When a homeowner buys a pest/termite warranty from a warranty company, and later pays a trade fee (deductible) directly to the pest control company doing the actual work, who owes sales tax on what -- the initial warranty fee, the deductible, and the warranty company's pass-through payment to the pest control company?

Plain-English summary

A pest control company performs both pest and termite services for a warranty company that sells annual pest control and termite warranties to homeowners. The warranty company collects and remits sales tax on the homeowner's upfront warranty fees. When the pest control company later performs work under the warranty, the homeowner separately pays a "trade fee" or deductible directly to the pest control company, and in some termite cases the warranty company also pays the pest control company an additional amount from the fee it originally collected.

The Comptroller answered five distinct questions:

1. Routine pest control service under warranty: the pest control company may accept a resale certificate from the warranty company instead of collecting tax on that service, since the warranty company already taxed the homeowner's upfront fee.
2. Warranty company's pass-through payment for termite services: confirmed nontaxable to pass through, because the warranty company already collected and remitted tax on the full amount received from the homeowner -- the pest control company may accept a resale certificate here too.
3. Trade fee/deductible paid by the homeowner directly to the pest control company for termite service: this IS taxable. The deductible is part of the selling price of the taxable service, and the pest control company -- as the party actually receiving that payment from the homeowner -- is liable for collecting and remitting the tax on it.
4. When the pest control company receives BOTH the deductible from the homeowner AND a separate payment from the warranty company for the same termite work: the total selling price of the service is taxable, and the homeowner's deductible portion specifically is taxable and must be collected by the pest control company. The warranty company's separate payment can still be handled via resale certificate since the warranty company is purchasing the service for resale to the homeowner.
5. Products purchased from an outside supplier (the elimination system used in termite treatment, which the company already charges its own customers tax on): the pest control company may issue a resale certificate to ITS suppliers instead of paying tax on those products, since it's already collecting tax on them from its customers.

What this means for you

Pest control and termite companies working under home warranty programs

Distinguish carefully between money flowing from the warranty company (generally resale-certificate-eligible, since the warranty company already taxed the homeowner once) and money flowing directly from the homeowner as a deductible/trade fee (independently taxable, and your responsibility to collect). Getting these two payment streams confused is the core risk this letter addresses.

Home warranty companies

Collecting and remitting tax on your customers' upfront warranty fees supports your service providers accepting resale certificates from you later -- but that doesn't relieve the service provider of collecting tax on any separate deductible the homeowner pays directly.

Accountants and tax professionals

Note the resale-certificate chain here: the pest control company issues certificates to ITS product suppliers (avoiding double taxation on inputs it will tax downstream), while accepting certificates FROM the warranty company (avoiding double taxation on an amount the warranty company already taxed upstream) -- two separate applications of the same resale mechanism in one transaction chain.

Common questions

Q: Does the pest control company have to collect tax when billing the warranty company for routine service?
A: No, per this letter -- it may accept a resale certificate from the warranty company instead, since the warranty company already taxed the homeowner's upfront fee.

Q: Is the deductible/trade fee a homeowner pays directly to the pest control company taxable?
A: Yes, per this letter -- it's part of the selling price of the taxable service, and the pest control company must collect and remit the tax.

Q: What if the pest control company gets paid by both the homeowner and the warranty company for the same job?
A: Per this letter, the total selling price (including the homeowner's deductible) is taxable, though the warranty company's separate portion can still be handled with a resale certificate.

Q: Can the pest control company avoid tax on the elimination-system products it buys from suppliers?
A: Yes, per this letter -- it may issue a resale certificate to its own suppliers, since it already charges its customers tax on those products.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9707586L

Original ruling text

July 18, 1997

Dear ***:

Thank you for your letter of July 3, 1997. You asked that we address the
taxability of a client's services.

The facts of the situation, related questions, and responses are as follows:

The company is in the business of performing both pest and termite services for
commercial and residential customers. The pest control company performs work
for a warranty company that provides certain warranties to homeowners. To
purchase the warranty from the warranty company, the homeowner pays a fee for
an annual pest control warranty and an additional annual fee for the termite
warranty. The warranty company collects and remits sales tax to the State of
Texas on the initial fees collected from the homeowner.

For any subsequent pest control service provided by the pest control company
under the warranty agreement, a trade fee (or deductible) is paid by the
homeowner to the pest control company.

Question 1: Should the pest control company collect and remit sales tax on
this pest control service provided by the pest control company under the
warranty agreement?

Response: The pest control company may accept a resale certificate from the
warranty company in lieu of collecting tax on the service. See the responses
to Questions 3 and 4 regarding the taxability of the deductible paid by the
homeowner.

As stated earlier, the warranty company also collects a fee for the annual
termite warranty from the homeowner and collects and remits sales tax to the
State of Texas. Per the agreement between the warranty company and the pest
control company, a portion of that termite fee received from the homeowner by
the warranty company is then paid to the pest control company by the warranty
company. The pest control company is then responsible to fulfill the warranty
terms with the homeowner. It appears that this payment from the warranty
company to the pest control company is nontaxable for sales tax purposes since
the warranty company collected and remitted sales tax on the full amount
received from the homeowner.

Question 2: Is that a correct assumption?

Response: Yes, the pest control company may accept a resale certificate from
the warranty company in lieu of collecting tax on the service.

For any subsequent termite service provided by the pest control company under
the warranty agreement, a trade fee (or deductible) is paid by the homeowner to
the pest control company.

Question 3: Should the pest control company collect and remit sales tax on
this termite service provided by the pest control company under the warranty
agreement?

Response: Yes. The trade fee or deductible is part of the selling price of
the taxable service. If the homeowner pays the fee to the pest control
company, the pest control company is liable for collection and remittance of
tax on the service.

In some cases, the pest control company would receive the trade fee (or
deductible) from the homeowner and also receive an additional payment from the
warranty company for termite services provided under the warranty agreement.

Question 4: Is the payment received from the warranty company for fulfilling
the terms of the warranty agreement subject to sales tax?

Response: The total selling price of the pest control service is taxable. It
appears that the pest control company is receiving payment for the service from
both the homeowner and the warranty company. As such, the deductible paid by
the homeowner to the pest control company is part of the selling price and is
taxable. Because the warranty company is purchasing the pest control service
for resale to the homeowner, the pest control company may accept a resale
certificate in lieu of collecting tax from the warranty company.

When treating for termites, the pest control company often uses a certain
elimination system which is purchased from an outside source. The pest control
company is charging its customers sales tax on the products used.

Question 5: Should the pest control company be charged sales tax on the
products when purchased from the outside source?

Response: The pest control company may issue a resale certificate to its
suppliers in lieu of paying tax on the products.

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