Are the fees a shared computer reservation system charges hotel and vehicle-rental affiliates taxable data processing, or a nontaxable information service?

Plain-English summary

Two reservation companies — one handling hotel reservations (CORP A) and one handling vehicle-rental reservations (CORP B) — used a jointly owned computer company (CORP X) that ran the central computer reservation and communication system. CORP X billed a computer reservation fee (per reservation) and a communications access fee (for the leased data circuits). The question was whether those fees are taxable data processing or a nontaxable information service.

The Comptroller's Tax Policy Committee determined that CORP X is not providing taxable data processing services to CORP A and CORP B. CORP X is providing information, but under Texas policy, information gathered or compiled on behalf of a particular client is not taxable when it is proprietary to that client and may not be sold to others. Here the information is proprietary: CORP X is restricted from giving any availability/reservations information to anyone other than the reservation companies (CORP A or CORP C) unless specifically authorized. Because the information is proprietary and cannot be resold, the reservation fees are a nontaxable information service, not taxable data processing.

The taxpayer's supporting submission (included with the ruling) framed the issue under Tax Code § 151.0038 (which defines information services to include furnishing specialized current information and electronic data retrieval) and Rule 3.342, which distinguishes a nontaxable information service from taxable data processing ("the processing, reformatting, or manipulation of data provided by the customer") and, in Rule 3.342(d)(1), excludes from tax information gathered for a particular client that is proprietary and may not be sold to others. The taxpayer also argued the communications access fee is a component part of the same information service (a pass-through of the leased-data-circuit cost, on which CORP X pays tax to its vendor), not a distinct telecommunications or data processing charge.

What this means for you

Operators of shared information / reservation systems

Furnishing specialized information that is proprietary to a specific client — and that you are restricted from selling to anyone else — can be a nontaxable information service rather than taxable data processing. The key is that the data is not provided by the customer for processing, and the information is client-proprietary and not resalable.

Data processing vs. information service

Taxable data processing involves processing, reformatting, or manipulating data the customer provides. Retrieving and furnishing specialized information the provider compiles — proprietary to the client — falls on the nontaxable information-service side of the line. How the arrangement is structured and restricted matters.

Bundled communications/access charges

Where a communications or access charge is a pass-through of the provider's own cost (on which the provider pays tax) and is a component of the information service rather than a separate service the customer directly uses, it can be treated as part of the nontaxable information service.

Common questions

Q: Are the reservation-system fees taxable in Texas?
A: No. The Comptroller determined the operator is providing a nontaxable information service, not taxable data processing, because the reservation information is proprietary to the reservation companies and cannot be sold to others.

Q: What makes it an information service instead of data processing?
A: Data processing involves manipulating data the customer provides. Here the operator retrieves and furnishes specialized information it compiles, and the information is proprietary to the client — that is a nontaxable information service.

Q: Why does "proprietary" matter?
A: Under Texas policy (reflected in Rule 3.342(d)(1)), information gathered on behalf of a particular client is not taxable if it is proprietary to that client and may not be sold to others. The operator was restricted from sharing the reservation information with anyone else.

Q: What about the communications access fee?
A: The taxpayer argued it is a component of the information service — a pass-through of the leased-data-circuit cost on which the operator already pays tax — not a distinct taxable service.

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

Statute: Tex. Tax Code § 151.0038 — defines information services to include furnishing specialized news or other current information and electronic data retrieval.

Rule: 34 Tex. Admin. Code § 3.342 — distinguishes information services from data processing (the processing, reformatting, or manipulation of data provided by the customer); subsection (d)(1) excludes from tax information gathered for a particular client that is proprietary and may not be sold to others. (These authorities appear in the taxpayer's supporting submission; the Comptroller's determination rests on the information being proprietary and non-resalable.)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8808L0899C08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller August 9, 1988

Dear ***:

The Tax Policy Committee has discussed the services that CORP X
provides to CORP A and CORP B.

