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.

Gilbert Zamora - Former Texas Comptroller Auditor & Tax Policy Expert, 31 Years

Gilbert Zamora – Former Texas Comptroller Auditor & Tax Policy Expert, 31 Years

The 14th Court of Appeals, in April of this year, upheld the trial court’s decision that held that that CheckFree Services did not provide data processing services that were taxable under the Texas sales tax law.  The court found that based on the trials courts factual findings, the CheckFree “provides professional services – facilitated by the use of computers and electronic commerce systems, requiring the oversight and management of thousands of certified specialist to achieve the goal of paying the bills of the bank’s customers.”   The court noted that any services that the taxpayer provided that fit the statutory definition of data processing services were incidental to the professional services provided.   Thus the “essence of the transaction” was the purchase of professional services and not taxable data processing services.

In its Reply Brief, the State argues that the Appeals Court, and Lower Court decision, ignore the contracts at issue in its analysis of the “essence of the transaction” on the basis that the CheckFree services were sold the Banks, not to the Banks’ account holders.  The state argues that the “essence of the transaction” must be viewed from the perspective of the Banks, not the end users as evidenced by the contracts between CheckFree and the Banks.

The State also argues that CheckFree wrongly contended that the “essence of the transaction” test require this court to ignore how the service is performed.  Ignoring how a service is performed would permit all providers of taxable services to evade the sales tax on these services.

The State points  out that unlike Direct Resources for Print, where the Direct Resources could provide its services to it customers in ways that did not require a computer, Checkfree can only provide it  services that the Banks contracted for with Checkfree’s electronic payment system.

The basic premise of the State’s argument is that the Tax Code does not ignore how a service is performed and neither should the court.

 

Background

Checkfree performed online bill pay services on behalf of banks, who provided the online bill pay services to their customers.  The banks’ customers used the service to make payments from their bank accounts to other parties.  The banks’ customers accessed the online bill pay service through an online electronic delivery platform operated by the Checkfree that customers could access through each bank’s online banking system.  Customers initiated payments online through the electronic delivery platform that CheckFree operated.  CheckFree then made the payments for the customers, either through electronic funds transfer from the customer’s account, or by sending a paper check drawn on the customer’s account to the payee.  CheckFree provided support for the electronic delivery platform’s hardware and software, monitored the transactions to prevent fraud and ensure compliance with banking regulations and also provided banks extensive reports on their customers’ bill pay transactions.

Texas imposes sales tax on certain services, one of which is “data processing services.”  The Texas Tax Code defines data processing services to include “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production . . . and other computerized data and information storage or manipulation.”  A Texas Comptroller rule states that data processing services do not include “the use of a computer by a provider of other services when the computer is used to facilitate the performance of the service or the application of the physical sciences, accounting principles, and tax laws . . .” Generally, the Texas Comptroller has taken the position that a service that requires the application of specialized professional knowledge is not a data processing service.

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