Is a company's automated call-processing and reporting service a taxable data processing or telephone answering service in Texas, and can it buy its own telephone service tax-free with a resale certificate?

Plain-English summary

A company (COMPANY A) planned to become what the industry calls an Application Service Provider: businesses would hire it to receive their incoming calls, faxes, letters, and e-mail, and COMPANY A's computer system would collect, read, and summarize each communication into a report, then relay both the report and original communication to the right person at the client business over an internet-based application. COMPANY A asked the Comptroller to sort out the sales tax consequences across four scenarios (computer located in or out of Texas, customer billed in or out of Texas), plus whether it could buy its own telephone service tax-free.

The Comptroller found this is taxable data processing under 34 TAC § 3.330 — using a computer to receive, store, process, and prepare reports from incoming communications is data processing, taxed to the extent the customer receives the benefit of the service in Texas (so if the customer is out of state and gets no Texas benefit, it's not taxable, regardless of where COMPANY A's computer sits). Effective October 1, 1999, only 80% of a data processing charge is taxable. Separately, if COMPANY A actually answers phone calls for its customers, that piece is a telephone answering service — fully taxable wherever the service is performed in Texas, without any multistate exception, because the Legislature added it as its own taxable service category (Tax Code §§ 151.0101(a)(15), 151.0102) effective October 1, 1991.

On the resale question: COMPANY A buys long-distance and toll-free phone service from a third-party carrier to run its system. Because that purchased telephone service becomes an integral part of the taxable service COMPANY A resells to its own customers, COMPANY A may give its telephone carrier a resale certificate under § 151.151 instead of paying tax on the purchase — but only for that integral-use portion. It cannot use a resale certificate to escape tax on telecommunications purchased for its own general business use (§ 151.302), and separately stating or marking up the pass-through phone charge on its own invoices doesn't turn COMPANY A into a telecommunications provider or change any of the above answers.

What this means for you

Call centers, answering services, and application service providers (ASPs)

If your business receives and processes customer communications by computer and generates reports, that's taxable data processing (80% of the charge, sourced to where your customer gets the benefit). If you also pick up the phone and answer calls for a client, that piece is a separately-taxable telephone answering service with no out-of-state exception — it doesn't matter where your customer is located.

Businesses buying telecom service to resell as part of another service

If you purchase telephone or other services that become an integral part of a taxable service you sell, you can give your supplier a resale certificate under § 151.151 instead of paying tax up front. But that only covers the resold portion — telecom bought for your own general business operations still owes tax, and you can't use a resale certificate to dodge it.

Accountants and tax professionals

This letter is a clean four-scenario matrix distinguishing data processing (multistate-benefit-sourced, 80% taxable) from telephone answering services (fully taxable wherever performed, no multistate carve-out) — useful whenever a client's automated-communications business blends both functions.

Common questions

Q: Is an automated system that reads and summarizes customer communications taxable in Texas?
A: Yes, as data processing services under 34 TAC § 3.330 — 80% of the charge is taxable, sourced to where the customer receives the benefit in Texas.

Q: What if the company also answers phone calls for its customers?
A: That portion is a fully taxable telephone answering service under Tax Code §§ 151.0101(a)(15) and 151.0102, taxable wherever performed in Texas regardless of the customer's location — there's no multistate-benefit exception like there is for data processing.

Q: Can the company avoid tax on the phone service it buys to run its system?
A: Yes, by issuing a resale certificate under § 151.151, because that purchased telephone service is transferred as an integral part of the taxable service it resells — but not for telecom bought for its own general business use.

Q: Does separately stating or marking up the phone charge change anything?
A: No — the company is not considered a telecommunications provider merely for separately billing or marking up the pass-through phone charge.

Q: Can any similar business rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code § 3.330 (Data Processing Services; multi-state benefit sourcing)
• Tex. Tax Code § 151.0101(a)(15) (telephone answering services as a taxable service)
• Tex. Tax Code § 151.0102 (definition of telephone answering service)
• Tex. Tax Code § 151.151 (resale certificate for items integral to a taxable service)
• Tex. Tax Code § 151.302 (resale exemption excludes general business use)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200009754L

Original ruling text

September 28, 2000

Dear **:

Thank your for your letter concerning the applicability of sales tax to the
transactions described in the factual scenario below.

Your client, ** ("COMPANY A") intends to begin a new business that
will receive incoming communications, analyze the communications, create
reports describing the terms of the communications, and relay the
communications and the reports to its customers. Within the industry, a
business that performs similar functions is referred to as an Application
Service Provider, or ASP. An ASP is described as an entity that deploys, hosts
and manages access to a packaged application to multiple parties from a
centrally managed facility. The applications are delivered over networks on a
subscription basis. This delivery model speeds implementation, minimizes the
expenses and risks incurred across the application and overcomes the chronic
shortage of qualified technical personnel available in-house.

Traditionally, most businesses receive incoming communications from customers
in several ways. For instance, businesses receive telephone calls, faxes,
letters, and e-mail. Currently, most businesses assign employees to collect
these incoming communications. After these employees collect incoming
communications, they analyze the communications to determine the proper
recipient within the organization. Then, the employees relay the communication
to the proper recipient. After the communication reaches the proper recipient,
a response is generated and sent to the customer.

COMPANY A intends to replace these types of employees with its proprietary
computer hardware and software system. Businesses will hire COMPANY A. After
the businesses hire COMPANY A, the businesses will download an internet-based
application that will allow the businesses to communicate with COMPANY A's
computer system. Thereafter, COMPANY A will receive incoming communications
directed toward the businesses. The incoming communication will be processed by
COMPANY A's computer system. COMPANY A's computer system will package the
incoming communication in its current medium (fax, letter, voice call, E-mail,
etc.). The computer system will read through the information contained in the
communication. After processing the information, the computer system will
generate a summary report describing the details of the communication. The
computer system will then send the report and the original communication to the
proper person within the business via the internet-based application.

