A 1997 law change removed the private-investigator license requirement for obtaining public records as of September 1, 1997 -- does that also make a pre-employment background screening service tax-exempt after that date?

Plain-English summary

A pre-employment screening business asked whether its services would become tax-exempt as of September 1, 1997, because the 75th Legislature amended the Private Investigators and Private Securities Agency Act (Article 4413(29bb), § 3(a)) to stop requiring a private-investigator license for a person obtaining information classified as public record.

The Comptroller confirmed the licensing change was real -- after September 1, 1997, the business's activity could no longer be classified as a taxable security service -- but explained that change did NOT automatically create a sales tax exemption. The information the company provides to prospective employers (verifying an applicant's truthfulness on a job application by checking criminal, education, military, driver's license, and credit history records) independently falls within the definition of a taxable information service under Rule 3.342(a)(2), which covers furnishing general or specialized information by any transmission method, including electronic data retrieval or research. Rule 3.342(b) makes gathering, maintaining, or compiling information for consideration taxable -- and reviewing public records to check an applicant's honesty and reporting the results to a customer is exactly that. If the company additionally sells the underlying public documents to its client for more than what it cost the company to obtain them, tax is due on that markup under Rule 3.342(d)(3).

What this means for you

Pre-employment screening and background-check companies

Losing your private-investigator licensing requirement for accessing public records doesn't remove your sales tax obligation -- your service is independently taxable as an information service regardless of what license (if any) you need to gather the underlying records.

HR departments and employers using screening services

Continue to expect Texas sales tax on background-check/verification service invoices; the 1997 licensing law change for the underlying investigators doesn't change that.

Accountants and tax professionals

This is a useful example of two different regulatory frameworks (private investigator licensing vs. sales tax information-service classification) being evaluated independently -- a change in one doesn't automatically flow through to the other.

Common questions

Q: Does the 1997 removal of the PI license requirement for public records make background-check services tax-exempt?
A: No, per this letter -- the licensing change and the sales tax classification as an information service are independent questions.

Q: Is checking an applicant's public records and reporting results to an employer a taxable information service?
A: Yes, per this letter, under Rule 3.342(a)(2) and (b).

Q: Is there additional tax if the company marks up the cost of the public documents it resells to the client?
A: Yes, per Rule 3.342(d)(3) as cited in this letter -- tax is due on the amount exceeding the cost of obtaining the document.

Citations and references

Statutes and rules:

• Tex. Rev. Civ. Stat. Art. 4413(29bb), § 3(a) (Private Investigators and Private Securities Agency Act, as amended by the 75th Legislature)
• 34 Tex. Admin. Code Rule 3.342(a)(2) (definition of information service)
• 34 Tex. Admin. Code Rule 3.342(b) (gathering/maintaining/compiling information for consideration is taxable)
• 34 Tex. Admin. Code Rule 3.342(d)(3) (tax on markup when reselling public documents)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9707603L

Original ruling text

July 22, 1997

Dear ***:

Thank you for your letter of July 11, 1997. You asked if your services will be
taxable after September 1, 1997, because of a change in the law.

As I understand it, you provide a pre-employment screening service. Currently,
you are required to be licensed by the Board of Private Investigators and
Private Securities Agencies to obtain the information used to provide this
service. The 75th Legislature amended Subsection (a), Section 3, of the
Private Investigators and Private Securities Agency Act (Article 4413 (29bb))
to no longer require a person to be licensed when obtaining information
classified as public information. You asked if, after September 1, 1997, a
business activity of obtaining information from public records will be taxable.

Response: While it is true that your service cannot be classified as a taxable
security service after September 1, 1997, the information you provide to a
prospective employer falls within the definition of a taxable information
service. The amendment to the Private Investigators and Private Securities
Agency Act to no longer license a person who obtains public information did not
automatically create an exemption from sales tax for your service.

An information service is defined in subsection (a)(2) of Rule 3.342.
Provision of an information service means furnishing general or specialized
news or other current information...by printed, mimeographed, electronic, or
electrical transmission, or by utilizing wires, cable, radio waves, microwaves,
satellites, fiber optics, or any other method now in existence or which may be
devised. It also includes electronic data retrieval or research.

Gathering, maintaining, or compiling information for consideration is subject
to sales tax. Therefore, when you review public records to determine if an
applicant has been truthful on a written application and provide that
information to your customer, you are providing a taxable information service.
Please refer to section (b) of Rule 3.342.

If you sell the public documents to your client at a cost exceeding the cost of
obtaining the documents, tax is due on the amount exceeding the cost of the
document. Please refer to subsection (d)(3) of Rule 3.342.

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

Enclosure