Are separately-billed CRM platform advisory/consulting services taxable as part of the taxable data processing service, even though consulting isn't itself a taxable service in Texas?

Plain-English summary

The Texas Comptroller ruled that a CRM software company's premium advisory services — separately billed, and not themselves a taxable service category — are still taxable, because they're bundled tightly enough with the underlying taxable CRM platform subscription to be treated as part of its price, rather than an independent nontaxable consulting service.

The company's cloud-based CRM platform is a taxable "data processing service" (a point the taxpayer conceded). Customers who buy a top-tier support plan can also purchase "advisory services" — consultants who help with organizational strategy, platform optimization, and best-practices recommendations, billed separately from the platform itself at a price that doesn't change whether or not advisory services are added. Even though consulting isn't itself a taxable service category, and the charge was separately stated, that alone doesn't make it nontaxable — Texas applies a three-part "unrelated service" test (not a taxable service in its own right; commonly sold standalone; distinct and identifiable performance), and the advisory services failed the middle prong. They're NOT sold on a stand-alone basis: only subscribers who already bought both the platform AND a top-tier support plan can even purchase them, and per the company's own marketing, the advisor's role centers on platform optimization and best practices for using the CRM tool. The clincher: the advisory subscription automatically terminates when the underlying platform subscription ends, mirroring a 2003 Comptroller decision that found consulting bundled the same way to be "incident to" the taxable service. Because the advisory services are related, not unrelated, their entire charge is folded into the taxable "sales price" of the data processing service — though the statutory 20% data-processing exemption still applies to the combined total.

What this means for you

SaaS and cloud platform companies offering premium advisory/consulting add-ons

Separately billing your consulting or advisory add-on service isn't enough to keep it nontaxable if it's gated behind your core taxable service (only available to subscribers, terminates with the underlying subscription, focused on optimizing use of your platform). To have a genuinely nontaxable consulting offering, make it available on a true stand-alone basis, independent of your taxable service.

Technology consulting firms selling both software and advisory services

Structure your advisory/consulting offerings to be independently purchasable, with their own term and termination provisions, if you want them treated as a separate, nontaxable service — tying the offering's life cycle to an underlying taxable subscription is a strong signal against "unrelated service" status.

Accountants and tax professionals

The controlling framework is the three-part "unrelated service" test in 34 Tex. Admin. Code § 3.330(d)(1), applied per Comptroller's Decision No. 40,252 (2003) (co-terminating consulting/data-processing agreements treated as related). The 20% statutory data-processing exemption under Section 151.351 applies to the combined charge once the advisory services are folded into the taxable sales price.

Common questions

Q: If I separately bill for a nontaxable-sounding service alongside a taxable service, is the separately-billed portion automatically nontaxable?
A: Not necessarily. Texas requires the service to ALSO be commonly sold on a stand-alone basis and be distinct/identifiable — gating it behind purchase of the taxable service, or tying its term to the taxable service's subscription, can make it "related" and therefore taxable too.

Q: Does calling something "consulting" or "advisory services" exempt it from tax?
A: Not by itself. Consulting isn't independently listed as a taxable service, but if it's bundled closely enough with an actual taxable service (like data processing), the whole charge can still be taxable as part of that taxable service's sales price.

Q: Does the 20% data processing exemption still apply to a bundled advisory charge?
A: Yes — once the advisory services are folded into the sales price of the taxable data processing service, the statutory 20% exemption applies to the combined total, same as it would to the platform fee alone.

Q: Can another SaaS company rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting taxpayer and facts presented, and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.007(a), (b) ("Sales Price" — includes a service that is part of the sale)
• Tex. Tax Code §§ 151.010, 151.051, 151.0101 (taxable item; imposition; data processing as taxable service)
• Tex. Tax Code § 151.351 (Information Services and Data Processing Services — 20% exemption)
• 34 Tex. Admin. Code § 3.330(d)(1), (d)(2) (Data Processing Services — unrelated-service three-part test)
• Comptroller's Decision No. 40,252 (2003) (co-terminating consulting agreement treated as incident to taxable data processing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201709026L

Original ruling text

September 25, 2017

Re: Private Letter Ruling No. 2017010120

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 request dated July 18, 2016. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance regarding the taxability of an advisory service offered to customers who also purchase data processing services.

Facts Presented

** (Taxpayer) is a Delaware corporation headquartered in **. Taxpayer sells subscriptions to a cloud-based customer relationship management platform (CRM platform). Taxpayer’s clients use the CRM platform to capture, store, and analyze information about their customers. For purposes of this letter ruling, Taxpayer stipulates that the CRM platform is considered software as a service and is a taxable data processing service.

When a client subscribes to the CRM platform, Taxpayer offers the option of purchasing varying levels of platform support. Clients who purchase one of the two top-tier support plans also have the option of purchasing advisory services.

