Is a fee paid for an electronic data-bridge that connects a loan-origination system to a mortgage-pricing engine a taxable telecommunications service, and can it be purchased tax-free for resale?

Plain-English summary

The Texas Comptroller ruled that fees a mortgage-pricing software company pays for an electronic data "bridge" connecting a loan-origination system to its pricing engine are a taxable telecommunications service — but because that service is integral to the company's own taxable data processing service, the company may buy the bridge access tax-free using a resale certificate.

The taxpayer runs a "pricing engine" that computes mortgage pricing for lenders and brokers — itself a taxable data processing service on which the taxpayer already collects sales tax. A separate company built a proprietary "E-pass integration" that electronically routes loan information back and forth between its own loan-origination-system product and the taxpayer's pricing engine, charging the taxpayer a fee each time a shared customer uses that connection. Texas taxes "telecommunications services" — broadly, the electronic transmission, routing, or reception of data using any transmission method — and the Comptroller found this data-routing bridge fits that definition, consistent with older guidance treating EDI (electronic data interchange) connections the same way. Normally that would make the bridge fee taxable to the buyer. But Texas also lets a buyer purchase a taxable service tax-free when it's an integral part of another taxable service the buyer resells — and since the bridge is integral to delivering the taxpayer's own taxable pricing-engine service, the taxpayer can issue a resale certificate to avoid paying tax on the bridge fee itself, while still collecting tax on its own pricing-engine charges to customers.

What this means for you

Fintech and SaaS companies buying data-connectivity or integration services

If a third-party integration, API bridge, or data-routing service you purchase is itself a taxable telecommunications service (electronic transmission/routing of data), and that connectivity is integral to a taxable service you sell, you may be able to purchase it tax-free with a resale certificate rather than paying tax twice (once on the input, once passed through in your own taxable sale).

Companies providing data bridges, EDI, or system-integration connectivity

Fees for routing data electronically between two companies' systems are broadly treated as taxable telecommunications services in Texas, following the same analysis applied to EDI connections since the early 2000s — plan to collect sales tax on these fees unless your customer provides a valid resale certificate.

Accountants and tax professionals

The controlling framework combines the telecommunications-service definition in Section 151.0103 (applied per STAR Accession Nos. 200108436L and 200107399L on EDI services) with the resale exemption in Section 151.302, following STAR Accession No. 9409L1329F09 (1994) on telecommunications services integral to data processing.

Common questions

Q: Is a fee for connecting two software systems electronically (like an API bridge or EDI link) taxable in Texas?
A: Generally yes — Texas treats electronic data routing/transmission services broadly as taxable telecommunications services, following its long-standing treatment of EDI connections.

Q: Can a business avoid tax on a data-bridge fee if it uses that connectivity to deliver its own taxable service?
A: Yes, if the bridge is integral to a taxable service the business resells (like this taxpayer's data processing pricing engine), it can buy the connectivity tax-free with a resale certificate.

Q: Does the buyer still need to collect tax on its own service to customers?
A: Yes — the resale exemption only avoids double taxation on the input; the buyer's own taxable service to its customers remains taxable as usual.

Q: Can another fintech 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 § 151.0103 (Telecommunications Services, definition)
• Tex. Tax Code §§ 151.010, 151.051, 151.101, 151.0101 (taxable item; imposition; taxable services list)
• Tex. Tax Code § 151.006, § 151.302 (Sale for Resale, definition and exemption)
• 34 Tex. Admin. Code § 3.285 (Resale Certificate; Sales for Resale)
• STAR Accession No. 200108436L (Aug. 27, 2001); STAR Accession No. 200107399L (July 26, 2001) (EDI as taxable telecommunications service)
• STAR Accession No. 9409L1329F09 (Sept. 7, 1994) (telecommunications service integral to data processing, resellable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201801012L

Original ruling text

January 19, 2018

RE: Private Letter Ruling No. 20170823122633

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ENDNOTE: 1] We are responding to your request dated December 16, 2015, followed by supplemental information submitted August 4, 2016. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on behalf of your client, ** (Taxpayer), with respect to the taxability of fees charged for an electronic bridge connecting mortgage originators to Taxpayer’s online tool for mortgage pricing.

Facts Presented

Taxpayer provides an online tool for mortgage product eligibility and pricing, which it calls a pricing engine. Lenders and mortgage brokers use Taxpayer’s pricing engine to compute the pricing of a customer’s mortgage. Taxpayer’s pricing engine is a taxable data processing service, and Taxpayer collects applicable Texas sales and use tax from its customers.

