How did Texas tax merchant credit-card processing, purchased data processing, setup packages, and card-authorization services?

Plain-English summary

A merchant processor collected credit-card proceeds from MasterCard and Visa and remitted them to merchants. The Comptroller agreed that its end-of-month percentage or per-transaction fees were not taxable services under Texas Tax Code § 151.010.

The processor was nevertheless the consumer of taxable data-processing services it bought to perform its nontaxable service. Rule 3.330(f)'s multistate treatment applied only if part of the purchased service benefited the processor's own out-of-state location. The locations of its merchant clients did not matter because they did not purchase the data-processing service.

Setup packages sold to merchants were taxable, while items transferred without charge were taxable to the processor. If property on which Texas tax had been paid was resold before use, the processor could claim a state-tax credit. A local-tax credit was available only for the same local jurisdiction; tax paid to a different local jurisdiction had to be recovered from the supplier.

The described card-authorization service was not taxable credit reporting. It checked whether a card was valid and authorized without providing credit history, standing, capacity, or insurability information.

What this means for you

A nontaxable service provider can still be the taxable consumer of the tools and services it buys. For multistate data processing, the purchaser's own benefit locations—not its customers' locations—controlled under this letter.

Common questions

Were merchant credit-card processing fees taxable? No under the described facts.

Could the processor allocate purchased data processing based on out-of-state merchants? No. Only benefit to the processor's own out-of-state location supported multistate treatment.

Were setup packages taxable? Yes when sold; no-charge items were taxable to the processor.

Were card-authorization services taxable credit reporting? No.

Could tax paid on resold property be credited? State tax could be credited if the item was resold before use; local credits required the same local taxing jurisdiction.

Citations and references

• Tex. Tax Code § 151.010 (taxable services)
• 34 Tex. Admin. Code Rule 3.330(f), including (f)(2) (multistate data-processing benefit)
• Tex. Tax Code § 151.427 (credit for tax paid on property later resold)
• 34 Tex. Admin. Code Rule 3.301 (tangible personal property)
• 34 Tex. Admin. Code Rule 3.343 (credit reporting services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9012L1089F04

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
Comptroller December 13, 1990

Dear **:

Thank you for your letter concerning sales tax applicable to your
client's business of merchant credit card processing services.

Your opinions based on the facts outlined in your letter are
restated below with response:

1. The end-of-month fees (percentage of credit card sales or
   per-credit card transaction) charged by Company X to the
   merchants would not be classified as a taxable service.
   Company X is basically acting in a capacity in which they are
   collecting the merchants' money from MasterCard and Visa and
   remitting it to the merchant. The credit card processing
   services as described are not included in the definition of taxable
   services as contained in Section 151.010, Tax Code.

Response: Correct

2. Company X is providing a non-taxable service to customers
   both in state and out of state. The purchases of the data
   processing services from Company Y are attributable to all of
   the merchants' accounts; therefore, Company X is a multi-
   state customer due to the service benefit location rule as
   defined in 34 TAC 3.330(f). It is understood that an exemp-
   tion certificate must be presented to the provider of the
   data processing services indicating the services are for a
   multi-state customer.

Response: Company X is providing a non-taxable service to its
customers. Therefore, Company X is the consumer of all taxable
items, including the data processing service, used in providing
the service. Section (f) of Rule 3.330 applies only if Company X
is a multi-state company and a part of the data processing service
is purchased for the benefit of Company X's out-of-state location.
The location of Company X's clients does not affect the taxability
of the data processing services because the clients are not the
purchaser of the data processing services.

3. Company X will use the records available for the charges to
   out-of-state companies to determine what amount of data
   processing will be exempt due to out-of-state-use. 34 TAC
   3.330(f)(2) states that a multi-state customer may use any
   reasonable method for allocation which is supported by
   business records.

Response: See response 2.

4. Company X is paying or accruing tax on the tangible personal
   property which is transferred to the merchants as part of the
   service agreement. The items are transferred to some
   customers at no charge. Other customers are billed for the
   items at Company X's cost, including the tax. Section
   151.427, Tax Code, states that a seller who acquires tangible
   personal property for storage or use, pays the tax, and
   subsequently resells, leases or rents the items to another in
   the regular course of business may take a credit for the
   amount of tax paid. Sales of taxable tangible personal
   property to persons who make gifts of the property or use the
   property for samples or advertising are taxable. 34 TAC 3.301.

Response: Your client is correct to collect the tax on the set-up
packages that are sold to the clients. The items in the set-up
packages for which your client does not charge the customer are
taxable to your client.

Texas sales and use tax paid to a supplier on taxable items may be
claimed as a credit by the purchaser on his sales and use tax
return against other sales and use tax the purchaser may be
required to report when the taxable item on which the tax was paid
was resold prior to making any use of such item. Please note that
credit for local taxes (city, county, MTA/CTD, and Special Purpose
District) may be claimed only when the tax paid to the supplier
was for the same local taxing jurisdiction to which the purchaser
is required to remit tax. Local tax paid to a supplier for a
local taxing jurisdiction other than the one in which the taxable
items are resold must be recovered from the supplier. Local
tax due the same local taxing jurisdiction may be reduced by the
amount of previously paid tax.

5. The authorization services which Company X requires to be
   used by the merchants is not a credit reporting service and
   not subject to tax. Credit reporting services are a compila-
   tion of a credit history or other information regarding a
   person's or company's credit worthiness, credit standing,
   credit capacity, or insurability. 34 TAC 3.343. The authori-
   zations are used to determine if a credit card is valid and
   is not unauthorized. No credit history or credit standing
   is given. The information is used to guarantee payment to
   the merchants from Company X.

Response: The authorization services as described in your letter
are not taxable.

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

Sincerely,
Jo Ann Dieck
Tax Correspondence