Texas Administrative Code Rule 3.330 Data Processing Services – The Most Vague Sales Tax Law in Texas

RE: Private Letter Ruling #142730026

The question should not be ‘What IS data processing?’ but instead, ‘What ISN’T data processing?’.

On January 3, 2017 the Texas Comptroller issued Private Letter Ruling #142730026. This Private Letter Ruling (PLR) was issued to an unidentified company (i.e., lender) which underwrote (i.e., loaned money on) collateralized real estate loans. The lender wanted to know if the purchase of a specific service from one of their vendors was taxable under Tax Rule 3.330 – Data Processing.

Specifically, the lender paid a vendor to track or monitor the insurance status of the collateralized real property. That is, the lender needed to know that the borrower was maintaining hazard and/or flood insurance on the real property they were loaning money on. In this PLR the lender is asking the Texas Comptroller to issue a decision on whether this particular service is subject to Tax Rule 3.330 – Data Processing.

Both parties seemed to agree that there were certain aspects of data processing involved in the tracking / monitoring service in question. The PLR provided no specific details as to how these services were provided except to say that the vendor in question provided insurance status information via some sort of automated system which apparently could be accessed online. I am assuming it was the automated online access aspect of the service which made the lender uneasy about whether sales tax was due under Tax Rule 3.330 – Data Processing.

Footnote: As required the lender had to submit actual vendor invoices / contracts and a complete description of how the automated information could be accessed online. In addition, the lender (or its representative) had to conduct and provide their own extensive research into existing applicable Texas sales tax law / authority (i.e., Statutes, Tax Rules, Tax Policy Letters and Administrative Hearing Decisions) to prove to the agency that this particular service had not been addressed before. This is actually a difficult requirement for submitting a PLR request. The agency would then decide if they would answer the tax question or just refer the business to some existing authority. For more information on how to submit a request for a PLR see Section 3.1 – Private Letter Rulings.

Bottom line, Private Letter Ruling #142730026 stated that these tracking / monitoring services were NOT taxable data processing services. Specifically, the agency believed this service was not a taxable data processing service because:

(1) Professional knowledge was involved and
(2) Any data processing activities were ancillary and incidental to the ‘professional service’ provided by the vendor.

Does online automated access cause any service to become taxable subject to tax rule 3.330 – Data Processing?

There are many services which involve some sort of automated online access. But this does not mean those services are subject to sales tax per Tax Rule 3.330 – Data Processing. The questions to ask are:

  1. Is the service provided via some sort of automated online access?
  2. Does the provision of the service require specifically trained and educated professionals?
  3. Are data processing activities, if any, ancillary and incidental to this service?

If you can answer YES to all three of these questions, then, in the opinion of Private Letter Ruling #142730026, your service SHOULD probably not be subject to sales tax per Tax Rule 3.330 – Data Processing. But ‘reader beware’.

The Texas Comptroller has recently issued a general ‘SYSTEM DISCLAIMER’ for every Private Letter Ruling which states in part:

“The Comptroller of Public Accounts maintains the STAR system as a public service. The documents which provide the Comptroller’s interpretation of the tax law are accurate for the time periods and facts presented in the documents. Letters on STAR (State Tax Automated Research) system can be the basis of a detrimental reliance claim only of the taxpayer to whom the letter was directly issued….. There is no assurance that a document on STAR represents a current policy, even if it has not been marked as superseded. If there is a conflict between the law and the information found on STAR, any decisions will be based on the law.”

The bottom line is that Tax Rule 3.330 – Data Processing is a dangerous and hard to understand tax law. And we at Texas Tax Group are here to help you. Thank you.

 

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Buying an Existing Business and Successor Liability

If you buy the assets of a Texas business, are you then responsible for that company’s existing state tax liability?

