Were charges for a customized credit pre-screen service taxable when the firm delivered a magnetic tape listing candidates who met client-specific criteria?
Apply this to your situation
This page answers the general question as of 1988. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
A credit-screening firm and each credit grantor developed client-specific criteria. The firm received a list of possible candidates, prepared an individualized computer program, compared the names with its existing credit database, and created separate rated and rejected lists.
The rated magnetic tape went to the client or a solicitation company; the firm retained the reject tape for quality control.
California treated the tape transfer as incidental to a customized service. The true object was evaluation and special-order extraction of qualifying names, not purchase of magnetic media.
The firm's charges to credit grantors were not taxable. The firm was the consumer of the magnetic tapes and other tangible property used in performing the service, including the delivered rated tape.
The PDF appends a July 26, 1994 editorial note emphasizing that the firm specially extracted information for its client rather than repeatedly selling identical database information. The formal opinion itself is dated April 20, 1988.
What this means for you
Credit bureaus, data providers, and lenders
Client-specific criteria, individualized programming, and customized extraction supported service treatment rather than sale of a standardized data product.
Accountants and tax professionals
Document the database, client criteria, custom programming, rated and rejected outputs, media ownership, solicitation use, repeated-market availability, and property cost.
Common questions
Q: Were pre-screen service charges taxable?
A: No.
Q: Did delivery on magnetic tape make the transaction a sale?
A: No.
Q: Who consumed the magnetic tapes?
A: The screening firm.
Citations and references
- TRW Inc. v. California State Board of Equalization, C455055, Order of Judgment dated February 11, 1988
Source
- Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
- Annotation page: Annotation 515.1252
- Original supporting opinion: 515.1252 PDF
Original ruling text
515.1252
(916) 445-6450
April 20, 1988
REDACTED TEXT
Dear REDACTED TEXT,
This is in reply to your March 1, 1988 letter in which you request an opinion on behalf of REDACTED TEXT, regarding the application of sales tax to REDACTED TEXT charge for its Prescreen Service. As stated in the Declaration of REDACTED TEXT dated December 14, 1987, which accompanied your letter, REDACTED TEXT Prescreen Service generally involves an evaluation of persons who are credit candidates based upon agreed upon credit criteria. The names are evaluated based upon data contained in REDACTED TEXT’s existing data base of credit information. Essentially, REDACTED TEXT uses the following steps in performing its Prescreen Service: “(a) Selection of a demographically based list of possible credit candidates. This list may contain median income for that area and other data. “(b) REDACTED TEXT employees work with the credit grantor (such as a bank) to establish a set of appropriate credit criteria. “(c) A list containing the abbreviated names and addresses of the possible credit candidates is sent to REDACTED TEXT. “(d) REDACTED TEXT after several preliminary steps, including preparation of an individualized computer program, evaluates the names on that list based upon its pre-existing bank of credit information. “(e) REDACTED TEXT prepares a revised list of names which pass the credit grantor’s set of credit criteria. “(f) The new list of qualified credit candidates is then forwarded to another company or, depending upon the type of solicitation, back to the bank (or other credit grantor). That company then prepares the formal solicitation of qualified credit candidates. The actual solicitation is done by mail, telephone, or both.
515.1252
2
April 20, 1988
“The initial group of names received by REDACTED TEXT California office is printed on a magnetic tape. During the Prescreen, that magnetic tape is processed as follows: “(a) The initial magnetic tape (the ‘user tape’) is tested. The list is alphabetized and errors are eliminated. “(b) The alphabetized list is put on a REDACTED TEXT magnetic tape. “(c) Using the REDACTED TEXT magnetic tape, REDACTED TEXT evaluates the names by comparing it with its existing data base. “(d) Two tapes are then made. One is a ‘rated tape’ with the list of all names which pass the credit criteria. The other ‘reject tape’ contains the list of names which did not pass the credit criteria. “(e) The rated tape is then sent to the company which will prepare the actual credit solicitation. The reject tape is retained by REDACTED TEXT for quality control purposes.” On the basis of our review of your letter and of the Order of Judgment dated February 11, 1988 in the case, TRW Inc. v. California State Board of Equalization, C455055, it is our opinion that REDACTED TEXT’s transfer of magnetic tapes as part of its Prescreen Service is incidental to the provisions of a service to the credit grantors. The transfer of magnetic tapes is not the true object of the contract between REDACTED TEXT and the credit grantors. Accordingly, sales tax does not apply to REDACTED TEXT’s charge to the credit grantors for the Prescreen Service. Sales tax applies to the sale to REDACTED TEXT of magnetic tapes and other tangible personal property which REDACTED TEXT consumes in performing the Prescreen Service, including the magnetic tapes which REDACTED TEXT transfers incidental to the service. We hope this answers your question; however, if you need further information, feel free to write again. Very truly yours, Ronald L. Dick Tax Counsel RLD:sr bc: REDACTED TEXT District Administrator
515.1252
3
April 20, 1988
Pre-Screen Credit Service. A firm evaluates persons for credit for clients by using data in an existing data base. The following steps are involved: (1) Selection of a demographically based list of possible credit candidates. (2) The firm and the client develop a set of appropriate credit criteria. (3) A list of potential candidates is sent to the firm by the client. (4) The firm prepares an individualized computer program and evaluates the names based upon the credit criteria developed in (2) above. (5) A list of those who meet the criteria is developed. (6) The list is sent to the client or its designee for use in solicitation. In developing a list, two magnetic tapes are prepared. One with those persons who meet the credit criteria and one which contains the names of the persons who did not meet the credit criteria. The transfer of the magnetic tape to the client is incidental to the service performed by the firm. Tax applies to the sale of the tape to the firm and the charge to the client is a nontaxable service. INSERT (A) 4/20/88 (A) This is because the firm extracted information from an existing database to the special order of its client and did not merely repeatedly sell data base information. Questionable: if we can’t add (A) to this anno. Because its not part of the backup letter, it won’t be understandable why some database transactions are sales and some are services. John Abbott 7/26/94
What does the law say today, for your facts?
This ruling is from 1988. Ezel checks current California tax law against your situation and cites the authority it relies on.
Opens in Ezel Pro.
- Checks the law as it stands today, not only this page
- Cites every source it relies on, so you can verify it
- Chat, drafting and research in one workspace