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.

Dino Marcaccio, President Former Texas Comptroller State Tax Auditor, 16 Years

Dino Marcaccio, President
Former Texas Comptroller State Tax Auditor, 16 Years

The Comptroller’s office can choose to litigate the pending cases and risk the same result as in CheckFree Services, or may opt to settle the pending cases and amend Rule 3.330 – Data Processing Services to address the findings by the District Court and the 14th Court of Appeals.

Some key findings in the District Court Case that the Appellate Court Decision notes are:

Here, in addition to the numerous findings describing the general nature of CheckFree’s services, the trial court made the following unchallenged finding: “CheckFree has thousands of skilled and/or certified professionals who collaborate in the performance of these professional services centered around bill payment.” The finding is supported by the testimony of Lawson and Kohl regarding the role of the professionals employed by CheckFree:

  • Bill pay service is a professional service requiring accredited or certified professionals across several areas including ACH processing, financial crime investigation, treasury, anti-money laundering, and accounting.
  • CheckFree employs over 3,000 associates and professionals necessary to facilitate the bill pay service.
    These professionals manage the actual bill pay process and make decisions at multiple stages of the bill pay process.
  • These professionals are responsible for critical monitoring and detection of fraud, money laundering, and other financial risks.
  • These professionals are also responsible for compliance with complex government regulations.
  • A team deals with errors and other customer service issues that arise after bill payment occurs.
  • These professionals are not a minor part of the bill pay service delivery; instead, they are the secret sauce of the service.

Because this evidence supports the trial court’s finding, we are bound by it. See Saulsberry, 2015 WL 6692271, at *3 (explaining that we are bound by unchallenged fact finding unless the evidence is legally insufficient to support it).

The Comptroller also has not challenged the following findings by the trial court:

The delivery platform for the bill pay service, the Electronic Commerce System, also called the Genesis System, and other technology, including software and equipment used to facilitate the performance of the bill pay service is not the service that CheckFree sells to the financial institutions. Rather, the technology and equipment are part of the delivery platform for the service, or the inputs that produce the service, but they are not the service.

* * *

Lawson and Kohl explained the distinction between bill pay and data processing: the activities the Comptroller labels as data processing are actually incidental activities facilitating the delivery of bill pay services and are not the actual service.

The functions or activities that are incidental to the bill pay service, such as, invoices, reports, and customer service, are not the service that CheckFree sells to the financial institutions.

These findings are likewise supported by legally sufficient evidence; thus we are bound by them. See id.

Additionally, none of the transactions for which CheckFree was audited and paid taxes fall clearly within the activities enumerated in either the applicable statute or agency rule. In other words, none of the services CheckFree was audited and paid taxes for consist of “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, [or] entering and retrieving information.” 34 Tex. Admin. Code § 3.330(a)(1) (emphasis added). Nor do any of these services consist of “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, . . . [or] other computerized data and information storage or manipulation.” Tex. Tax Code § 151.0035. To the contrary, the trial court’s findings, excerpted above, establish that, to the extent that CheckFree provided any of these services, they were ancillary to the professional bill pay services provided by CheckFree for the bank’s customers-the electronic commerce services that the bank purchased from CheckFree. See Roark Amusement & Vending, 422 S.W.3d at 637-38 (focusing on “economic realities” underlying transaction to determine whether tax was due).

***

In sum, we must strictly construe taxing statutes against the Comptroller and liberally in favor of CheckFree. See Morris, 388 S.W.3d at 313. Under these circumstances, we determine that the trial court’s unchallenged findings support the trial court’s conclusion that CheckFree’s services do not fall within the Comptroller’s definition of data processing services because that definition specifically excludes providers of other professional services who use a computer to facilitate the performance of their services. See 34 Tex. Admin. Code § 3.330(a)(1); Tex. Tax Code § 151.0101(b) (providing the Comptroller with exclusive jurisdiction to interpret what taxable services, including data processing services, means); see also Tex. Tax. Code § 151.0035 (providing examples of “data processing service”).

For the foregoing reasons, we overrule the Comptroller’s sole issue on appeal.

Based on these findings, bill paying services and other similar services are not taxable data processing services to the extent that they require accredited or certified professionals to:

  • prevent or detect fraud areas like money laundering
  • perform financial crime investigation,
  • treasury, anti-money laundering,
  • accounting,
  • including ACH processing
  • compliance with complex government regulations
  • manage the actual bill pay process and make decisions at multiple stages of the bill pay process.

The application of the findings of the Checkfree case may apply to other services that the Comptroller currently taxes, if those services require accredited or certified professionals to perform those services. Following the courts directive, the essence or object of a service determines whether the service is taxable and not whether a computer is used to facilitate the service.

Companies that are providing services necessitating the use of accredited or certified professionals and companies that are purchasing these services, that are under audit  or believe that they may be charging or paying sales tax in error on these services,  should contact Texas Tax Group for a free consultation to discuss their service, audit or sales tax responsibilities.

14th Court of Appeals Decision in Glenn Hegar, et al v CheckFree Services Corp

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 an electronic commerce system, 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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