The terms and conditions of the CRM platform subscription are set out in the Master Subscription Agreement (Agreement), last updated June 23, 2016. The terms and conditions of the advisory services are described in the Advisory Services Special Terms. According to Taxpayer’s Advisory Services Special Terms, the order form for a subscription to the advisory services is governed by the Agreement. As stated in the Agreement’s Use of Services and Content terms, any added subscriptions will terminate on the same date as the underlying subscriptions, unless otherwise provided in the applicable order form.

Advisors partner with a client, develop an understanding of the client's business organization and goals, and work with the client to create and execute a business plan to achieve those goals. Under the Advisory Services Special Terms, a[n] Advisor provides guidance and recommendations on organizational restructuring and platform optimization and may advise on such topics as: “Solution Architecture and Design Reviews, Integration Strategy, Org Strategy, Security Compliance, Mobile and Web Strategy, Performance Management, Solution Compatibility, Environment and Release Management, Master Data Management, Fit/Gap Analysis of product capabilities, Optimization Planning, and best practices recommendations on use of the [CRM] platform.” The Advisory Services Special Terms does not establish a specific set of deliverables for a[n] Advisory service.

A[n] Advisor does not perform any coding, programming, installation or implementation of the CRM platform. Additionally, the role of a[n] Advisor is not limited to advising only on the CRM platform or Taxpayer products.

Taxpayer bills for the advisory services of a[n] Advisor separate and apart from the billing for the CRM platform and support plan. The prices of the CRM platform and support plan remain the same regardless of whether the client purchases the Advisory services.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Are Taxpayer’s advisory services nontaxable consulting services?

Ruling: Taxpayer’s advisory services are taxable as part of the sales price of Taxpayer’s data processing services.

Analysis:

Sales tax is imposed on the sales price of each taxable item. Section 151.051 (Sales Tax Imposed). A taxable item is defined as tangible personal property or a taxable service. Section 151.010 (Taxable Item). Taxable services are listed in Section 151.0101 and include data processing services.

Section 151.007(a) defines “sales price” as “the total amount for which a taxable item is sold, leased, or rented….” Section 151.007(b) states, in relevant part, “the total amount for which a taxable item is sold, leased, or rented includes a service that is a part of the sale….”

For purposes of this letter ruling, Taxpayer concedes the CRM platform is a data processing service. The advisory services are consulting services, and consulting is not specifically listed as a taxable service in Section 151.0101.

When a nontaxable service is provided with a taxable data processing service, the nontaxable service will not be taxed as a data processing service if the service is determined to be unrelated and the charges for the nontaxable service are separately stated. Rule 3.330(d)(2) (Data Processing Services).

Charges for the advisory services are separately stated from the charge for the CRM platform subscription. The services are not unrelated under Rule 3.330(d)(1), however. Rule 3.330(d)(1) provides, a service is considered unrelated to the sale of data processing services if all three following conditions are met: (1) it is neither a data processing service, nor a service taxed under other provisions of the Tax Code, Chapter 151; (2) it is of the type which is commonly provided on a stand-alone basis; and (3) the performance of the service is distinct and identifiable.

The advisory services are not provided on a stand-alone basis. Taxpayer does not offer the services of a[n] advisor without the prior purchase of the CRM platform. Further, not all CRM platform subscribers have an option of purchasing the advisory service. Taxpayer only gives the option of purchasing the advisory services of a[n] advisor to the CRM platform subscribers who also chose to purchase a top-tier platform support plan.

Additionally, a role of the advisor is to advise on “best practices recommendations on use of the [CRM] platform.” Taxpayer’s website further conveys the message that an integral part of the advisor's role is CRM platform optimization. According to Taxpayer’s website, advisors “connect you directly to the newest [Taxpayer] technology, best practices for deployment and implementation, and unparalleled product and vertical knowledge.” See taxpayer's website. (last visited June 8, 2017).

Previous comptroller guidance further supports the conclusion that the advisory services are related to the CRM data processing services. In Comptroller’s Decision No. 40,252 (2003), although the nontaxable consulting service was performed under a separate agreement, the data processing master agreement stated that if terminated, the consulting agreement shall terminate simultaneously. Based on this provision, the Administrative Law Judge held, in relevant part, that the nontaxable consulting service was incident to the data processing service provided under the master agreement.

As in Comptroller’s Decision No. 40,252, the advisory subscription will terminate when the Agreement ends, unless the parties have contracted otherwise. This shows the advisory services are not offered independently from the sale of the CRM platform, and cannot be treated as being provided on a stand-alone basis.

Based on the above, the advisory services offered by Taxpayer are related to the sale of the CRM platform. As such, the advisory services are part of the sale of taxable data processing services under Section 151.007(b) and, therefore, are taxable.

The first twenty percent of the total sales price of taxable data processing services is exempt from tax. Section 151.351 (Information Services and Data Processing Services). The twenty percent applies to the total sales price of the CRM platform and the advisory services since both are taxed as part of the selling price of the CRM platform subscription.

Comptroller’s Decisions and STAR documents cited are on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010120.

Regards,

Tax Policy Division – Indirect Taxes

State Comptroller of Public Accounts

ENDNOTE

1.Unless otherwise noted, 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.