A monitoring/surveillance company collected Texas sales tax from Texas customers before it was permitted to collect Texas tax, and remitted that tax in good faith to a different state instead. Since it never got permitted in Texas until later, does it still owe that collected tax to Texas?

Plain-English summary

This is an internal Tax Policy Division memo answering an auditor's question about a company (referred to as "TP") that sells monitoring and surveillance systems. TP became permitted to collect Texas sales tax on August 1, 1995. Before that date, TP had already been selling to Texas customers and collecting Texas sales tax on those sales — but it was remitting that collected tax to a different state (referred to as "STATE"), not to Texas. TP agreed the tax was owed to Texas from August 1, 1995 forward, but argued it shouldn't have to pay Texas the tax collected before that date, since it never kept any of the money and remitted it "in good faith" to the other state.

The Comptroller rejected that argument. Tax Code Section 111.016(a) states that anyone who collects a tax, or money represented to be a tax, from another person holds that amount in trust for the state and is liable to the state for the full amount collected. TP had taken over customers and assumed responsibility for providing security services in Texas (monitoring equipment already installed and operating in Texas, not a mere equipment lease as TP argued) — so it owed Texas the sales tax it collected on those services, regardless of where TP mistakenly sent the money.

The Comptroller also rejected TP's reliance on Rule 3.340's multistate tax credit, which exists to prevent double taxation: because TP only taxed the transaction once (never remitted tax to both states on the same sale), there was no double taxation to relieve, so the credit didn't apply. TP was told it should instead seek its own refund of the taxes it erroneously paid to the other state, since TP hadn't shown that the other state ever legally imposed its own sales/use tax on security services performed in Texas.

What this means for you

Businesses that collect Texas sales tax before becoming Texas-permitted

If your business began collecting tax from Texas customers on transactions later determined to be taxable in Texas, but sent that collected money to another state instead, you remain fully liable to Texas for the amount you collected — "good faith" remittance to the wrong state is not a defense. Your recourse is to seek a refund from the other state, not to withhold from Texas.

Businesses expanding into Texas by acquiring an existing customer base or contracts

Watch what you're actually taking over: if you assume responsibility for delivering an ongoing taxable service (like monitoring/security services on equipment already in place), that can make you liable for Texas tax on those receipts even if you frame the arrangement as an equipment lease.

Accountants and tax professionals

This is a clean illustration of the "trust fund" theory behind Tax Code Section 111.016(a): once tax is collected (or represented as collected), the collecting business holds it for the state regardless of what it does with the money afterward. It's also a reminder that Rule 3.340's multistate credit only relieves genuine double taxation — a single tax collected once and misdirected doesn't qualify.

Common questions

Q: My company collected Texas sales tax before becoming permitted in Texas, but sent it to another state by mistake. Do I still owe Texas?
A: Yes — Tax Code Section 111.016(a) makes you liable to Texas for the full amount of tax you collected, regardless of where you sent it or your good-faith intentions.

Q: Can I use the multistate tax credit (Rule 3.340) to offset what I owe Texas?
A: Only if the same transaction was taxed twice. Here the transaction was taxed only once (collected once, just sent to the wrong state), so there was no double taxation and the credit didn't apply.

Q: What should I do about the tax I already sent to the wrong state?
A: Seek a refund of that erroneously paid tax directly from that other state.

Q: Does it matter whether I call the arrangement a "lease" rather than a taxable service?
A: The label doesn't control — the Comptroller looked at what was actually happening (ongoing monitoring of equipment already installed and operating in Texas, i.e., a security service under Sections 151.0075/151.0101(a)(14) and Rule 3.333), not just the contract's terminology.

Q: Can I rely on this letter for my own situation?
A: No. This is based on the specific facts presented, and the letter notes the opinion may change on additional or different facts.

Citations and references

• Tex. Tax Code § 111.016(a) (tax collected is held in trust for the state; collector liable for full amount)
• Tex. Tax Code § 151.0075 (definition of taxable services)
• Tex. Tax Code § 151.0101(a)(14) (security services as a taxable service)
• 34 Tex. Admin. Code Rule 3.333 (security services)
• 34 Tex. Admin. Code Rule 3.340 (multistate tax credit)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9805596L

Original ruling text

DATE: May 1, 1998

TO: Rosario Contreras, El Paso Audit (2I90)

FROM: Eddie C. Washington, Tax Policy (2E40)

SUBJECT: Texas Sales Tax Collected When Not Permitted in Texas and Remitted to
State of ** (STATE)

** (TP) is a retailer of monitoring and surveillance systems, and
is currently under audit for period of August 1, 1995, through January 31,
1998. TP is located in **, Taxpayer Number **.

TP became permitted for Texas sales tax on 08/01/95. Before then, TP had been
selling to Texas customers and collecting Texas sales tax on the sales, but
remitting the sales tax to the State of STATE. TP is in agreement that the tax
is due, but feels that it is not obligated to pay the tax collected prior to
08/01/95 to the State of Texas, because none of the tax was kept by the company
and they remitted it "in good faith" to the State of STATE.

Attached is a letter which TP sent your office in which Mr. **,
Vice President, Finance, refers to Rule 3.340 regarding multistate tax credits.

It seems to you that Rule 3.340 was created mainly to avoid double taxation.
Please note that double taxation is not the issue in this instance because TP
only taxed the transaction once.

What is the State's position involving all matters discussed?

Answer: Texas Tax Code Section 111.016(a) states: "Any person who receives or
collects a tax or any money represented to be a tax from another person holds
the amount so collected in trust for the benefit of the state and is liable to
the state for the full amount collected."

When TP "obtained" customers from **, it assumed the responsibility
of providing security services [see Texas Tax Code Sections 151.0075 and
151.0101(a)(14) and Rule 3.333 concerning security services]. This is not
merely leases of equipment as TP contends. The equipment was already in place
in Texas with monitoring being performed. TP's argument that the "leases" were
accepted in STATE is immaterial. The Texas sales tax collected is owed to
Texas.

This is not a case of double taxation. Under Rule 3.340 concerning multi-state
tax credit, credit for sales tax paid to another state is not allowed as a
credit against sales tax owed to Texas.

TP has not shown that STATE legally imposed sales or use tax on security
services performed in Texas. TP erroneously paid the Texas sales and use taxes
to STATE. TP is liable for the full amount of sales tax collected from
security service customers in Texas, including those receipts for services
provided before August 1, 1995. TP should seek a refund of the taxes
improperly paid to STATE.

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