Is a fraud-detection service that compares an online shopper's device data against a fraud database and returns an 'Allow/Deny/Review' recommendation a taxable information service in Texas?

Plain-English summary

A company ("COMPANY") provides online retailers with a fraud-detection and risk-assessment service. Retailers embed COMPANY's free JavaScript/API software on their own websites; when a shopper checks out, the software gathers device-level data (device type, operating system, IP address, geographic location, and telecom/internet provider), compares that data against COMPANY's proprietary database of devices known to be linked to fraudulent transactions, and — within milliseconds — sends the retailer a recommendation to "Allow," "Deny," or "Review" the transaction. Retailers pay a minimum monthly fee plus per-query charges.

The taxpayer argued this was a nontaxable "proprietary information service" under Rule 3.342(a)(5). The Comptroller went further and ruled it isn't an information service at all — taxable or exempt. Both the statutory definition (Tax Code § 151.0038: furnishing general/specialized information, financial information, or electronic data retrieval/research) and Rule 3.342 require a sale of information. Here, COMPANY isn't selling information to its retailer customers; it's gathering data, running its own internal comparison against its fraud database, and delivering a recommendation — a different kind of service than furnishing information. Because the service falls outside the information-service definition entirely, it isn't subject to Texas sales and use tax as any of the enumerated taxable services under Section 151.0101.

Since the whole service was ruled nontaxable on this ground, the Comptroller didn't need to reach the taxpayer's other, alternative ruling requests.

What this means for you

Fraud-detection, risk-scoring, and screening service providers

If your product's core function is analyzing input data against your own proprietary model or database and returning a recommendation or score — rather than delivering underlying information or data itself — this ruling supports treating the service as outside Texas's information-service tax altogether. The key fact pattern: no information changes hands; only a conclusion (Allow/Deny/Review) does.

E-commerce and online retail businesses

If you're the retailer purchasing this kind of service, this ruling (for this specific taxpayer and fact pattern) supports not paying Texas sales tax on the charges, but you cannot rely on someone else's private letter ruling for your own purchases — ask your vendor whether it has its own ruling, or seek your own.

Accountants and tax professionals

Note the doctrinal nuance: the Comptroller didn't classify this as an exempt/proprietary information service (which would still be an information service, just a nontaxable kind) — it ruled the service falls outside the information-service category altogether, because there's no sale of information at all. That's a stronger, cleaner outcome than merely qualifying for an exclusion, but it also means the "proprietary information" exclusion analysis wasn't actually needed or reached on the merits.

Common questions

Q: Is any service that screens or scores data automatically nontaxable?
A: No — it depends on whether the service actually sells or furnishes information to the customer. A service that returns underlying data or reports (not just a recommendation) may be a taxable information or data processing service instead.

Q: Does the speed of the process (milliseconds) matter to the ruling?
A: The ruling describes the process as happening in milliseconds, but the legal reasoning turns on what is transacted (a recommendation, not information), not on speed.

Q: Can other online retailers or fraud-detection vendors rely on this ruling?
A: No. This is a private letter ruling, binding on the Comptroller only as to the taxpayer and facts presented, and it cannot be relied upon by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0038 (information service definition)
• Tex. Tax Code § 151.0101 (taxable services)
• 34 Tex. Admin. Code Rule 3.342 (Information Services), Rule 3.342(a)(5) (proprietary information exclusion, not reached)
• 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)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201611086L

Original ruling text

November 9, 2016

RE: Private Letter Ruling #150120751

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters,[1] in response to your request dated December 16, 2014 and resubmitted with supplemental information February 12, 2015. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

Your client, "COMPANY" provides fraud detection and risk assessment services for retailers who conduct online transactions with their customers. You specifically requested guidance on the taxability of COMPANY'S service. This automated service provides retailers a recommendation regarding whether they should complete a transaction based on information gathered from the device used to make an online purchase. [2]

Relevant Facts Presented

The COMPANY'S service gathers information from the devices purchasers use to complete online transactions and recommends whether a retailer should complete a transaction. To gather this information, COMPANY provides its customers with software that works with the customers’ existing web pages and software to process online transactions. Customers receive the software, without charge, in the form of a JAVA script or application programming interface.

The terms of COMPANY'S service agreement with its customers grant a non-exclusive license allowing customers to distribute an unlimited number of copies of the software. The agreement specifies a customer may not modify the software. The agreement also specifies that COMPANY retains ownership of the software and the data that the software collects.

The software gathers information related to the device (computer, tablet, phone, etc.) a purchaser uses to complete online transactions. The information collected includes the type of device used, its operating system, IP address, geographic information, and the telecommunications or internet access service provider for the device. Customers may establish rules for receiving alerts based on criteria such as purchaser location, number of transactions per account, or number of devices using an account.

COMPANY maintains a database of devices that are known to have been used in fraudulent transactions. When a purchaser initiates a transaction with a retailer, the COMPANY software installed on the retailer’s web site transmits the information it has collected to COMPANY’s servers, where the collected attributes are compared against the database.

Based on the results of the comparison, COMPANY transmits a recommendation to “Allow,” “Deny,” or “Review” the transaction to its customer. The process of gathering information and sending a recommendation takes place in milliseconds.

Customers are billed a minimum monthly fee and are charged based on the number of queries to COMPANY’s databases.

Requested Ruling

The COMPANY's service is a nontaxable proprietary information service under Rule 3.342(a)(5), and charges for the COMPANY's service are not subject to Texas sales and use tax.

Analysis and Ruling

Section 151.0038, in relevant part, defines an “information service” as furnishing general or specialized information, including financial information or electronic data retrieval or research. Additionally, the definitions of taxable and nontaxable information service under Rule 3.342 require a sale of information.

Taxpayer, however, is not selling information to its customers. The COMPANY's service involves gathering information, comparing that information to data that COMPANY has compiled and analyzed, and providing a recommendation to customers based on that comparison.

Because the COMPANY's service does not involve the sale of information, it does not fall within the scope of an information service as defined by Section 151.0038 and Rule 3.342. Therefore, the COMPANY's service does not fall within the scope of the services enumerated as taxable services under Section 151.0101, and COMPANY’s service is not subject to Texas sales and use tax.

As we have determined that COMPANY’s service is not a taxable service, the additional ruling requests included in the private letter ruling request are not addressed.

If you have questions about this private letter ruling, please email us through our website at https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #150120751.

Sincerely,

Indirect Tax Section

Tax Policy Division

Texas Comptroller of Public Accounts

ENDNOTES:

[1] Unless otherwise indicated, all references herein to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

[2] COMPANY's Service Agreement, provided February 12, 2015.