For Texas franchise tax, is selling compiled information an intangible or a service, and where is it apportioned?

Plain-English summary

A tax adviser asked how a client's receipts from selling compiled information should be apportioned for the (pre-2008) Texas franchise tax, and whether the sale was of an intangible or a service. The Comptroller held it is a service, apportioned to where the company compiles the information.

• The facts. Despite the document's "geophysical" catalog title, the client actually compiles information on the effectiveness of drugs used to treat psychiatric patients, gathered from hospitals and clinics across the country. A catalogue on each drug is maintained at the client's Texas office; the compiled information is sold to pharmaceutical companies for research and development, delivered as a hard copy via Federal Express for a flat fee per report. The information is not compiled for a specific company or drug, and anyone can buy it.
• Is it the sale of an intangible? No - it is a service. Compiling the information is the performance of a service, and the format in which the information is distributed is not determinative of the apportionment treatment. The receipts are therefore apportioned as the sale of a service under Texas Tax Code Secs. 171.103(2) and 171.1032(a)(3).
• Apportioned by where the work is done, not the report's destination. A corporation's gross receipts for each service performed in Texas are Texas gross receipts (Secs. 171.103(2) and 171.1032(a)(3); Rules 3.549(e)(38) and 3.557(e)(33)). Because the client compiles the information from its Texas office, the receipts are Texas receipts - the destination of the report does not control.
• Supersedes an earlier ruling. The Comptroller reviewed its October 25, 2000 response (STAR Accession No. 200010842L) about a corporation that provided seismic studies and other data, concluded those activities were also the performance of a service (receipts, including charges for access to the information, apportioned to where the corporation compiled the information), and said it would change that document's status to superseded. This is why STAR catalogs the present letter under the "geophysical information / access to a library" heading.
• Research and development credit. If the client is eligible for a federal R&D credit under Internal Revenue Code Sec. 41 for this activity, it may be eligible to take the credit for Texas franchise tax purposes.

Currency note: This applies the pre-2008 franchise tax's apportionment rules and its then-existing R&D credit, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Information, research, and data-compilation businesses

If your product is information you gather and compile, Texas treated the revenue as a service, not the sale of an intangible - and the fact that this company delivered it on paper did not change that. What mattered was where the company performed the compiling work. Because it compiled the information from its Texas office, the receipts were Texas receipts regardless of the shipped report's destination.

Companies relying on an older "access to information" ruling

The Comptroller superseded its 2000 seismic-data letter (200010842L) here, re-confirming the same service characterization: access-to-information charges are apportioned to where the corporation compiled the information. If you were relying on that earlier letter, this one restates the rule and supersedes it.

Accountants and tax professionals

Do not apportion compiled-information sales by destination or treat them as intangible sales because they are delivered as a report. Apply the service rules (Secs. 171.103(2)/171.1032(a)(3); Rules 3.549(e)(38)/3.557(e)(33)) and source to where the service is performed. Separately, check IRC Sec. 41 eligibility for a possible Texas franchise-tax R&D credit.

Common questions

Q: Is selling a compiled information report the sale of an intangible?
A: No. Compiling the information is the performance of a service; the delivery format does not change that.

Q: Is the receipt apportioned to where the report is delivered?
A: No. It is apportioned to where the service is performed. If the company compiles the information from its Texas office, the receipts are Texas receipts.

Q: Can the company claim a Texas franchise-tax R&D credit?
A: If it is eligible for the federal R&D credit under IRC Sec. 41 for this activity, it may be eligible for the credit for Texas franchise tax purposes.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.103(2) - a corporation's gross receipts for each service performed in Texas are Texas gross receipts (taxable capital)
• Texas Tax Code Sec. 171.1032(a)(3) - same, for earned surplus
• 34 Tex. Admin. Code Secs. 3.549(e)(38), 3.557(e)(33) - services apportioned to where the service is performed
• Internal Revenue Code Sec. 41 - federal research and development credit, referenced for the Texas franchise-tax R&D credit

Related ruling (described in prose, not linked):

• STAR Accession No. 200010842L - the Comptroller's October 25, 2000 seismic-data response, superseded by this letter (same service characterization)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200210520L

Original ruling text

October 16, 2002

Dear **:

Thank you for the ruling request regarding the apportionment of gross receipts
for Texas franchise tax purposes.

You have indicated your client compiles information on the effectiveness of
drugs used to treat psychiatric patients from hospitals and clinics throughout
the country. A catalogue on each drug and the effectiveness is maintained at
your client's Texas office. The compiled information is sold to pharmaceutical
companies for use in research and development. The requested data is sold as a
hard copy and delivered to the purchaser via Federal Express. The information
is not compiled for a specific company or drug, and any company can purchase
this from your client. The purchaser is charged a flat fee for each report
requested.

You asked the following questions:

1. Is this sale of the information an intangible?

Response: No, compiling the information is the performance of a service. The
format in which the information is distributed is not determinative of the
apportionment treatment. Therefore, the receipts must be apportioned as the
sell of a service in accordance with Texas Tax Code Sections 171.103(2) and
171.1032(a)(3).

2. If this is not the sale of an intangible, should the receipts be
   apportioned based upon the destination of the report?

Response: Tax Code Sections 171.103(2) and 171.1032(a)(3) provide that a
corporation's gross receipts for each service performed in Texas are Texas
gross receipts. See also Comptroller's Rule 3.549(e)(38) and Rule
3.557(e)(33). If your client is compiling the information from their Texas
office, the receipts will be Texas receipts.

In analyzing this situation, we reviewed Tax Policy's October 25, 2000,
response (Star Accession No. 200010842L) to you concerning a corporation that
provided seismic studies and other data to its customers. We have concluded
that those activities also represented the performance of a service. Thus, the
receipts for the sale of those services (including charges for access to the
information) should be apportioned to the location where the corporation
compiled the information. We will change the status of that document on our
to reflect that it has been superseded.

3. Can the client claim a research and development credit for the cost of the
   equipment and personnel required to gather the information?

Response: If your client is eligible to take a research and development credit
under Internal Revenue Code 41 for federal income tax purposes for this
activity, then your client may be eligible to take this credit for Texas
franchise tax purposes.

If you have any questions or need additional information, please call me at
1.800.531.5441, extension 34629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division