Is a residual referral fee a point-of-sale technology company earns from a credit card processor, for referring its retail/hospitality clients to that processor, subject to Texas sales tax?

Plain-English summary

A company sells and installs point-of-sale (POS) systems for retail and hospitality clients and correctly collects sales tax on those system sales. Separately, it has a referral deal with a credit card processor: the company hands prospective merchants the processor's merchant agreement, forwards the signed agreements back to the processor, and does nothing else — no marketing materials, no additional underwriting, no ability to alter the agreement. In exchange, the processor pays the company a "residual fee," a percentage of what the processor nets from that merchant's processing fees over time. The company asked whether that residual fee is taxable.

The answer is no. Texas only taxes services that appear on its specific list of enumerated taxable services (things like data processing, information services, repair services, and others named in the statute). Simply promoting another company's product and passing along paperwork isn't one of them — it's a plain referral/finder's-fee arrangement, not a data processing, information, or any other listed taxable service. Since the activity doesn't fit any taxable category, the residual fee income isn't subject to Texas sales or use tax.

What this means for you

Technology resellers, VARs, and referral partners

Earning a referral or residual fee for pointing customers toward a third party's product or service — without doing anything more (no data manipulation, no ongoing service delivery, no taxable activity of your own) — generally isn't taxable in Texas. The key fact pattern here is doing nothing beyond promotion and paperwork forwarding; adding services on top (like account management, technical support, or data handling) could change the analysis.

Businesses mixing taxable product sales with referral income

Keep your taxable POS/technology sales revenue separate from nontaxable referral income in your books — this ruling shows the two can sit side by side with very different tax treatment even when they arise from the same client relationships.

Accountants and tax professionals

This is a clean, minimal-facts illustration of the enumerated-services principle: absent a fit with one of the Section 151.0101 categories, an income stream isn't taxed no matter how it's structured or what it's called. Worth citing for any client with pure referral/commission arrangements that don't involve data processing, information services, or another listed activity.

Common questions

Q: Would the answer change if the company did more than just forward paperwork?
A: Potentially — this ruling turns on the narrow fact that the company only promoted the processor's service and submitted signed agreements, with no rights to alter agreements and no additional client data gathered. A referral relationship involving actual data processing or another enumerated taxable service could be analyzed differently.

Q: Does this mean all referral or finder's fees are tax-free in Texas?
A: Not necessarily — the answer depends on whether the underlying activity fits one of Texas's specifically enumerated taxable services. A pure referral (as here) generally isn't taxable, but bundling in other taxable services could change that.

Q: Does this ruling apply to my referral arrangement?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts. Similar referral arrangements should confirm their own scope of activity with a Texas tax professional.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.101 (sales tax and use tax imposition)
• Tex. Tax Code § 151.010 (Taxable Item)
• Tex. Tax Code § 151.0101 (Taxable Services — enumerated list)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202407021L

Original ruling text

July 24, 2024

RE: Private Letter Ruling No. 20221004151119

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 September 23, 2022, and additional information received via email. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of credit card processing fee residual payments (Residual Fees) received by** (Taxpayer) as part of a referral agreement.

Facts Presented

Taxpayer provides clients in the retail and hospitality business with a variety of technology- based services, including the sale and installation of point-of-sale systems. Taxpayer collects sales and use tax on the sale of the point-of-sale systems.

Taxpayer also enters into a referral agreement (Agreement) with a credit card processor (Processor) to promote the Processor’s services to Taxpayer’s clients that accept credit cards as payment for goods and services.

Taxpayer provides Processor’s merchant agreement to prospective merchants who want to apply for Processor’s services. Taxpayer then submits the executed merchant agreements to Processor. The Agreement states that Taxpayer has no rights to the merchant agreements and cannot alter merchant agreements. Taxpayer only promotes Processor’s service. Taxpayer does not create any marketing materials, nor does it gather any additional information from the merchant to provide to Processor.

Taxpayer receives a Residual Fee from Processor for each accepted merchant whose merchant’s agreement was submitted by Taxpayer. The Residual Fee is a percentage of Processor’s income from fees charged to merchants after subtracting Processor’s costs.

Question, Ruling, and Analysis

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

Question: Is the Residual Fee subject to Texas sales and use tax?

Ruling: No, Taxpayer’s Residual Fee is not subject to sales and use tax.

Analysis: Sales or use tax is imposed on the sale or use of each taxable item in this state. Sections 151.051 (Sales Tax Imposed) and 151.101 (Use Tax Imposed). A taxable item is comprised of both tangible personal property and taxable services. Section 151.010 (Taxable Item). The term “taxable services” only applies to services listed in Section 151.0101 (Taxable Services).

The Residual Fee compensates Taxpayer for promoting Processor’s services and submitting executed merchant agreements to Processor. These activities do not fall under the services listed as taxable services under Section 151.0101. Therefore, Taxpayer’s services are not subject to sales and use tax.

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. 20221004151119.

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.