Did a law firm's separately stated reimbursement of taxable electronic legal-research costs create another taxable information-service sale to its client?

Plain-English summary

A law firm paid database companies for computerized legal research used internally by its lawyers to prepare documents, advise clients, and provide legal services. The database invoices included Texas sales tax.

The Comptroller treated that research as a taxable expense of the law firm, not information resold to the client. The firm could separately state an equal reimbursement on the client's bill without creating additional sales-tax liability. The tax component was to be labeled “Sales Tax Reimbursement.”

Because the reimbursement was not a taxable information-service sale, the letter did not require the firm to qualify as a retailer or issue resale certificates to the database companies under the stated assumptions.

What this means for you

Under the 1988 guidance, client-specific use and exact reimbursement did not convert the law firm's internal research input into a resale. The firm paid tax to the database vendor and could recover the cost without a second layer of tax.

Common questions

Was the client's reimbursement taxable? No.

Who paid tax on the database service? The law firm.

What label did the letter require for the tax portion? “Sales Tax Reimbursement.”

Could the firm buy the research for resale? No, under the described use.

Citations and references

The letter did not cite a rule or statute by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8803L0869G09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller March 18, 1988

Dear **:

Thank you for your recent letter regarding reimbursement of sales tax
paid
by law firms for information services.

Your questions and my responses are based on the situation you described
as
follows:

Law firm "X" provides a wide variety of legal services to its
clients. X's attorneys frequently perform computerized legal
research using electronic data bases such as LEXIS, WESTLAW and
the like in connection with the particular projects of specific
clients. The results of that research (retrieved cases,
statutes, administrative materials, professional articles,
texts and the like) are used internally by X's lawyers to
prepare documents, to advise and counsel clients, and otherwise
to render legal services.

Since October 1st, X's statements from the electronic data base
companies have included Texas sales tax. X now desires to
begin seeking reimbursement from its clients for such
electronic research. X is able to identify from its internal
records and from the invoices received from the electronic data
base companies the charges incurred on behalf of individual
clients.

Accordingly, X proposes to include on a client's statement
under disbursements for expenses a charge for computerized
legal research incurred on that client's behalf by X's
attorneys. The amount charged to the client will be equal to
X's payment to the electronic data base company for research
conducted on the client's behalf, which charge will include a
proportionate share of the sales tax paid by X.

X does not hold a Texas Sales and Use Tax Permit and does not
now file Texas sales and use tax returns. Except for this
issue, it should be presumed in formulating your responses that
X is not subject to the sales tax collection and reporting
requirements of the Tax Code.

Question 1: Would X's charges to its clients for reimbursement of
amounts
paid to the electronic data base companies (being equal to
the companies' charges to the law firm, including sales tax)
be treated as taxable sales of information services by X?

Answer: No. This is a taxable expense of the law firm that provides the
service. The charges may be separately stated to clients without
causing an additional tax liability. The sales tax amount should
be labeled "Sales Tax Reimbursement".

Question 2: If your response to question No. 1 is affirmative, must X
qualify as a retailer, collect sales tax from its clients on
the reimbursement amounts billed, and remit the same on sales
and use tax returns filed with your office?

Answer: See answer #1.

Question 3: If your response to question No. 2 is affirmative, can the
law firm issue resale certificates to the electronic data base
companies and purchase the electronic information free of
sales tax?

Answer: See answer #1.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call our
toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may write
me
at the Tax Policy Division.

Sincerely,
Julie Pesl
Tax Policy Division