We have determined that CORP X is not providing taxable data
processing services for CORP A and CORP B. It does appear that
CORP X is providing information to CORP A and CORP B. However,
information which is gathered or compiled on behalf of a parti-
cular client is not taxable if the information is of a proprie-
tary nature to that client and may not be sold to others.

The Committee has determined that this information is not taxable
because it appears to be proprietary in that CORP X is restricted
unless specifically authorized elsewhere by CORP A or CORP B to
give any availability/reservations information to anyone other than
CORP A or CORP C.

If you have any further questions on this matter, please feel free
to contact me.

Sincerely,
Dan Pearson
Deputy Comptroller

Fact Summary

This ruling request relates to the taxability of computer
reservation fees and communication access fees billed by a
subsidiary jointly owned by CORP M and CORP C. Refer to the
attached exhibit which illustrates the relationship of the
entities involved.

CORP M and CORP S, two unrelated corporations, jointly own
CORP A, which operates an inter-hotel reservation service,
the ** Reservation Service, to facilitate the marketing
of guest rooms and other services provided by the hotels that
CORP M and CORP S franchise, own and/ or operate worldwide.

CORP C owns CORP B, as a wholly owned subsidiary, which operates
CORP C's vehicle reservations for its worldwide locations.

CORP M and CORP C jointly own CORP X Computer Services, to share
the cost of developing and maintaining a computer-based reservation
and communication system to handle the reservation requirements of
their respective hotel and vehicle rental operations. Substantially
all of the revenues of CORP X are derived from fees charged to the
affiliates and licensees of CORP M, CORP S, and CORP C. A portion
of such revenues is derived from providing a similar service to
certain other unrelated hotel chains.

CORP A, CORP B and CORP X are principally located in ***,
Texas. CORP A and CORP B are similar operations which maintain a
group of reservation sales agents who communicate with customers and
travel agents by telephone, by way of an 800 number, and provide
reservation information regarding rates and availability of CORP M
rooms or CORP C vehicles.

CORP X maintains the central computer facility which provides the in-
formation to support these two distinct reservation systems. Such
reservation information is generally entered for CORP M by the hotels,
and for CORP C by CORP B. Once entered, such information is available
only to: the CORP M hotels or CORP A with respect to hotel information;
CORP B with respect to vehicle information; and to a limited extent on
a delayed basis to travel agents by way of an airline reservation system.

Actual reservations may be made in several different ways. In the case
of CORP M, an CORP A sales agent may enter a reservation, a hotel em-
ployee may make a reservation for a customer, or a reservation may be
made by a travel agent through an airline reservation system. In the
case of CORP C, a reservation may be entered by an CORP B agent or a
travel agent through an airline reservation system. After a reservation
is entered, the information in printed form is made available directly
to the appropriate hotel or vehicle rental location.

CORP X bills an annual fixed fee based upon each CORP M or CORP C reser-
vation made. In addition to the reservation fee, CORP X charges a com-
munications access fee, which is a monthly fee fixed annually that is
intended to provide for the cost of the leased data circuits that allow
access to the reservation system.

In the case of CORP M, if a hotel makes a reservation for itself, CORP
X will bill that hotel a fixed fee for each reservation. If an CORP A
representative makes a reservation or if a reservation is made by any
other means, CORP X will bill CORP A the fee.

CORP A charges each hotel a reservation fee for each reservation booked
by or through CORP A for such hotel. CORP M and CORP S do not operate
CORP A with the intention of generating a profit on the services pro-
vided by CORP A. Rather, CORP A's billings are designed to recoup over
time only the costs of the operation of the ** Reservation Service.
The CORP X reservation fee is a part of the cost of operating CORP X,
and therefore is included in the service fee charged to the hotels.
Although the CORP X fee is not separately denominated, the effect of
the arrangement is a pass-through of the CORP X charge to the ultimate
beneficiary of the reservation -- the hotel.

