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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