Were year-end expense allocations from related stores to a shared accounting and data-processing corporation taxable in Texas?

Plain-English summary

A corporation performed payroll accounting, ledger and financial-statement preparation, tax-return filing, and other accounting functions for related stores. It did not invoice them during the year; instead, each store received a year-end journal-entry allocation of the corporation's expenses.

The Comptroller treated the total charges to Texas stores as taxable data-processing services. The company had not shown that taxable services were 5% or less of the total, separately billed nontaxable services, or established the intercorporate-services exemption. Charges to out-of-state stores were not subject to Texas tax when the benefit was derived outside Texas.

The response rejected four defenses. Expense reimbursement was still consideration and part of sales price; operating without profit did not prevent seller status; labeling the service company an agent did not exempt services it actually performed; and it was not an employee paid regular wages or salary under § 151.057.

What this means for you

Related corporations remained separate legal entities for sales-tax purposes. Book-entry allocations and corporate-family labels did not replace the need to prove a statutory exemption or separately establish nontaxable services.

Common questions

Were the Texas-store allocations taxable? Yes, in full on the evidence described.

Were charges benefiting out-of-state stores taxable in Texas? No, provided the benefit was derived outside Texas.

Did calling the payments expense reimbursements help? No.

Did an agency or employee theory exempt the services? No, for the reasons and evidence stated in the memorandum.

Citations and references

• Texas Tax Code §§ 151.003, 151.005(3), 151.007, 151.008(a), 151.010, 151.057, and 151.346
• 34 Tex. Admin. Code Rule 3.330(a), Data Processing Services
• 34 Tex. Admin. Code Rule 3.321(b), advertising-agency seller and purchasing-agent examples

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9203L1164A08

Original ruling text

DATE: March 6, 1992

TO: Jim Horton, Supervisor, 2I40, Fort Worth Audit

FROM: John Christian, Tax Administration

SUBJECT: ***

Facts: * (Taxpayer) provides data processing services to
several related * (Stores), located in *, *,
*, and *, ***, and in Oklahoma. The services
provided include payroll accounting and payroll check distribution,
preparation of general ledgers and financial statements, and basic
accounting functions necessary in the daily activities of the Stores.
Taxpayer also prepares and files federal and state tax returns for
the Stores. Taxpayer's sole corporate function and reason for being
is to provide these services to the Stores.

Taxpayer does not invoice the Stores for services rendered.
Rather, at year-end, a percentage of Taxpayer's expenses is
booked as a journal entry to each Store's general ledger.
Taxpayer designates revenues received from Stores on its
books of account as revenues for "accounting services".

According to your information, the corporations do not
qualify for the intercorporate services exemption provided
for in Tax Code Section 151.346. Neither has Taxpayer presented
evidence, nor even argued, that this exemption applies.
Taxpayer has not provided evidence that taxable data
processing services comprise 5% or less of the total charges
between Taxpayer and Stores.

Question: Is the total year-end charge from Taxpayer to
Stores taxable as a charge for data processing services?

Answer: The evidence indicates that Taxpayer provides
numerous services to Stores that are included in the
definition of data processing services found in Rule 3.330
(a). Taxpayer cannot produce evidence that the taxable
services comprise 5% or less of the total charge for
services rendered, and does not bill separately for
nontaxable services. Taxpayer has not proven that the
intercorporate services exemption applies.

Therefore, the total amount charged to Texas Stores is
subject to Texas sales tax. The amounts charges to Store
located outside Texas are not subject to Texas tax, provided
the benefit of those services is derived outside Texas.

Petitioner's Contention:

(1) Revenues received by Taxpayer from Stores represent
expense reimbursement only, and not consideration for
the provision of taxable services;

(2) Taxpayer does not conduct its business for profit,
and so is not a "seller" under the Tax Code;

(3) Taxpayer is only an agent of Stores in providing
services, which exempts its services; and

(4) Taxpayer is an employee of Stores, whose services are
exempt under Tax Code Section 151.057.

Tax Division's Responses:

(1) The Tax Code defines a "sale" or "purchase" to include
"the performance of a taxable service" when done or
performed for consideration. Tax Code Section 151.005 (3). The
revenues received by Taxpayer from the Stores for the
performance of taxable services constitute consideration for
the performance of those services. Therefore, Taxpayer is
making "sales" of data processing services to the Stores.

Characterizing the revenues as "expense reimbursement" does
not change this fact. In fact, sellers of tangible personal
property, real property, taxable services, nontaxable
services, etc., ordinarily calculate their prices based, in
part, on the amount necessary to recover (in whole or in
part) expenses incurred in making the sale. At least a
portion of every seller's sales price could thus be
characterized as "expense reimbursement". Because the
statute does not exclude from the definition of "sales
price" the expenses incurred by the seller (See Tax Code
Section 151.007), an "expense reimbursement" is part of the sales
price of a taxable good or service.

(2) Taxpayer has pointed to no provision of the Tax Code
that requires a seller of data processing services to charge
his or her customers an amount sufficient to generate a
profit in order to be considered a "seller". A "seller" or
"retailer" is defined at Tax Code Section 151.008 (a) as follows:

"Seller" or "retailer" means a person engaged in the business of
making sales of taxable items of a kind the receipts from the sale
of which are included in the measure of the sales or use tax
imposed by this chapter.

(Taxable item means "tangible personal property and taxable
services". Tax Code Section 151.010.)

