SECTION 3.354. Debt Collection Services

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Claim--Without limitation, any alleged right, entitlement, or demand, whether for money or property, arising out of or concerning any actual or alleged obligation, promise or indebtedness, howsoever arising, whether in law or in equity, in contract or in tort, whether secured or unsecured, actual or contingent, and whether liquidated or unliquidated.

(2) Contingent fee--An arrangement whereby a debt collector agrees, by contract or otherwise, to accept as consideration for debt collection services a percentage of the amount actually collected, whether inclusive or exclusive of actual expenses incurred in performing such services.

(3) Debt--Any obligation to pay a sum certain in money or other consideration.

(4) Debt collection service--Any activity performed for consideration, to collect or adjust a delinquent debt, to collect or adjust a claim, or to repossess property subject to a claim, including any activity performed in furtherance of the satisfaction or compromise of a debt or claim.

(5) Debt collector--Any person performing debt collection services.

(6) Drawer--The payor who owns the account on which a check is drawn.

(b) Responsibilities of debt collectors.

(1) Tax is due and must be collected on the total charge for debt collection activities when:

(A) the last known address of the debtor in the creditor's records at the time the account is placed for collection is in Texas; and

(B) the creditor for whom the debt is collected is located in Texas or is engaged in business in Texas (as provided in Tax Code, §151.107) at the time the debt is referred for collection.

(2) Collection of current credit and real estate accounts, including mortgage payments and rental payments, is not subject to tax under this rule. A current credit or real estate transaction is one that has not exceeded the later of the due date of the payment or the date on which a penalty or other contractual sanction attaches. Late charges for payment of mortgage payments are considered additional interest and not debt collection charges. Mortgage reinstatement fees following forfeiture of a mortgage are not considered debt collection charges.

(3) The drawer of a dishonored check is responsible for paying the cost incurred to process a dishonored check including the sales tax due on the debt collection service.

(4) Debt collectors must obtain a tax permit and collect tax on the entire sales price of their service, or accept a properly completed exemption certificate in lieu of collecting tax. See §3.287 of this title (relating to Exemption Certificates) and §3.322 of this title (relating to Exempt Organizations).

(5) If a debt collector charges a contingent fee, the sales price is the amount actually withheld by or remitted to the debt collector for the performance of such services, including any amounts withheld or remitted for the purchase of taxable items used or consumed in performing the service.

(c) Resale certificates.

(1) A debt collector may issue a resale certificate in lieu of tax to a supplier of tangible personal property only if care, custody, and control of the property is transferred to the client. For example, a debt collector purchases magnetic tape to transfer the results of debt collection services to customers. The tape is transferred to the customer, and the customer owns and uses the tape to review the results of the service. Taxpayer may purchase the tape tax free by issuing a resale certificate. Tax is due on the total amount charged the customer, including amounts for the tape and for the services.

(2) A resale certificate may be issued for a service if the buyer intends to transfer the service as an integral part of taxable services. A service will be considered an integral part of a taxable service if the service purchased is essential to the performance of the taxable service and without which the taxable service could not be rendered.

(3) A resale certificate may be issued for a taxable service if the buyer intends to incorporate the service into tangible personal property which will be resold. If the entire service is not incorporated into the tangible personal property, it will be presumed the service is subject to tax and the service will only be exempt to the extent the buyer can establish the portion of the service actually incorporated into the tangible personal property. If the buyer does not intend to incorporate the entire service into the tangible personal property, no resale certificate may be issued, but credit may be claimed at the time of sale of the tangible personal property to the extent the service was actually incorporated into the tangible personal property.

(d) Nontaxable services.

(1) Activities undertaken by a debt collector to determine whether a creditor has a claim are not taxable if the debt collector determines not to attempt to collect or adjust the claim.

(2) Collection of court-ordered child support or medical child support is not taxable.

(3) Services that are provided by a person who acts as a trustee in connection with the foreclosure sale of real property under a lien that is created by a mortgage, deed of trust, or security instrument are not taxable.

(e) Unrelated services.

(1) A service will be considered as unrelated if:

(A) it is not a debt collection service nor a service taxed under other provisions of Tax Code, Chapter 151;

(B) it is of a type that is commonly provided on a stand-alone basis; and

(C) the performance of the unrelated service is distinct and identifiable. Examples of an unrelated service that may be excluded from the tax base include charges for consultation, training, or collection of current mortgage payments.