At present, CORP X charges the communications access fee to CORP A,
which in turn allocates substantially all of such charges among the
hotels, based on the number of rooms at each hotel. The billings of
CORP A reflect this amount separately as a "communications access fee."

In the case of CORP C, CORP X bills CORP B for each reservation made.
CORP B charges the rental locations a reservation fee for each reser-
vation booked for such location. CORP B, by agreement with its affil-
iates and licensees, is not permitted to take a profit on this service.
Accordingly, CORP B's billings are designed to recover only the costs
of its operations. The CORP X reservation fee and communication access
fee is part of the cost of operating CORP B and therefore is included
in the reservation service fee charged to the rental locations. Although
the CORP X fees are not separately stated in the bill, the effect of the
arrangement is to pass the CORP X charge to the ultimate beneficiary of
the reservation -- the rental location.

Arguments

Computer Reservation Fee

The computer reservation fee represents a charge for a nontaxable in-
formation service. It qualifies as an information service, as distin-
guished from a data processing service, because the service provided
represents the furnishing of specialized current information to third-
party reservation service entities (CORP A, or CORP B). Texas Tax
Code Sec. 151.0038 defines information services to include "furnishing
specialized news or other current information" and "electronic data
retrieval."

Comptroller's rule 3.342 (Information Service) distinguishes a data
processing service from an information service by defining data pro-
cessing as "the processing, reformatting, or manipulation of data
provided by the customer." In this case, the service provided con-
sists of specialized information retrieval, and the data base infor-
mation is not provided by the customer (CORP A, or CORP B). Thus, the
fact that the CORP X reservation fee constitutes a charge for the
furnishing of specialized information to third-party entities distin-
guishes it from a data processing service where the customer utilizes
the computer to process and manipulate data information.

Although in some cases, the "CORP M" compass reservation fee is billed
directly to a CORP M hotel, the reservation is generally entered at a
different location, and the hotel billed the CORP X fee would in most
cases be a third-party entity (i.e., CORP S, CORP M, or CORP M fran-
chises). The "CORP C" compass computer reservation fee is always made
through and billed to CORP B.

Another characteristic which distinguishes this as an information ser-
vice is that the CORP X computer reservation fee is generated only when
a reservation is made. No computer fee is generated if a reservation
is not made, or if the computer data base is otherwise accessed or up-
dated. If this were a data processing service, there would be a direct
correlation between the use of the computer system and the fee charged.
In this case, a fee is generated only when a reservation is made. Thus,
the compass reservation fee is directly associated with the sale of in-
formation, and not from the usage of the system.

The information service is nontaxable, because the information provided
is of a proprietary nature, and may not be resold by the information
provider.

Comptroller's Rule 3.342(d)(1) states that "the sale of information
which is gathered on behalf of a particular client is not subject to
tax 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."

The information provided by CORP X Computer consists of the current
availability of a room/rental car at a specified location for a spe-
cified time period. Such information is proprietary because it, in-
herently, has value only to the reservation service provider. It has
no value to any other party for any other use. Once used, the infor-
mation has no value and cannot be resold.

Although Rule 3.42 does not define the term "proprietary nature," the
manner in which it is used, suggests that the term denotes a property
right or interest in the work product on the part of the customer. In
Stroh v. Blackhawk Holding Corp., 48 Ill. 2d 471, (1971), the court
examined the term "proprietary" in the context of stock ownership and
stated:

"...to the plaintiffs, 'proprietary' as used
in the definition of shares, means a property
right and shares must then represent some
economic interest, or interest in the property
or assets of the Corporation. However, the
work 'proprietary' does not necessarily denote
economic or asset rights, although it has been
defined as synonymous with ownership or to
denote legal title (Citing: Evans v. U.S.,
251 Supp 296, 300; Asch V. First National
Bank in Dallas (Texas, 304 S.W. 2d 179, 183;
The American Heritage Dictionary of the
English Language (1969)).

