Does a retailer have to collect sales tax on the service charge (bad-check fee) paid by the writer of a dishonored check?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered a retailer's question about whether sales tax should be collected on the service charge paid by someone who writes a check that bounces (a dishonored or "bad" check).

The answer turns on who actually collects the fee. If the retailer itself collects the processing fee directly from the person who wrote the bad check, no tax is due on that fee. But if the retailer instead hires a debt collection agency to pursue the bad check, and that agency charges the processing fee to the check writer, then tax is due on the fee, and it's the check writer who must pay it.

The Comptroller noted this opinion is based on the facts presented, and that the opinion could change if the facts were different.

What this means for you

Retailers who collect their own bad-check fees

If your business collects a service charge directly from a customer whose check bounced, you don't need to add sales tax to that fee — it's not a taxable charge in that scenario.

Retailers who use a debt collection agency

If you turn a dishonored check over to a debt collection agency and that agency tacks on a processing fee to the check writer, tax becomes due on that fee. The tax is owed by the person who wrote the bad check, not by your business.

Accountants and tax professionals

The distinguishing fact in this letter is who is doing the collecting — the retailer directly, versus a third-party debt collection agency. That single fact changes the tax outcome for what is otherwise the same kind of fee.

Common questions

Q: Do I owe tax if I charge my own customers a fee for a bounced check?
A: No, according to this letter — if you (the retailer) collect the processing fee directly from the check writer, no tax is due on it.

Q: What if I send bad checks to a collection agency?
A: If the collection agency charges the check writer a processing fee, tax is due on that fee, and the check writer is responsible for paying it.

Q: Can I rely on this letter for my own business?
A: This opinion is based on the specific facts presented to the Comptroller's office. If your facts are different, the outcome could differ, and STAR letters generally may be relied on only by the taxpayer to whom they were issued.

Citations and references

No statutes or rules were cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9511720L

Original ruling text

November 15, 1995

Dear **:

Thank you for your letter of November 7, 1995. You asked whether you should
collect tax on the service charge paid by the writer of a dishonored check.

When a retailer collects the processing fee directly from the writer of a
dishonored check, no tax is due on the processing fee. However, if the
retailer hires a debt collection agency to collect the check and the debt
collection agency charges the processing fee to the check writer, tax is due on
the processing fee and must be paid by the writer of the dishonored check.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change. You may call me toll free at
1-800-531-5441, ext. 5-0037. The direct line is 512/475-0037. You also may
write to Sales Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division