(2) If a combination of nontaxable unrelated services and taxable debt collection services is performed under the same contract, and the debt collection portion exceeds 5.0% of the overall charge, then the parties to the contract must separately identify taxable and nontaxable services along with the charges that apply to each, or else the entire contract is presumed to be for debt collection and is taxable. If the charge for the taxable portion of the services is not separately stated at the time of the transaction, the service provider or the purchaser may later establish for the comptroller, through the debt collector's books or other documentary evidence, the percentage of the total charge that relates to nontaxable unrelated services. Both parties must retain documentation that clearly defines the work that is performed to show that, had the nontaxable service and debt collection service been done independently, the charge for each would reasonably approximate the amount allocated. The comptroller may recalculate the charges if the allocation appears unreasonable and either party may be held responsible for the additional tax, penalty, and interest on the taxable services.

(3) Charges for services or expenses directly related to and incurred while providing the taxable service are taxable and may not be separated for the purpose of excluding these charges from the tax base. Examples would be charges for meals, telephone calls, hotel rooms, or airplane tickets.

(f) Service benefit location. If both the creditor and the debtor are located in Texas, Texas tax is due.

(g) Service benefit location--multistate customer.

(1) To the extent a debt collection service is used to benefit a separate, identifiable segment of a creditor's business (other than general administration or operation of the business) the service is presumed to be used at the location where that part of the creditor's business is conducted.

(2) To the extent the use of the service cannot be assigned to an identifiable segment of a creditor's business, the service is presumed to be used to support the administration or operation of the creditor's business generally. The service is presumed to be used at the creditor's principal place of business. The principal place of business means the place from which the trade or business is directed or managed.

(3) If a multistate customer claims that part of the debt collection service benefits the customer's business at locations both within and outside the state, the customer must provide the debt collection service provider with an exemption certificate in lieu of tax. It will then be the customer's responsibility to report the tax to this office for that portion of service that benefits Texas locations. The service will not be taxable to the extent the customer can establish benefit outside Texas. A multistate creditor may use any reasonable method for allocation which is supported by business records.

(4) A debt collector who accepts a certificate in good faith is relieved of responsibility for collecting and remitting tax on transactions to which the certificate relates.

(h) Local taxes.

(1) Local sales tax. Local sales taxes (city, county, transit authority, and special purpose district) apply to debt collection services in the same way they apply to tangible personal property. Generally, service providers must collect local sales taxes if their place of business is within a local taxing jurisdiction, even if the service is actually provided at a location outside that jurisdiction.

(A) Transit sales taxes do not apply to services provided outside the boundaries of the transit area.

(B) In the case of multiple locations, if an order for service is placed at one location but the service is provided at another location, the place of business from which the service is provided will determine to which local taxing entity the tax is allocated.

(2) Local use tax.

(A) If the service provider's place of business is outside a local taxing jurisdiction but service is provided to a customer within a local taxing jurisdiction, local use taxes apply and the service provider is responsible for collecting the local use tax if the service provider has representation in the local jurisdiction.

(B) If a customer of a service provider located outside a local taxing jurisdiction claims that part of the debt collection service benefits the customer's business in more than one local taxing jurisdiction, the customer must provide the service provider with an exemption certificate in lieu of use tax. (This claim may be asserted and the exemption certificate issued only in situations where use tax is due and does not apply when local sales tax is applicable.) The local use tax for each local taxing jurisdiction to which the exemption certificate applies must be reported, allocated, and paid by the customer. A debt collector who accepts in good faith an exemption certificate claiming benefit in more than one local taxing jurisdiction is relieved of responsibility for collecting and remitting local use tax on transactions to which the certificate relates.

(3) References. For more information on the collection and allocation of local sales and use taxes, see §3.374 of this title (relating to Collection and Allocation of the City Sales Tax), §3.375 of this title (relating to City Use Tax), §3.424 of this title (relating to Collection and Allocation of Transit Sales Tax), and §3.425 of this title (relating to Transit Use Tax).

(i) A multistate creditor purchasing debt collection services for the benefit of both in-state and out-of-state locations is responsible for issuing an exemption certificate and for reporting and paying local tax as provided by subsection (g) of this section.

(j) Use tax. If a debt collector is not engaged in business in Texas or in a specific local taxing jurisdiction and is not required to collect Texas tax, it is the Texas creditor's responsibility to report and pay the state and local use tax to this office.

Source Note: The provisions of this §3.354 adopted to be effective March 24, 1988, 13 TexReg 1222; amended to be effective November 13, 1989, 14 TexReg 5787; amended to be effective December 11, 1992, 17 TexReg 8332; amended to be effective March 23, 1995, 20 TexReg 1749; amended to be effective February 7, 1996, 21 TexReg 601; amended to be effective October 9, 2002, 27 TexReg 9386