The court also cited Colten v. Jacques Marchais, Inc., 61
N.Y.S. 2d 269, 271, in which "proprietary rights" were defined as
those conferred by virtue of ownership of a thing. In that case,
the court defined "proprietary" as meaning ownership, exclusive
title or dominion, and implying possession and physical control
of a thing.

In Associated Press v. Emmitt, D.C. Cal, 45 F. Supp 907, the
court examined the membership agreement entered into between the
Associated Press and its member newspapers. Under the agreement,
the member acquired the right to receive the service defined in
his contract and the privilege of attending meetings and voting
on Associated Press policy. In addition, the Associated Press
agreed not to furnish services except to other members of the
Association. No member could furnish any news to persons other
than members or furnish the news of the Associated Press in
advance of publication. The court held that such restrictions
upon the members inure to the benefit of each member and that
each member's proprietary interest in news is protected because
other members are held to similar restrictions.

Such a property interest exists in the reservation information pro-
vided by CORP X. Consequently, the information should be considered
to be of a "proprietary nature" and should therefore meet the test
for exemption.

By contrast, a taxable information service consists of information
which is made available by the provider of the information service
to the public or a specified segment of industry. In this case,
the availability of the information is restricted to: the CORP M
entities or CORP A, the CORP C rental locations or CORP B, and, to
a limited extent, to travel agents by way of an airline reservation
system. The availability of information through the airline reser-
vation system is made on a delayed basis at the direction of CORP A
or CORP B. Any reservation made via the airline reservation system
is handled and billed in the same manner as any other CORP A or CORP
B. booked reservation. The toll free 800 number available to the
general public goes to the respective reservation service entities,
and any reservation information provided is proprietary to CORP A
or CORP B.

The classification of the CORP X computer reservation fee as a non-
taxable information service is consistent with the Comptroller's
existing policy interpretation. Comptroller's Rule 3.342(b)(5) pro-
vides that charges to a person by a financial institution 'for ac-
count balance information is a nontaxable information service.
Likewise, the Comptroller has ruled that MIS reports produced from
IMPACT teller machine transactions are considered proprietary in-
formation, and not taxable. In this example, CORP X Computer is
also retrieving specific proprietary information. The information
provided only has value when a potential client makes a specific
reservation inquiry to a reservation service entity, and the reser-
vation service entity matches that information request to create a
reservation. Thus, the CORP X computer reservation fee clearly
represents a fee for the sale of proprietary information, and is
nontaxable.

Communications Access Fee

In our opinion, the communications access fee is a component part
of the nontaxable information service provided by CORP X Computer,
and is not a distinct telecommunications or data processing service.

The communications access fee is a monthly fixed fee intended to
provide for the cost of the leased data circuits that allow access
to the CORP X system. It primarily represents the cost of the data
circuits from the worldwide CORP M and CORP C Rental locations to
CORP X Computer. It also includes the cost of the data circuits
from CORP X to CORP A and CORP B. which are located in different
buildings at the same location. CORP X computer pays tax to its
vendor on the cost of the leased data circuits. Thus, the commun-
ications -access fee is a pass-through of a cost incurred by CORP
X Computer in its capacity as an information service provider.

The communications access fee is not a distinct service fee
because the reservation service companies do not directly utilize
the leased data circuits. Because it is billed to the two
reservation service companies by CORP X Computer, it represents
part of the cost of the information service. Although CORP A
separately denominates the communications access fee as a part of
its reservation service fee, CORP B simply considers it a
component cost covered by its reservation service fee. The fact
that CORP A separately denominates the charge should not result
in it becoming a distinct service fee. It does not represent a
charge for a separate service provided by CORP A, and CORP A
could not have otherwise purchased the communications service fee
for resale since it never was a direct user of the data circuits.

Respectfully submitted,