Is a taxable 'asset management' service that monitors oil-and-gas equipment and lets customers view collected data taxable data processing, or an exempt proprietary information or monitoring service?

Plain-English summary

A company sold two related things to oil-and-gas customers: (1) a remote equipment monitoring system (hardware, taxability not at issue), and (2) a separately-billed "asset management service" used with that system. The service collects data from the monitored equipment (things like valve flow rates and rectifier voltages), stores it, lets the customer log in via browser, smartphone, or text to view it, run reports, and even remotely control the equipment, and sends alarm alerts based on customer-set parameters.

The Comptroller ruled this is a taxable data processing service, not an exempt information service, proprietary information service, or security service:

• Not a security service — a license under the Texas Occupations Code (Chapter 1702) isn't required for this kind of asset monitoring, so it doesn't meet the statutory trigger for a taxable security service either.
• Not an information service (taxable or exempt) — Rule 3.342's definitions, including the "proprietary information" exclusion the taxpayer argued for, all require a sale of information. Here, the company isn't selling information to customers; it's compiling, storing, and returning the customer's own equipment data. That takes it outside the information-services category entirely (Rule 3.342(a)(1)), so the proprietary-information carve-out never comes into play.
• Is a data processing service — the service "compiles and maintains data from the monitoring equipment" that customers can retrieve on demand, squarely matching Rule 3.330(a)(1)'s definition of data processing (compiling/producing records, maintaining information, entering and retrieving information).

The ruling also draws a clean line against pure monitoring-and-notification services, citing three older STAR rulings (compactor-level monitoring with a phone call when full; emissions monitoring; power-outage monitoring/notification) that stayed nontaxable because they involved only watching and alerting — no data compilation/storage/retrieval layer. This service crossed that line because it adds collection, manipulation, and on-demand storage/retrieval on top of the alerting.

Because it's a data processing service, the standard 20% statutory exemption for separately stated data processing charges applies (Rule 3.330(b)) — so 80% of the fee is taxable.

What this means for you

SaaS, IoT, and remote-monitoring providers

If your product is billed as "monitoring" but the backend also stores, compiles, or lets customers retrieve historical data on demand, expect the Comptroller to treat the retrieval/storage layer as taxable data processing even if the pure alert/notification function alone would be exempt. Simple watch-and-notify (no stored/retrievable data trail) stays outside the taxable categories; add persistent storage and query/report access, and you're now in data processing territory.

Oil and gas equipment/service companies

Bundling hardware sales with a data service doesn't automatically make the service exempt just because the hardware itself isn't at issue. Here the service was billed and analyzed completely separately from the monitoring hardware — get your own analysis if your invoicing structure differs.

Accountants and tax professionals

This ruling is a useful illustration of Rule 3.342(a)(1)'s scope-limiting effect: a service can escape both the taxable and nontaxable "information service" buckets if it doesn't involve a sale of information at all — which then routes the analysis to whichever other taxable-service definition actually fits (here, data processing). Don't assume "not an information service" means "not taxable" — check data processing and security services too.

Common questions

Q: Is all equipment-monitoring software taxable in Texas?
A: Not automatically. Pure monitoring-and-notification services with no data compilation, storage, or on-demand retrieval have been ruled nontaxable in other STAR rulings. Once the service adds compiling, storing, and letting the customer pull historical data or reports, it becomes taxable data processing.

Q: Does the 20% data-processing exemption apply here?
A: Yes, per Rule 3.330(b), as long as the data processing charge is separately stated — 20% of that charge is exempt, 80% is taxable.

Q: Why didn't the "proprietary information" exclusion for information services help here?
A: That exclusion (Rule 3.342(a)(5)(A)) only matters if the service is an information service to begin with — i.e., a sale of information. Since the company wasn't selling information (it was processing the customer's own equipment data), the whole information-services category, both taxable and exempt sides, didn't apply, per Rule 3.342(a)(1).

Q: Can another company rely on this ruling?
A: No. This is a private letter ruling binding only on the Comptroller as to the taxpayer and facts presented, and it cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0035 (data processing service definition)
• Tex. Tax Code § 151.0075 (security service definition)
• Tex. Tax Code § 151.0101 (taxable services)
• 34 Tex. Admin. Code Rule 3.330 (Data Processing Services), Rule 3.330(a)(1), (b) (20% exemption)
• 34 Tex. Admin. Code Rule 3.342 (Information Services), Rule 3.342(a)(1), (a)(5)(A)
• Tex. Occ. Code §§ 1702.101, 1702.102 (private security licensing)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Prior STAR guidance discussed:

• STAR Doc. 9309L1265G08 (compactor-level monitoring/notification — nontaxable)
• STAR Doc. 9701244L (emissions-level monitoring — nontaxable)
• STAR Doc. 200401320L (power-outage monitoring/notification — nontaxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201607899L

Original ruling text

July 13, 2016

Re: Private Letter Ruling #151540710

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings
and General Information Letters, [Endnote 1] in response to your June 3, 2015 request.
Detrimental reliance relief is provided in accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on the application of Texas sales and use tax to an
asset management service, which you refer to as a remote equipment monitoring
service, offered by your client in connection with a remote equipment
monitoring system that is sold separately.

