How is Texas sales tax computed on an employee incentive program that charges website-design fees, transaction fees, and reward certificates redeemable for merchandise or gift cards?

Plain-English summary

The Texas Comptroller broke down the sales tax treatment of a multi-part employee incentive program into four separate pieces, each taxed differently. The company designs and hosts a website for corporate clients to run reward programs — employees earn "certificates" (worth either a dollar amount or points tied to dollars) redeemable for merchandise, including gift cards, through that website.

Website design, consulting, and start-up fees: fully taxable as a data processing service — creating, storing, and maintaining a website counts as data processing under a 2005 Comptroller decision, and the entire bundled charge is taxable even if the consulting and setup portions are separately stated on the invoice (only 20% of the total is statutorily exempt under § 151.351).

Transaction fees for issuing certificates: NOT taxable, because the certificates themselves are just an intangible right to a future purchase — you can't tax a fee tied to selling an intangible.

Merchandise purchased with certificates: taxable, using the same rule Texas applies to old-fashioned trading stamps — when a certificate (like a stamp) is redeemed for physical merchandise, tax is due on the certificate's face value or the merchandise's retail price, whichever is larger, and any transaction/shipping fees get folded into that taxable amount.

Gift cards purchased with certificates: NOT taxable — a gift card is itself just another intangible right to a future purchase, so redeeming one intangible (the certificate) for another intangible (the gift card) doesn't trigger a taxable sale, even though the same certificates ARE taxable when redeemed for physical goods.

What this means for you

Employee incentive, loyalty, and rewards program operators

If your program looks similar — a website platform, redeemable points/certificates, and a mix of merchandise and gift-card rewards — expect to collect tax differently depending on what the employee actually redeems for: physical merchandise is taxable (based on face value or retail price, whichever is higher), while gift cards are not, even though both are "purchased" with the same certificates. Your website design/build charges are separately taxable as data processing, regardless of how the redemption side is taxed.

Companies designing or licensing incentive-program platforms

The "entire amount charged... is taxable even if separately stated" rule for the website design bundle is a trap worth knowing: itemizing consulting vs. website-build charges on your invoice doesn't split out a nontaxable consulting-only portion — the whole bundle rides on the data-processing characterization.

Accountants and tax professionals

This ruling usefully separates four distinct tax questions that often get conflated in loyalty/incentive program design: (1) platform/software delivery (data processing), (2) fees on the sale of an intangible (nontaxable), (3) redemption of an intangible for tangible goods (taxable, trading-stamp rule), and (4) redemption of one intangible for another (nontaxable). Each turns on different statutory and rule authority.

Common questions

Q: Is the whole employee incentive program taxable as one bundled service?
A: No — it splits into at least four separately analyzed pieces: website design (taxable data processing), certificate transaction fees (nontaxable), merchandise redemptions (taxable per the trading-stamp rule), and gift-card redemptions (nontaxable).

Q: How much tax is due when an employee redeems a certificate for merchandise?
A: Tax is computed on whichever is LARGER: the face value of the certificate, or the retail price of the merchandise — plus any transaction and shipping fees, which get folded into the taxable amount.

Q: Why are gift cards treated differently from other merchandise?
A: Gift cards are themselves an intangible right to a future purchase (like the certificates), so redeeming a certificate for a gift card is an intangible-for-intangible exchange, not a taxable sale of goods.

Q: Can another incentive-program company rely on this ruling?
A: No. It binds the Comptroller only as to the taxpayer and facts in this specific request and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (sales tax imposed)
• Tex. Tax Code § 151.010 (taxable item)
• Tex. Tax Code § 151.007(a)(3), (b) (sales price/receipts)
• Tex. Tax Code § 151.0035 (data processing service)
• Tex. Tax Code § 151.0101(a)(12) (taxable services)
• Tex. Tax Code § 151.351 (20% exemption)
• 34 Tex. Admin. Code Rule 3.330 (Data Processing Services)
• 34 Tex. Admin. Code Rule 3.301(a)(2) (Promotional Plans — trading stamps)
• 34 Tex. Admin. Code Rule 3.286(d)(2)(B); Rule 3.303(a), (d)
• Comptroller's Decision No. 44,736 (2005)
• STAR Accession Nos. 200405590L (2004), 200603549L (2006)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201901048L

Original ruling text

January 25, 2019

RE: Private Letter Ruling No. 20180618092040

**:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Aug. 2, 2016. Additional information relating to the request was received on May 4, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of taxpayer’s services that include consulting, website development, transaction fees for intangible certificates, and merchandise purchased with certificates.

Facts Presented

** (Taxpayer) provides a number of services geared towards helping its customers implement employee incentive programs. In developing the incentive program, Taxpayer consults with a customer to determine the type of behavior or performance they wish to encourage and the types of rewards they wish to provide. Taxpayer then designs a website for the customer that is used to administer the incentives. Taxpayer retains control of the website and their customers must request any changes or upgrades. Once the website is complete, Taxpayer trains the customer's employees how to use the website.