Taxpayer's representative cites the definition of "business"
at Tax Code Section 151.003 as supporting its position that
Taxpayer must operate at a profit to be considered a
"seller". However, the statute provides only that
"business" means "an activity of or caused by a person for
the purpose of a direct or indirect gain, benefit, or
advantage." Taxpayer's representative would define "gain,
benefit, or advantage" as monetary profit, only.

There is no statutory basis for this restrictive definition.
A "gain, benefit, or advantage" can be interpreted to
include virtually any benefit (whether actually realized or
merely projected) derived from Taxpayer's conduct of its
activities. This includes federal and state tax advantages
and business convenience for related corporations that would
otherwise have to employ in-house or unrelated service
providers to perform the same functions Taxpayer performs.
Keeping the revenues from the performance of a service
within a corporate family constitutes a definite "gain,
benefit, or advantage" to all members of the family,
including the seller.

Furthermore, to accept Taxpayer's definition would require
that all businesses in Texas must operate at a profit before
their sales and/or services would be subject to sales and
use tax. This result would be blatantly contrary to the
legislative intent to impose sales and use tax on the sale
or purchase of a taxable item. One has only to consider the
percentage of Texas businesses that operate at a loss to
understand that the legislature did not intend to exclude
their sales and services from the tax base.

(3) Taxpayer's primary argument in this regard is that it
has no "customers" for data processing services, and again
that it does not conduct its business at a profit. This
second issue has already been addressed, above. The
argument that the Stores are not Taxpayer's "customers" is
not convincing because Taxpayer states, without citing any
authority or documentary proof, that (a) Taxpayer is the
duly authorized agent of Stores, and (b) services and sales
between an Agent and its Principal are not subject to tax.

Taxpayer has presented no documentary evidence that Taxpayer
is the duly authorized agent of Stores in providing services
to Stores. Furthermore, even if Taxpayer produces such
evidence, it is the Comptroller's position that a purchaser
cannot avoid payment of tax of services rendered or items
sold merely by designating the seller his or her "agent".
See, for example, Rule 3.321 (b)(3), which provides that an
advertising agency is a seller of employee-fabricated
property (property fabricated by employees of the
advertising agency, and not purchased pre-fabricated from
third parties) and must collect tax on its sales; the agency
may not be considered the "agent" of its customer in selling
such property.

In the context of advertising agencies, we have recognized
that a duly authorized purchasing agent may not be
considered to be selling to the principal items or services
that the agent purchases from third parties acting as agent
for principal. See Rule 3.321 (b)(1) and (2). In these
situations, though, the agent is responsible for paying to
the third-party seller any tax that is due on the purchase.

This is far different from the situation where an "agent",
express or implied, actually performs taxable services for
his or her "principal". It is our position, therefore, that
representing the seller of a taxable item or service as the
"agent" of the purchaser does not render the sale exempt
from tax.

Also, Taxpayer seems to imply that a corporation cannot be a
"customer" of a related corporation from which it purchases
goods or services. It is a fundamental principal (reflected
in the policy of this agency) that related corporations are
separate legal entities in fact and by law. Their separate
natures will not be disregarded to exempt sales of taxable
items between related corporations, unless the
intercorporate services exemption (discussed earlier)
applies. Please note, also, that the legislature expressly
exempted such qualifying intercorporate service
transactions. It is our position that such transactions
would be taxable but for the express statutory exemption.

(4) Finally, Taxpayer's representative argues that Taxpayer
is the employee of the Stores, and its services are,
therefore, exempt from tax under Tax Code Section 151.057. This
argument is not persuasive. For one thing, Taxpayer is
compensated not by "regular wages or salary" as required by
the statute, but by annual payments calculated based on
Taxpayer's expenses. In addition, Taxpayer has not provided
any evidence or argument that would indicate that it meets
statutory or common-law definitions of an "employee" in its
relationship with the Stores.

Further, Taxpayer would extend the employee services
exemption to cover services performed by an agent for its
principal. This is based on the theory that the legal
relationship between principal/agent is identical to the
legal relationship between employer/employee, and that the
legislature meant to exempt principal/agent services in Tax
Code Section 151.057. This purported exemption for principal/agent
services is based solely on an implied legislative intent.
Since exemptions are the antithesis of equity (and are
therefore to be strictly construed), we declined to
administratively extend the exemption found in Tax Code
Section151.057 to cover services provided for consideration
between agents and their principals.

This entire point is moot, in any event, because Taxpayer
has not shown that it is the agent of the Stores in
providing services, and has not demonstrated that there
exists a statutory exemption for sales of taxable services
by an agent to its principal.

Conclusion: For the reasons set out above, it is the
position of the Tax Administration Division that the
assessment for data processing services provided by Taxpayer
to the Stores should be upheld.

Taxpayer has requested a meeting in Austin. Because this is
an audit situation that involves settled policy issues, it
would not be appropriate for Tax Administration to interfere
in the progress of the audit. Taxpayer should work through
the auditor, and audit supervisor, and through their chain
of command to resolve issues arising out of the audit. The
redetermination process is also available to Taxpayer in the
event it does not reach agreement with the Audit Division.

You may provide Taxpayer's representative with a copy of
this memorandum in reply to his request for a sales tax
ruling.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If
you have further questions, feel free to write or call me at
1-800-252-5555, ext. 3-3889.