Lenders and mortgage brokers use loan origination systems (LOS) to process mortgages from initial application to closing and funding. COMPANY LOS is an LOS product offered by COMPANY. Customers using COMPANY's LOS are the primary users of Taxpayer’s pricing engine.

To integrate Taxpayer's mortgage pricing services into the COMPANY LOS workflow, COMPANY created a proprietary electronic bridge, or “E-pass integration,” that facilitates the transmission of loan information between the COMPANY LOS and Taxpayer’s pricing engine.

A lender who is a customer of both Taxpayer and COMPANY will originate a loan using the COMPANY LOS. COMPANY’s proprietary E-pass integration allows the lender to transmit the loan information from COMPANY LOS into Taxpayer’s pricing engine. The pricing engine prices the loan and locks the loan rate for the lender. Taxpayer delivers the locked loan information back to the lender through the E-pass integration so the lender can continue the loan closing process.

COMPANY charges Taxpayer a fee for each time a lender or mortgage broker who uses COMPANY’s LOS (an Affiliate) accesses Taxpayer’s pricing engine through the E-pass integration (the COMPANY Fees).

The Recitals in the Electronic Bridge Agreement between Taxpayer and COMPANY state that the electronic bridge allows Taxpayer “to receive and facilitate orders….” More specifically, the recitals state that the electronic bridge enables Taxpayer and Affiliates to “establish electronic linkages, to transmit data, and electronically order, track, and report” mortgage product eligibility and pricing services. The recitals note that the bridge allows Affiliates to “interconnect with [Taxpayer] in its capacity as a third-party service provider” in order to “view, interface with, and transmit data to” Taxpayer’s pricing engine.

Question, Ruling, and Analysis

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

Question: Are the COMPANY Fees paid by Taxpayer to COMPANY subject to Texas sales and use tax?

Ruling: Yes. The COMPANY fees are paid for a telecommunications service and are subject to Texas sales and use tax. Taxpayer may purchase the telecommunications services tax-free for resale.

Analysis:

Telecommunications Services

Texas sales tax is imposed on the sales price of each taxable item purchased in this state. Section 151.051 (Sales Tax Imposed). A complementary use tax is imposed on each taxable item purchased for storage, use, or consumption in Texas. Section 151.101 (Use Tax Imposed). The Tax Code defines a taxable item as tangible personal property or a taxable service. Section 151.010 (Taxable Item). Taxable services are listed in Section 151.0101 (“Taxable Services”) and include telecommunications services.

Section 151.0103 (Telecommunications Services) defines “telecommunications services” as “ . . . the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, or any other method now in existence or that may be devised, including but not limited to long-distance telephone service.”

COMPANY charges Taxpayer a fee to route data from a customer’s COMPANY LOS workflow to Taxpayer’s pricing engine and then to route data back from Taxpayer to the customer to complete the loan origination process. The service constitutes a telecommunications service because COMPANY’s electronic bridge routes data to and from Taxpayer and its customers for a charge.

Previous Comptroller guidance provides an analysis of Section 151.0103 that is consistent with this conclusion. For example, STAR Accession Nos. 200108436L (August 27, 2001) and 200107399L (July 26, 2001) describe Electronic Data Interchange (EDI) services similar to those provided by COMPANY to Taxpayer. The letters, which define EDI as “computer-to-computer exchange of business documents between different companies,” found EDI to be taxable telecommunications services.

Like the EDI services, COMPANY’s electronic bridge exchanges loan pricing information between lenders and Taxpayer – services that come within the definition of telecommunications services.

Sale for Resale Exemption

Section 151.006 (“Sale for Resale”) defines a “sale for resale,” in relevant part, as the sale of “tangible personal property or a taxable service to a purchaser who acquires the property or service for the purpose of reselling it with or as a taxable item… or as an attachment to or integral part of other tangible personal property or taxable service; . . .” Section 151.302 (Sales for Resale) provides that the sale for resale of a taxable item is exempt from Texas sales and use tax.

Prior Comptroller guidance found the purchase of a telecommunications service to be a sale for resale when that service was integral to the performance of a data processing service, such as the one Taxpayer provides through its pricing engine. See STAR Accession No. 9409L1329F09 (Sept. 7, 1994).

Taxpayer may issue a resale certificate in lieu of paying tax on the purchase of telecommunications services from COMPANY. For more information regarding resale certificates, please refer to Rule 3.285 (Resale Certificate; Sales for Resale).

STAR documents cited are available 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 #20170823122633.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

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