The answer is often YES. It is called Successor Liability (Tax Code Section 111.020 and 111.024) and it is applied by the Texas Comptroller to the purchasers of many businesses in this state. Many people don’t know that just buying the assets of a company can cause the prior tax liability to be assigned to the purchaser. Even if you didn’t buy the assets, the Comptroller can still attempt to assign the debt if a number of other criteria are met. The bottom line is that this is a very gray area of Texas taxation and only an experienced firm can help.

The Texas Comptroller’s Publication titled Buying an Existing Business (Form 98-117) begins with: “Before you buy an existing business, find out if the owner owes any Texas taxes”.

Worst Case Scenario: Erroneous Successor Liability Assigned

It is also possible that the Comptroller’s Office will ERRONEOUSLY assign Successor Liability even if little or no credible supporting evidence is found. Once these tax bills are issued, the person or business must quickly file for an Administrative Hearing and then prove they don’t owe the debt.

Texas Tax Group has represented clients who have received these Successor Liability tax bills and simply DID NOT OWE THEM. In one case the Client simply occupied the same space and continued to run the same type of business. This client didn’t even know the prior client much less purchase their assets. But they received a Successor Liability tax bill based on Tax Code Section 111.020 and 111.024 and the Comptroller then demanded payment within 30 days. We were able to eventually cancel the tax assessment after providing a significant amount of documentation.

These are truly difficult cases since the Comptroller can simply send the Successor Liability tax bill to anybody and then make them prove they are not responsible. The Comptroller can issue these tax bills with as a very little burden to prove these assessments, but the business owner must I can truly say that the Comptroller is often careless when issuing these Successor Liability assessments.

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Revenue Suppression Software (aka Zapper Programs)

Texas Comptroller Auditors Are On The Lookout!

If you run a business that takes in a lot of cash (convenience store, restaurant, nightclub, etc.), you might be tempted to buy one of these Zapper programs. Bad idea. Although these programs do a pretty good job of excluding the cash sales from your POS cash register system, an alert Federal or State Auditor can often figure out the scam. (more…)

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Hotel Occupancy Tax Lawsuits Argue for Collection by Online Travel Companies

And What Does It Potentially Mean for Sales Tax Issues Involving Out-of-State Retailers

For over 10 years, online travel companies (OTCs) hotel occupancy tax cases have been initiated by a large number of individual cities, municipalities and states all over the country.  At this time over 100 lawsuits have been initiated.  The central argument in most cases is whether these OTCs should be required to remit the hotel tax on their markup / profit.  For example, assume the hotel and the OTC agree to a contract whereby the hotel will receive $70/night and the OTC charges $100 for a particular room.  Assuming the hotel tax rate is 10% the OTC will remit $80 to the hotel ($70 room charge plus the $10 hotel tax) and keep the remaining $20 (OTC markup). (more…)

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Has the Texas Comptroller Stopped Issuing Tax Policy Letters?

Due to a significant loss of Tax Policy Experts, the Texas Comptroller’s Office has not issued a Tax Policy Letter (TPL) since late 2012. Folks, that is over 4 years!

You might say, ‘Who cares and what the heck is a Tax Policy Letter anyway?’. Well, let me tell you. (more…)

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If You Provide a Service Using the Internet Then Beware

Tax Rule 3.330  – Data Processing

There is, without a doubt, one taxable service Tax Rule that stands out far above ALL others as being vague and undefined and which can be applied, right or wrong, at the discretion of an inexperienced rookie Texas Comptroller auditor. Think about it. Just about any company’s services which are provided by the use of the internet can be subject to sales tax for a four year look-back audit period based on this poorly drafted tax rule.    (more…)

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Are You Personally Liable for Fraudulent Tax Evasion?

Section 111.0611: Personal Liability for Fraudulent Tax Evasion

I prefer to call it the ‘Personal Officer Fraud’ Tax Code Section. Either way, you have probably never heard of this tax law unless you or your client has received some type Texas Comptroller Notification usually based on a Sales Tax or Liquor Tax audit assessment. These assessments are absolutely deadly and very often result in liens on officers’ homes and if not paid, a personal lawsuit by the Texas Attorney General’s Office on behalf of the Texas Comptroller’s Office. I personally believe that over 50% of these assessments have little to no legal basis and often can be challenged and BEAT. (more…)

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The Texas Comptroller Managed Audit Program: A Win-Win Scenario

The Managed Audit Program (MAP) was initiated by the Texas Comptroller’s Office in 1999 in order to allow qualifying businesses to conduct quasi self-audits with minimal input from the Texas Comptroller’s Office. The benefit to the Comptroller’s Office and the State are significant cost savings because less resources are being expended. The numerous business benefits are listed below. (more…)

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Successor Liabilities – Audit Assessments Can Be Transferred

What is a Successor Liability?

Since 2010 the Texas Comptroller’s Office has nearly tripled the annual number of successor liability assessments based on the three tax code sections listed below. Most of these assessments involve either a Sales Tax audit or a Mixed Beverage Gross Receipts Tax audit, which are transferred to a successor entity or individual using one or more of the following three tax code sections: (more…)

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Buyer Beware: State Tax Consultants Who Charge a Flat Fee

Texas Does NOT Regulate State Tax Consulting Firms

You’ve heard it before. If it sounds too good to be true, it probably is. Some Texas state tax consultants promise to take care of your entire audit (including both the field audit as well as the highly complex and time consuming Administrative Hearings process) for a single flat fee. DON’T BELIEVE IT! (more…)

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Requesting an Independent Audit Review Conference (IARC) to Stop an Incorrect Texas Comptroller State Tax Audit from being Billed

Imagine this uncomfortable scenario. Your business is under audit by the Texas Comptroller’s Office. It is the last day of the Field Audit and you are meeting with the auditor at the Exit Conference. The auditor then hands you a tax bill for an amount that you disagree with. What do you do now? What rights do you have? (more…)

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Occasional Sale Exemption (Sales of Entire Operating Assets) – Tax Rule 3.316 (d)

Imagine that you purchased all the heavy equipment assets of a Texas contractor for $2 million dollars. Then a year later the Texas Comptroller’s Office randomly selects your business for audit.

Next, imagine that the Sales Tax Auditor decided to tax the entire $2 million dollar purchase because he/she believed the entire operating assets were not purchased in a single transaction as required by Tax Rule 3.316 (d) resulting in a Texas Sales & Use Tax bill for almost $200,000 (tax, penalty, interest). (more…)

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Tandem Skydiving – Is It Subject to Texas Sales Tax?

Not according to the U.S. (DOT) Department of Transportation

Welcome to one of the most debated state sales tax ‘amusement service’ issues in the country. In at least four states, excluding Texas, business owners are fighting and winning the battle over whether they have to charge sales tax on their tandem skydiving services. It should be noted that many ‘Sales Tax’ states have a tax on amusement services which usually includes ‘tandem skydiving services’. Tandem skydiving occurs when a student skydiver is harnessed to an instructor who then guides the student through the entire jump process (i.e., ground training, jump, free fall, chute time and landing). (more…)

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Contractors and Texas Sales and Use Tax

I often talk to contractors who have just received their Sales Tax Audit Notices. The majority of the time they have concerns.

The business owner may be performing residential jobs, new or existing commercial work or both. The types of contracts (lump-sum vs. separated) can also dictate when sales tax is either charged to the customer or paid by the contractor. In the case of exempt clients the contractors need to know about exemption documentation and whether to separate the contract charges (i.e., materials and labor). (more…)

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Stop Senate Bill 1808

Hello current and former Texas Tax Group clients and friends.

On Friday March 13, 2015, Texas Senator Paul Bettencourt filed Senate Bill 1808. If passed, this bill would allow the Texas Comptroller to conceal the names of businesses under audit from the general public effective September 1, 2015. (more…)

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