The schedule of fees included in the PLR request describes an “upfront services fee.” This one-time fee includes:

website configuration services and branding;

a communications and training package; and

website access.

The rewards are given to employees in the form of certificates that are used to purchase merchandise, including gift cards, through the website provided by Taxpayer. The value of a certificate is either a specific dollar amount or a certain number of points that are tied to the value of US dollars. Taxpayer invoices its customers for the face-value of the certificate when they award certificates to an employee. In addition, Taxpayer charges its customers a transaction fee, which is based on the face-value of the certificates. After an employee chooses a reward and the certificates are redeemed, the item is drop-shipped by Taxpayer’s supplier directly to the employee.

Taxpayer is currently issuing resale certificates to its suppliers for the merchandise. The amount invoiced to its customers is equal to the face-value of the certificate plus the transaction fee. Taxpayer is currently collecting and remitting tax from customer’s employees on the sale of merchandise based on the retail sales value.

The relevant facts are based on the following redacted documents provided by Taxpayer:

Exhibit A - A statement of work;

Exhibit B - A schedule of fees;

Exhibit C - A services agreement;

The Private Letter Ruling request; and

Additional documentation in the form of invoices.

Questions, Rulings, and Analysis

Our restatement of your questions are shown below, followed by our rulings and analysis.

Question One: Are Taxpayer’s charges for consulting, start-up, and website design taxable?

Ruling One: Charges for website design are a taxable data processing service. The total amount charged for the website design, including the consulting and start-up charges, is taxable. Section 151.351 (Information Services and Data Processing Services) provides an exemption for 20 percent of the total amount charged for data processing services.

Analysis: Texas imposes a sales tax on each taxable item sold in this state. Section 151.051 (Sales Tax Imposed). A taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Data processing services are listed as a taxable service under Section 151.0101(a)(12) (“Taxable Services”).

A data processing service is defined in Section 151.0035 (Data Processing Service) and Rule 3.330 (Data Processing Services). A data processing service includes computerized data and information storage or manipulation. The creation, storage, and maintenance of a website is a taxable data processing service. Comptroller's Decision No. 44,736 (2005).

Taxpayer’s consulting services are performed to develop and implement an incentive program through the creation of the customer’s website. The entire amount charged for taxpayer’s web design and consulting services is taxable even if the consulting and start- up charges are separately stated. Section 151.007(b) (“Sales Price” or “Receipts”).

Question Two: Are taxpayer’s transaction fees for the issuance of the certificates taxable?

Ruling Two: The certificates represent an intangible right to a future purchase. Transaction fees charged on the sale of an intangible are not subject to Texas sales and use tax.

Analysis: Texas imposes a sales tax on each taxable item sold in this state. Section 151.051 (Sales Tax Imposed). A taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Taxpayer’s certificates are the intangible right to purchase merchandise and are not subject to Texas sales and use tax. A transaction fee related to the sale of an intangible is not subject to Texas sales and use tax. STAR Accession No. 200405590L (May 24, 2004).

Question Three: Is the purchase of merchandise using certificates by a customer's employee taxable?

Ruling Three: The merchandise purchased from Taxpayer using certificates is subject to Texas sales and use tax. The purchase of gift cards, the right to a future purchase, using certificates are not subject to Texas sales and use tax.

Analysis: Rule 3.301 (Promotional Plans, Coupons, Retailer Reimbursement) addresses a similar exchange of an intangible for taxable merchandise. For example, redeeming a trading stamp in exchange for merchandise is a sale of merchandise. A trading stamp company or retailer must collect sales tax based on the value of the stamp or the retail price of the merchandise, whichever is larger. See Rule 3.301(a)(2).

The amount of sales and use tax due must be separately stated on the bill, contract, or invoice to the purchaser or there must be a written statement to the purchaser that the stated price includes sales or use tax. See Rule 3.286(d)(2)(B) (Seller's and Purchaser's Responsibilities).

Charges for shipping and handling are included in the selling price of the merchandise. See Section 151.007(a)(3) and Rule 3.303(a) and (d).

Taxpayer's certificates, which are redeemable intangibles, function in the same manner as trading stamps. Taxpayer is required to collect and remit tax on the amount invoiced to customers, the face-value of the certificates, upon redemption of the certificates in exchange for merchandise. The taxable amount also includes any charges such as transaction and shipping fees.

Gift cards are an intangible right to a future purchase. Taxpayer is not required to collect and remit tax upon redemption of its certificates in exchange for gift cards. STAR Accession No. 200603549L (March 23, 2006).

Comptroller’s Decisions and STAR documents cited can be found 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/taxhelp/ and reference Private Letter Ruling No. 20180618092040.

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.