Is a SaaS platform that turns clients' raw customer data into structured advertising databases taxed as a data processing service or an information service?

Plain-English summary

The Texas Comptroller ruled that a Delaware company's web-based advertising-data platform is a taxable data processing service, not a taxable information service and not a nontaxable service. The platform takes raw customer data clients already collect (names, demographics, location, purchases, web browsing, credit card use, email activity, app activity), uses machine learning to organize it into customer profiles, and builds databases formatted for the client's advertising needs — including exporting the data into third-party advertising analytics systems. The taxpayer's own contract described the offering as "software as a service" (SaaS).

The line between the two similar-sounding taxable categories matters because Texas exempts only 20% of an information service charge and only 20% of a data processing service charge — but which bucket a service falls into affects how it's analyzed. An information service means the provider gathers, compiles, and sells its own curated information (news, research, data retrieval) to customers. Data processing, by contrast, means processing, reformatting, or manipulating data the customer already supplied. Because this platform's core function is reformatting and restructuring data clients bring to it — not compiling and selling the taxpayer's own gathered information — it's data processing. The Comptroller distinguished a 2011 Comptroller Decision involving an online-dating lead service, which sold candidate information it gathered directly to dating-service clients (a genuine information service), from this taxpayer's platform, which only reshapes data the client already owns.

What this means for you

SaaS and martech companies

If your platform's core value is taking a client's own data and restructuring, reformatting, cleaning, or reorganizing it (even with sophisticated machine learning) for the client's own use, Texas is likely to tax it as a data processing service, with only 20% of the charge exempt. The SaaS delivery model itself doesn't avoid tax — the Comptroller has held SaaS taxable as data processing since at least 2008 (STAR 200805095L, cited here).

Companies that sell their OWN gathered data

The key distinguishing fact from the 2011 dating-lead case: if you gather and compile information yourself and then sell that compiled information to customers, you may instead be providing a taxable information service (also 20% exempt, but analyzed differently, e.g. under the proprietary-information exclusion in Rule 3.342(a)(5)(A) for data gathered specifically for one client that isn't resold). Whether your service is "data processing" or "information service" turns on whose raw data you start with and what you do with it — worth confirming against your specific facts.

Accountants and tax professionals

Both categories carry the same 20% statutory exemption under § 151.351, so for pure tax-rate purposes the distinction may not change the bottom line — but it affects which regulatory tests and case citations apply, and whether a narrower exclusion (like the proprietary-information carve-out) might apply instead.

Common questions

Q: Is all SaaS taxable in Texas?
A: Not automatically taxable as a blanket rule, but a SaaS platform that processes, reformats, or manipulates customer-supplied data is taxed as a data processing service, per the Comptroller's consistent position since 2008.

Q: What's the tax rate on data processing services?
A: 80% of the charge is taxable (20% is statutorily exempt) under Tex. Tax Code § 151.351 — the same 20% exemption applies to information services.

Q: How is this different from a company that sells leads or compiled information it gathered itself?
A: That's a genuine information service (illustrated by the 2011 online-dating lead case cited here), because the provider compiles its own gathered information and sells it. This taxpayer only reformats data the client already collected and supplied.

Q: Can another SaaS 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 § 151.0101(a)(10), (12) (taxable services)
• Tex. Tax Code § 151.0038 (information service)
• Tex. Tax Code § 151.0035 (data processing service)
• Tex. Tax Code § 151.351 (20% exemption)
• 34 Tex. Admin. Code Rule 3.342(a)(1), (2), (5)(A), (6) (Information Services)
• 34 Tex. Admin. Code Rule 3.330(a)(1) (Data Processing Services)
• Comptroller Decision No. 104,366 (2011) (distinguished — online-dating lead compiler = information service)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201902014L

Original ruling text

February 22, 2019

RE: Private Letter Ruling No. 20180411151546

Dear **:

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 March 27, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance regarding the taxability of information services using a platform to create databases structures for advertising purposes for customers.

Facts Presented

** (Taxpayer), a Delaware corporation located in CITY, Washington, offers clients a web-based platform that helps them fine-tune their targeted advertising campaigns. Clients provide Taxpayer raw data they collect from customers. Taxpayer’s platform organizes the raw data into discreet customer profiles using advanced machine learning software. Each customer profile includes the person’s name, demographics, location, purchasing behavior, internet browsing activity, credit card information, email activity, and mobile application activity. Once the platform establishes customer profiles, it can then create multiple databases that can be formatted for a multitude of advertising purposes. Clients can also export the data to various advertising systems.