In order to provide these services, COMPANY A will purchase telephone service
from a third-party telephone company. These telephone services will include
long distance and toll free numbers. COMPANY A will pay the telephone company
directly for the telephone services.

COMPANY A intends to use four stand-alone computer systems to run its business.
One computer system will be located within Texas. The other three computer
systems will be located outside of Texas. The businesses that COMPANY A will
perform the services for will be located in Texas, in other states, and in
foreign countries. The people who make the incoming communications that COMPANY
A will receive (the "end-users") will be located in various places around the
world, and some of these persons may be located in Texas. COMPANY A will not be
in a position to determine where the end-users are located for the majority of
the incoming communications. Thus, there are two variables that may affect your
answers to the questions that follow, namely,

1) the location of the computer system; and

2) the location of COMPANY A's customer. Based on these two variables, there
are four possible scenarios (the "Four Scenarios"):

Scenario One: An end-user calls COMPANY A's computer system located in Texas
and COMPANY A bills its customer who is also located in Texas.

Scenario Two: An end-user calls COMPANY A's computer system located in Texas
and COMPANY A bills its customer who is located outside Texas.

Scenario Three: An end-user calls COMPANY A's computer system located outside
of Texas and out client bills its customer who is located in Texas.

Scenario Four: An end-user calls COMPANY A's computer system located outside of
Texas and COMPANY A bills its customer who is also located outside of Texas.

While factually correct and complete, the foregoing description of COMPANY A's
operations has been stated in simplified and non-technical terms. You ask that
we contact you if we believe that we need a more technological description of
the activities COMPANY A intends to engage in and you will provide you with
such a description.

QUESTIONS Based on the facts set out above, COMPANY A seeks answers to the
following questions:

1. For each of the Four Scenarios, is COMPANY A performing a service that is
   subject to the Texas sales and use tax? If so, specifically what is the taxable
   service that COMPANY A is performing?

Response: The use of a computer by COMPANY A to receive, store, process,
manipulate and prepare summary reports of incoming communications directed
toward the businesses, constitute taxable data processing services. See
subsection (a) of Rule 3.330. Tax is due to the extent that COMPANY A's
customer's receives benefit of this service in Texas. See subsection (f) of
Rule 3.330, regarding multi-state customers. Effective October 1, 1999, only
80% of the charge for data processing services is taxable.

COMPANY A's charges for providing answering services for incoming phone calls
for their customers are subject to sales tax as telephone answering services.
These services are taxable regardless of the location of their customers.
Electronic answering services have been taxable since October 1, 1986.

Effective October 1, 1991, tax must be collected on the total amount charged
for providing telephone answering services as defined in Texas Tax Code,
Section 151.0102. The Legislature added telephone answering services to the
definition of taxable services in Texas Tax Code, Section 151.0101(a)(15).

Scenario One: Data processing is taxable in total unless the customer can issue
COMPANY A an exemption certificate asserting a multi-state benefit. Telephone
answering service if applicable is taxable if service is performed in Texas.

Scenario Two: Data processing service is not taxable if customer does not
receive benefit in Texas.

Scenario Three: Data processing is taxable in total unless customer can issue
COMPANY A an exemption certificate asserting a multi-state benefit. Telephone
answering service if applicable is taxable if the service is performed in
Texas.

Scenario Four: Data processing service is not taxable if customer does not
receive benefit in Texas.

2. For each of the Four Scenarios, if the telephone company that COMPANY A
   buys telephone services from is located in Texas, may COMPANY A issue a sale
   for resale exemption certificate to the telephone company in lieu of paying the
   Texas sales and use tax when it buys the telephone service?

Response: COMPANY A's purchase of long distance and toll free telephone
service from a third-party telephone company for incoming customer
communications that COMPANY A will process is considered integral to the
taxable service that COMPANY A is provided. As such, COMPANY A may issue a
resale certificate to the provider citing Texas Tax Code section 151.151. This
section provides that "A purchaser may give a resale certificate for the
acquisition of a taxable item if the purchaser intends to sell, lease, or rent
it in the regular course of business or transfer it as an integral part of a
taxable service performed in the regular course of business."

COMPANY A may not issue a resale certificate as prescribed under Texas Tax Code
section 151.302, for telecommunication services purchased for general business
use.

3. For each of the Four Scenarios, if the services that COMPANY A will perform
   are subject to the Texas sales and use tax, are they data processing services?
   If not, why not? Is the first 20% of COMPANY A's charge to its customers exempt
   from the Texas sales tax?

Response: Under the four scenarios, the services provided by COMPANY A are
taxable data processing services (see response to Question 1). As such,
effective October 1, 1999, 20% of COMPANY A's charge for this service is
exempted from sales tax.

4. For each of the Four Scenarios, other than the Texas sales and use tax,
   what other Texas tax obligations will COMPANY A incur if it chooses to operate
   its business in the manner described above?

Response: If COMPANY A is incorporated, it will be subject to the Texas
franchise tax.

5. For each of the Four Scenarios, would any of the answers to the questions
   above change because of the manner in which COMPANY A charges its customers for
   the third-party telephone service? If COMPANY A separately states the charge
   for the telephone service that it is passing through on its invoices to its
   customers, would this change the tax implications of the transactions? Does it
   matter if COMPANY A marks-up the charge for the telephone service when it bills
   its customers?

Response: No, COMPANY A will not be considered a telecommunications provider
if it separately bills or marks up its charge for the telecommunications
services that it uses to perform its services.

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:
[email protected]

Sincerely,

Gilbert Zamora
Tax Policy Division