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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Here Come the Millennial Auditors

High Sales Tax Auditor Turnover May Mean Over Assessed Sales Tax Audits

I bet a lot of you would like to know why you are getting audited by young, inexperienced and sometimes aggressive Texas Comptroller Sales Tax Auditors. To do that I must make sure you understand WHO ARE the MILLENNIALS (see below).

Baby Boomers (born 1940 – 1960, approximate period)
Generation X (born 1960 – 1980, approximate period)
Millennials (born 1980 – 2000, approximate period)

Millennial Texas Comptroller Auditors

Wikipedia defines Millennials with college degrees as those folks who DO NOT STAY at any job for more than 2 or 3 years and then move to the next job. This cycle usually continues for an average of 3 jobs before they finally settle down for the long haul. If the Texas Comptroller continues to hire young new college graduates then it is a given that most of them will quit in 2 to 3 years and move on to their 2nd job or 3rd job.

Because of the above probability you have a good chance of being audited by one of these young, inexperienced and possibly aggressive auditors. And that is bad news since auditors from the past (hired from 1980 to 2000) usually stayed around much longer, were much more experienced and were in general less aggressive. It is also likely that a 1 to 3 year old Texas Comptroller auditor will not have a firm grasp of proper auditing and estimation techniques and will certainly not know taxability as well as seasoned auditors (i.e., what is taxable and what is not).

Are Auditors Ranked on How Much Tax is Assessed?

It is a fact that the agency continues to provide most auditors with a periodic printout of HOW MUCH tax they are assessing along with other statistics such as ‘tax assessed per hour’ on tax due audits. It is inevitable that many auditors will then believe that they are being reviewed and possibly promoted based on TAX ASSESSMENT factors.

No More Tax Policy Letters

Let me add one more depressing thought. Since 2012 the Texas Comptroller has ceased to issue what are called Tax Policy Letters. These are considered by any serious Texas Sales Tax student to be the most important source of sales tax authority (trumping the statutes, tax rules and hearings). And why has the Texas Comptroller stopped issuing these critical pronouncements. It is easy. Most of the senior Tax Policy Experts have left the agency (i.e., quit, retired, died). I have written another detailed blog on this subject. It should be noted that Texas Tax Group has four former Texas Comptroller Tax Policy Experts on staff.

The takeaway here is to watch out. Take your audit and auditor seriously. If you decide to hire an outside consulting firm then you must also do your homework. Texas Tax Group is committed to a singular activity – defending and representing you with your Texas Comptroller Tax Audit.

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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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Sexually Oriented Business Fee (aka the Pole Tax)

If the Comptroller issued you an estimate for this fee, then it is probably wrong. Defend yourself against it now. 

Most, if not all, of these SOB fee estimated assessments are wrong. Very wrong. Consultants at Texas Tax Group (ex-Texas Comptroller auditors) have carefully reviewed the Texas Comptroller’s SOB fee estimation method on SOBF client assessments and found many errors.  These audit methodology errors can easily DOUBLE what the business actually owes in SOB fee.  Texas Tax Group can help you defend yourself against these harsh and significantly over stated assessments. (more…)

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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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Sales Tax Issues for Upstream Oil and Gas Operators: Smell that? That’s the smell of money!

On any windy day in the Permian Basin, Eagle Ford Shale or the Barnet shale areas, the unmistakable smell of oil and gas is clearly evident in the air.  To oil and gas producers that is the smell of money.  However, it can also signal a possible leak on a flow line, gathering line, tank battery or other lease site equipment.  When money is flowing in hand over fist, it is easy to overlook the expense side of oil production, the development of a lease, building roads, building a pad, drilling the well, casing the well and completing the well site with flow lines, processing equipment and storage tanks for produced water and oil. However, this equipment on the lease site is subject to exposure to the elements along with exposure to the corrosive nature of the produced water, oil and gas, thus requiring ongoing maintenance and detection of leaks in the wellbore, casing, flow lines, etc. (more…)

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Update to Glenn Hegar, et al v CheckFree Services Corp (RULE §3.330 – Data Processing Services)

The Texas Attorney General’s office did not appeal the decision reached by the 14th Court of Appeals in Glenn Hegar, et al v CheckFree Services Corp, therefore the decision becomes final and we now await to see how the Comptroller’s office will apply the decision to similar data processing cases pending in district court and where protective claims were filed pending the outcome of CheckFree Services. (more…)

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State to challenge Decision in Glenn Hegar, et al v CheckFree Services Corp

The Texas Attorney General’s office on July 20, 2016 filed its Reply Brief in Glenn Hegar, et al v CheckFree Services Corp before the 14th Court of Appeals. (more…)

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Texas Supreme Court to Hear Case on Exemption for Downhole Equipment

The Texas Supreme Court has agreed to review the appellate court decision in Southwest Royalties v. Glenn HegarComptroller of Public Accounts. The case addresses the taxability of oil and gas production equipment used below ground by upstream petroleum companies, primarily big dollar items such as casing and tubing. Southwest Royalties is arguing that the below-ground equipment used in oil and natural gas production qualifies as processing equipment under Texas Tax Code Sec. 151.318, and Comptroller Rule 3.300 – Manufacturing; Custom Manufacturing; Fabricating; Processing. (more…)

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Sales Tax and the Upstream Petroleum Industry

The upstream sector of the Petroleum industry involves companies that search for potential underground crude oil and natural gas fields, drill exploratory wells, and subsequently drill and operate the wells that recover and bring the crude oil and/or raw natural gas to the surface. Sales taxes can be a significant cost for the companies exploring, drilling and operating successful oil and gas wells. (more…)

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Sales Tax and Midstream Oil and Gas Companies

Companies involved in the midstream movement of oil and gas from the well sites to the processing or downstream refineries generally utilize pipelines, tanker trucks, barges, rail or oil tankers.

In Texas oil and gas is primarily moved by pipeline. Texas has over 425,000 miles of pipelines within its borders that represent about 1/6 of the total pipeline structure in the United States. The Pipeline safety department of the Texas Railroad Commission is charged with the responsibility of enforcing compliance with federal and state laws and regulation by the more than 1,485 pipeline operators in Texas of intrastate gathering, transmission, distribution and master-metered systems. (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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