Is a pre-employment background screening service (criminal, education, driving, and credit checks) taxable in Texas?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered a taxpayer's question about whether pre-employment screening is a taxable service. The taxpayer used on-line databases to run background checks for its customers on their job applicants, pulling together credit reports, civil and criminal record checks, education background verification, and driver's license information.

The Comptroller held that this is a taxable "information service" as defined in Section 151.0038(a)(2) of the Texas Tax Code, which covers electronic data retrieval or research. The letter also points the taxpayer to Rule 3.342 (Information Services) for more detail.

Because it is providing a taxable information service, the taxpayer is required to hold a Texas sales and use tax permit and to collect and remit sales tax on the charges for its screening services. The Comptroller enclosed a sales tax permit application with the letter.

The letter adds a separate, non-tax note: because some of the services (like criminal checks and driver's license information) may fall under private-investigator regulation, the taxpayer may also need a license from the Board of Private Investigators and Private Security Agencies, and encloses Rule 3.333 for review.

The Comptroller closed with the standard caveat that the opinion is based on the facts as presented and could change if the facts are different.

What this means for you

Background-check and screening companies

If you sell pre-employment screening services in Texas — pulling credit history, criminal/civil records, education verification, or driver's license data through on-line databases for employers checking job applicants — the Comptroller treats this as a taxable "information service." You need a Texas sales and use tax permit, and you must charge, collect, and remit sales tax on those charges.

Businesses that hire screening vendors

If you're an employer paying a vendor to run background checks on applicants, expect sales tax to apply to that vendor's charges, since the vendor is providing a taxable information service under Texas law.

Screening companies handling criminal or driving records

Beyond the sales tax obligation, this letter flags that certain services — like criminal background checks and driver's license lookups — may also require a separate license from the Texas Board of Private Investigators and Private Security Agencies. That's a licensing question distinct from the sales tax analysis, and worth checking with that board directly.

Common questions

Q: Is a pre-employment background screening service taxable in Texas?
A: Yes. The Comptroller classified it as a taxable "information service" under Section 151.0038(a)(2) of the Texas Tax Code because it involves electronic data retrieval or research (credit reports, criminal/civil checks, education verification, driver's license information).

Q: Does a screening company need a sales tax permit?
A: Yes. As a provider of a taxable information service, the company must hold a Texas sales and use tax permit and collect and remit sales tax on its charges.

Q: Does offering criminal or driver's license checks require any other license?
A: Possibly. The letter notes some of these services may require a license from the Board of Private Investigators and Private Security Agencies, separate from any sales tax obligation.

Q: Can another business rely on this specific letter?
A: No. STAR letters generally may be relied on only by the taxpayer to whom they were issued, and this opinion is expressly based on the facts presented to the Comptroller — different facts could change the outcome.

Citations and references

Statutes and rules:

• Section 151.0038(a)(2), Texas Tax Code (definition of information service)
• 34 Tex. Admin. Code Rule 3.342 (Information Services)
• 34 Tex. Admin. Code Rule 3.333 (enclosed re: Sales Tax Permit / private investigator licensing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9512L1392B01

Original ruling text

December 11, 1995

Dear ** :

Thank you for your letter of November 24, 1995. You asked
whether pre-employment screening is a taxable service.

As I understand it, you are supplied with on-line databases to
do pre-employment screenings. The information you provide your
customers regarding their job applicants includes credit
reports, civil and criminal checks, education background
verification, and driver's license information.

You are providing a taxable information service. Section
151.0038(a)(2) of Texas Tax Code defines an information service
as electronic data retrieval or research. Also, please refer
to Rule 3.342 relating to information services.

As an information service provider, you are required hold a
Texas sales and use tax permit and collect and remit the tax
due on your services. An application for the sales tax permit
is enclosed.

In addition, some of your services (e.g., criminal checks,
driver's license information) may require that you obtain a
license from the Board of Private Investigators and Private
Security Agencies. You may write to this agency at 313 E.
Anderson Lane, Suite 200, Austin, Texas, 78752. Rule 3.333 is
enclosed for your review.

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

NOTE: Previous Accession Number 9512933L