Is a computer vendor's 'price update service' — reformatting a manufacturer's electronic price/part-number data and selling it to dealers on tape or diskette — a taxable data processing service, an information service, or exempt, and does the 20% partial exemption apply?

Plain-English summary

A computer-systems vendor for outdoor power equipment and agricultural dealers asked the Comptroller how to tax its "price update service" — a service where it collects manufacturers' updated price/part-number data electronically, reformats it to load automatically into its own software, and sells the update on tape or diskette to its authorized dealer customers.

The Comptroller found the service has features of both data processing (manipulating data supplied by manufacturers into a new format) and information services (compiling and selling data), but concluded the customer's real purchase is an information service: "Your customers are not paying for you to manipulate the manufacturer's data to fit software that you sell. They are buying up-to-date price information." Practically, though, that classification call didn't change the outcome — the Legislature's exemption effective October 1, 1999 gives both data processing and information services a 20% exemption on the charge, so "regardless of whether you bill the update service as data processing or information services," the customer gets the same 20% break.

Separately, the letter confirms a training charge is not taxable at all when separately stated: charging customers for training them on how to use the vendor's software, billed as its own line item, falls outside the taxable service categories entirely under 34 TAC Rule 3.308(b)(3).

What this means for you

Software and computer-systems vendors

If you sell a service that reformats third-party data (like a manufacturer's price list) for your customers to load into your software, expect it to be treated as a taxable information service (or arguably data processing) — but either way, only 80% of the charge is taxable due to the 20% exemption. Whether you call it "data processing" or "information services" on your invoice doesn't matter for the tax result.

Vendors bundling training with software sales

Break out training charges as a separately stated line item on your invoice — a standalone, separately stated charge for training customers on your software is entirely nontaxable, distinct from the taxable installation, technical support, and revision charges around it.

Accountants and tax professionals

This is a useful illustration of the "essence of the transaction" question applied to a hybrid data-processing/information-service fact pattern: the Comptroller didn't need to resolve the classification precisely because the post-1999 20% partial exemption applies identically to both categories. Where that convergence doesn't exist, the classification would matter more.

Common questions

Q: Is reformatting a manufacturer's price data and reselling it to dealers a taxable service in Texas?
A: Yes, but only 80% of the charge is taxable — the Comptroller treats it as an information service (arguably also data processing), and both categories get a 20% exemption on the charge effective October 1, 1999.

Q: Does it matter whether I bill this kind of service as "data processing" or "information services"?
A: Not for the tax result in this letter — the 20% partial exemption for the charge applies either way.

Q: Can I charge for training separately without collecting tax on it?
A: Yes. A separately stated charge for training customers on your software is not taxable, under 34 TAC Rule 3.308(b)(3).

Q: Can I rely on this letter for my own business?
A: No. This opinion is based on the facts the taxpayer presented; other facts, though similar, may yield a different result, and letters on STAR can be the basis of detrimental reliance only for the original taxpayer.

Citations and references

Rules:

• 34 TAC Rule 3.308(b)(3) (separately stated software training charges are not taxable)

Other: the letter references a Legislature-enacted 20% partial exemption for data processing and information services charges, effective October 1, 1999, but does not cite a specific Tax Code section number for it.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005309L

Original ruling text

May 15, 2000

<**>

Dear **:

Thank you for your e-mail inquiry. Your fact situation is restated below
followed by my response.

Recently, one of our customers faxed a page from a tax update flyer that
notified taxpayers of a partial sales tax exemption for data processing
services. The customer is, of course, expecting a refund of sales tax; so, in
order to determine if a refund is appropriate, I phoned your office for advice.

Based upon the information I gave to your representative, he indicated that the
only service we provide that is subject to the exemption is our "price update
service". However, after discussing the matter with our programming manager,
PERSON A, he called your office to ask a few more questions. During that
conversation, PERSON A received information that differed from what I had
received earlier. As a result, we ask that you please use this letter as a
request for written confirmation of whether the exemption applies to our
business practices.

COMPANY B is a turnkey vendor that specializes in computer business systems
designed for use by Outdoor Power Equipment and Agricultural dealers and
distributors. When we sell a computer system, it is shipped complete to the
dealership/distributorship; where a representative of our company performs
minimal installation, and training on the use of the software - pos, order
entry, purchasing, shop management, accounts receivable, etc. Following the
installation, we provide technical support of the software over the phone,
monthly software revisions, sales of supplies and additional software/hardware.
There seems to be no question that these items, as well as any related labor
and freight charges, are subject to the full sales tax rate. However, the
"price update service" is questionable.

In our industry, a dealer may represent any number of manufacturers with parts
and whole goods - Honda, Toro, John Deere, Briggs & Stratton, Kohler, etc. It
is not unusual for the dealer/distributor to carry many thousands of part
numbers. Additionally, the manufacturers are forever changing prices and part
numbers, as well as adding and deleting items from their lines. Normally the
dealer/distributor will receive an updated price book from the manufacturer
that reflects such changes. If the dealer has a computer system, the
information must be entered manually, from the book.

However, COMPANY B entered into agreements with the manufacturers to receive
the information in some type of electronic format. We then process the
pricing/part number information into a format that can be read automatically by
our software. Then, if our customer is an authorized dealer of a particular
line, he/she is permitted to purchase a copy of the updated information. Such
updates are sent to the customer on tape or diskette, so they can be loaded
directly into the computer system; and with a few typed commands, the
pricing/part numbers will be updated automatically.

The person I spoke with believed that because we were "processing information",
i.e. the tape received from the manufacturer, that the exemption applied. The
person PERSON A spoke with viewed the situation differently - in their opinion,
we were simply compiling information and making it available for sale to our
customer base - that we were not really offering "data processing services",
for it is not being done for a particular customer, but the customer base at
large, from information received from a third source. A similar example might
be a software company that gathers address information, compiles it into a
format that can be loaded directly onto various computer systems, and then
makes the information available for sale to anyone who might wish to purchase
it.

Response: First, a separately stated charge for training your customers on
your software is not taxable. Rule 3.308(b)(3).

With regard to the updating service, this has aspects of both data processing
(i.e., manipulating data provided to you by manufacturers) and information
services. Your charge to your customers is for an information service. Your
customers are not paying for you to manipulate the manufacturer's data to fit
software that you sell. They are buying up-to-date price information. However,
the exemption passed by the Legislature, effective October 1, 1999, exempts 20%
of the charge for both data processing and information services. Therefore,
regardless of whether you bill the update service as data processing or
information services, your customers are entitled to the 20% exemption.

Tax rules can be accessed online:
www.window.state.tx.us/taxinfo/rulendx/ruleindex.html

You may complete a sales tax application online and then download and sign the
form. Applications are available at:
www.window.state.tx.us/taxinfo/taxforms/01-forms.html

The State Tax Automated Research system may be accessed online at:
www.window.state.tx.us/

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at: