asked the Comptroller's office whether it owes sales tax on a "factoring fee" it sometimes charges clients. The booths are custom designed for each customer, and once the design is finished the company hires a manufacturer to produce the booth. Because it's custom work, the manufacturer insists on being paid up front. When a client can't pay up front, the company itself pays the manufacturer and then "factors" that amount — charging the client an additional fee, in effect interest, on top of the booth's price to recoup the cost of paying the manufacturer early.

The company argued this factoring fee was really a charge for a separate service (essentially short-term financing) and asked whether it should be taxed as such. The Comptroller's office disagreed: Sec. 151.007 of the Texas Tax Code defines "sales price" (the amount subject to sales tax) as the total amount charged for a taxable item "without a deduction for the cost of ... the materials used, labor or service employed, interest, losses, or other expenses." Because interest charges are expressly included in the sales price by statute, the factoring fee — which the letter treats as recouping part of the company's cost of doing business — is taxable to the customer along with the rest of the booth's price.

What this means for you

Businesses that finance or factor invoices for custom goods

If you front money to a manufacturer or vendor on a client's behalf and then pass that cost back to the client as a fee or interest charge, don't assume you can carve that charge out as a nontaxable financing or service fee. Under Sec. 151.007, interest and other costs of doing business are part of the taxable sales price of the underlying taxable item, so the fee rides along with the tax treatment of the booth (or other taxable item) itself.

Accountants and tax professionals

This letter is a straightforward application of the "sales price" definition in Sec. 151.007, which bars deducting interest, labor, materials, or other expenses from the taxable amount. It's a useful precedent whenever a client tries to separately bill for financing, carrying costs, or factoring fees tied to a taxable sale — those add-on charges generally stay in the tax base rather than being treated as an exempt service.

Common questions

Q: Is a factoring or financing fee added to a custom order taxable?
A: Yes, according to this letter. Sec. 151.007 defines "sales price" to include interest and other costs of doing business without deduction, so a factoring fee tacked onto a custom exhibit booth's price is taxable along with the booth.

Q: Does it matter that the fee is described as interest rather than part of the booth's price?
A: No. The Comptroller treated the fee as recouping the company's cost of doing business, and Sec. 151.007 specifically includes interest in the definition of sales price, so relabeling the charge doesn't remove it from tax.

Q: Could a different set of facts change this result?
A: The letter notes its opinion is based on the facts presented and may change if additional or different facts are involved.

Citations and references

• Tex. Tax Code § 151.007 (definition of "sales price," which excludes any deduction for interest, labor, materials, or other expenses)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9501L1338C12

Original ruling text

January 17, 1995

Dear **:

I am responding to your memo transmitted to Burrell Lankford regarding the
sales price of exhibit booths. You explained that your company designs and
sells exhibit booths.

The booths are custom designed for a particular customer. Once the design is
completed you have a manufacturer produce the booth; because the booth is a
custom job, the manufacturer insists on being paid up front in order to not be
left holding the bag. Occasionally one of your customers/clients cannot pay up
front. Your company will "factor" the amount of the invoice that is needed to
pay the manufacturer. When you do this you add a factoring fee (or interest)
to the price charged your client as part of the sales price of the booth.

As I understand your explanation, when a client cannot pay up front, your
company pays the fee to the manufacturer. Because you pay the manufacturer
fee, you charge your client an additional fee (interest). You asked whether
this factoring fee is taxable because it is a charge for a service being
rendered your client.

This factoring (interest) charge is specifically included in the definition of
sales price found in Sec. 151.007 of the tax code as stated below,

". . . 'sales price' or 'receipts' means the total amount for which a taxable
item is sold, leased, or rented, valued in money, without a deduction for the
cost of: . . . (2) the materials used, labor or service employed, interest,
losses, or other expenses; . . ." (emphasis added).

This fee recoups part of your cost of doing business in this manner; therefore,
this charge is taxable to your customer.

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

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9501973L