For example, Taxpayer’s client, a distributer of spirits, wine, and champagne, provides its sales information, customer loyalty program information, wine club membership data, web analytics from its website and mobile applications, and information from its email marketing systems via Taxpayer’s web-based platform. The web-based platform accepts the raw data and stitches it together to develop customer databases for Taxpayer’s client to review or export to the client’s advertising analytics system for a number of other advertising purposes.

Additionally, Taxpayer’s Pre-Release Evaluation Agreement (Agreement) describes Taxpayer’s service as “software as a service (‘SaaS’) enabling businesses to create and maintain a verified view of customers and prospects, and orchestrate channels to deliver personalized marketing, including data staging, stitching, views, segmenting and orchestration ….” Schedule 1 of the Agreement references additional services such as cleaning clients’ preexisting data and helping export the data to various advertising systems.

Question, Ruling, and Analysis

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

Question: Is Taxpayer’s service a data processing service, an information service, or a nontaxable service?

Ruling: Taxpayer’s service is a taxable data processing service. Under Section 151.351 (Information Services and Data Processing Services), twenty percent of the charge for data processing services is exempt.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). The term “taxable services” includes only those services listed in Section 151.0101 (“Taxable Services”). Both information services and data processing services are listed as taxable services. Section 151.0101(a)(10), (12). Twenty percent of the charge for a data processing or information service is exempt. Section 151.351.

The term “information service” means “furnishing general or specialized news or other current information, including financial information … or electronic data retrieval or research.” Section 151.0038 (“Information Service”) and Rule 3.342(a)(2) (Information Services). Generally, information gathered, maintained, or compiled and made available by the service provider to the public or to a specific segment of industry for consideration is subject to sales tax. Rule 3.342(a)(6).

Certain information services are not subject to tax, including the “sale of information that is gathered or compiled on behalf of a particular client … if the information 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 3.42(a)(5)(A).

Rule 3.342 excludes certain activities from the definition of information services. Rule 3.342(a)(1) states, “Processing, reformatting, or manipulating data provided by the customer is data processing and is not included in the definition of information services.”

Data processing services include “word processing, data entry, data retrieval, data search, information compilation … and other computerized data and information storage or manipulation.” Section 151.0035 (“Data Processing Service”). Rule 3.330(a)(1) further defines data processing services as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information and entering and retrieving information. It specifically includes … computerized data and information storage or manipulation.” See Rule 3.330(a)(1).

Taxpayer’s platform provides clients a data processing service. The platform accepts a client’s raw customer data, organizes it into customer profiles, and creates databases structured and formatted for various advertising purposes. The platform also allows clients to export these databases to third-party advertising analytics systems in the systems’ required formats.

Taxpayer’s contracts with clients acknowledges that the services provided through the platform are SaaS. SaaS is “a software application delivery model where a vendor develops a web-native software application and hosts and operates (either independently or through a third-party) the application for use by its customers over the internet.

Customers do not pay for owning the software itself but rather for using it.” See STAR Accession No. 200805095L (May 28, 2008). The Comptroller determined SaaS is taxable as a data processing service. See STAR Accession No. 200805095L.

Taxpayer contends its service is akin to the services at issue in Comptroller Decision No. 104,366 (2011). In that case, the service provider solicited information from potential candidates for its online dating service clients. The service provider compiled the information potential candidates submitted and sold that information to its dating service clients as potential leads. The Comptroller found that the service provider was performing an information service instead of a data processing service.

Unlike the service provider in Comptroller’s Decision No. 104,366, Taxpayer’s service is not an information service. Rule 3.342(a)(1) specifically states that processing, reformatting, or manipulating data provided by the customer is data processing and is not included in the definition of information services. Taxpayer’s platform converts raw data received from a client into restructured and reformatted databases. The platform also allows clients to reformat the data to the required format for export to a third-party advertising analytics system. Taxpayer’s platform processes, reformats, and manipulates data provided by Taxpayer’s clients and is therefore a taxable data processing service.

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/web-forms/tax-help/ and reference Private Letter Ruling No. 20180411151546.

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.