Relevant Facts:

** (Taxpayer) sells remote equipment monitoring systems
and asset management services. The remote equipment monitoring system is sold
separately, and its taxability is not at issue. Customers may also purchase an
asset management service that is used in connection with the monitoring system.
The charge for the service is stated separately on the customer’s invoice.

Taxpayer’s product data sheet states that the asset management system collects
and delivers valuable data concerning oil and gas assets, when, where, and how
it is needed. The asset management system gathers and stores information
related to the equipment being monitored. The customer may customize the
information that is gathered and stored.

In addition to monitoring the customer’s oil and gas equipment, the asset
management service allows a customer to access data, control interruption of
the monitored equipment, and request information or reports at any time via any
Web browser, smartphone, or text message. Data can also be exchanged with
compliance software (available separately from Taxpayer) and with other file
formats such as Microsoft Excel. The compliance software and the taxability of
such are not at issue and not addressed in this response.

Specifically, the remote monitoring unit takes digital readings and transmits
them to the asset tracker website, where customers can access the data
collected. Digital readings include, but are not limited to, DC voltages of a
rectifier and flow rates through a valve. Taxpayer does not provide any data
analysis but the customer can print reports from the asset tracker website that
show the history of the digital readings and alarm notifications.

The asset management service allows customers to program a schedule of
parameters which trigger the unit to report alarm readings to the website. The
monitoring units alert the customer directly by phone, email or text if an alarm
situation is triggered, based on the customer’s specifically chosen parameters.

Requested Rulings:

Taxpayer requests a ruling that the asset management service offered by
Taxpayer is not subject to Texas sales and use tax.

Ruling & Analysis:

We reviewed whether Taxpayer’s service meets the definition of various taxable
and nontaxable services, including security services, information services, and
data processing services.

Taxpayer’s asset management service would be a taxable security service if a
license were required under Texas Occupations Code Sections 1702.101 or
1702.102 to provide the service. See Section 151.0075. We have consulted with
the Regulatory Services Division of the Texas Department of Public Safety and
determined that the Texas Occupations Code does not require such a license for
performing the asset management service. Therefore, Taxpayer’s service is not
a taxable security service.

The asset management service does meet the definition of a data processing
service under Section 151.0035, however. Consequently, Taxpayer’s service is
taxable. See Section 151.0101.

In general, services which consist of only monitoring and notification are not subject
to Texas sales and use tax. See, e.g., STAR Documents 9309L1265G08 (relating to
monitoring compactor levels and telephoning customer when full), 9701244L (relating
to monitoring emission levels), and 200401320L (relating to monitoring power outages
and notification of when outage occurs).

Unlike the monitoring services in the above referenced STAR Documents, Taxpayer is
providing more than a nontaxable monitoring service. Taxpayer’s asset management
service provides for the collection, manipulation, and storage of data retrieved from the
monitoring equipment. These services fall within the definition of data processing services,
which are taxable. See Section 151.0035, Data Processing Service, Section 151.0101,
Taxable Services, and Rule 3.330, Data Processing Services.

Data processing services are defined as “the processing of information for the
purpose of compiling and producing records of transactions, maintaining
information, and entering and retrieving information.” Rule 3.330(a)(1). It
specifically includes “computerized data and information storage or manipulation.” Id.

The asset management service compiles and maintains data from the monitoring
equipment. This stored data is retrievable on demand by the customer. The
asset management service therefore falls within the definition of a data
processing service and is taxable.

Taxpayer asserts, in part, that it is selling nontaxable propriety information
services. Information services are defined, in relevant part, as “furnishing
general or specialized news or other current information.” Rule 3.342,
Information Services. Excluded from taxable information services is the sale
of information gathered or compiled on behalf of a particular client that is of
a proprietary nature to that client and may not be sold to others by the person
who gathered or compiled the information. See Rule 3.342(a)(5)(A).

The definition of nontaxable information services provided by Rule 3.342(a)(5)(A) requires
a sale of information. Taxpayer, however, is not selling information to its customers.
Taxpayer is compiling, manipulating, and storing customers’ information that has been
gathered by the customers’ equipment. Taxpayer’s service is excluded from the definition
of information services, either taxable or nontaxable, by Rule 3.342(a)(1).

The asset management service is subject to sales and use tax as the sale of
data processing services pursuant to Section 151.0035 and Rule 3.330. The total
charge for separately stated data processing services is subject to a 20-percent
exemption from sales tax pursuant to Rule 3.330(b).

If you have questions about this response, please email us through our website at
https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #151540710.

Regards,

Tax Policy Division – Indirect Taxes
State Comptroller of Public Accounts

ENDNOTE

1. Unless otherwise noted, all references herein to “Section” are to Tex. Tax
   Code Ann. (Vernon 2008 and Supp. 2015) and all references to “Rule” are to
   34 Tex. Admin. Code (2015).