Texas Letter Ruling 9210L1204F03: Stock/Commodity Quotation Service — 'Real Time' Quotes And Bids

Subject

Stock/Commodity Quotation Service — "Real Time" Quotes And Bids

Plain-English summary

A company operating computer facilities that collect, validate, and distribute stock and commodity market data asked the Comptroller how three different services it offered were taxed under Texas sales and use tax.

The first service — "last sale information," meaning real-time price quotes and bids on stocks and commodities — is available broadly and is the company's core public-facing offering. The Comptroller ruled this is a taxable information service under 34 TAC 3.342. The reasoning: the broker and dealer-trader customers are mainly interested in getting "real time" quotes and bids and in placing buy/sell orders, and the essence of that service is delivering specialized, current financial information via electronic retrieval or research. Sales tax applies to sales of this service to Texas customers.

The company also ran two other, separate services limited to a closed group of subscribing broker-dealers over a dedicated communications network (not available to the general public):

• Order execution services — transmitting buy/sell orders between broker-dealers for negotiation and execution, validating that orders contain the right information, sending trade confirmations, and routing trade data to settlement. The Comptroller found these services do not meet the definition of a taxable information service (because the company isn't gathering, maintaining, or compiling information — it's just transmitting orders), do not meet the definition of a taxable data processing service under 34 TAC 3.330 (no compiling/producing records, maintaining information, or entering/retrieving data — just verifying and transmitting orders), and do not meet the definition of a taxable telecommunications service under 34 TAC 3.344 (that rule targets public-utility-like services available to a broad base of end users; this service is restricted to selected broker-dealers over private leased lines, so at most it's the phone companies providing the taxable telecommunications piece, not the company itself).

• Settlement support services — receiving trade information from broker-dealers, comparing both "sides" of a trade, sending confirmations to the parties and clearing agencies, and forwarding data to the last-sale information service (replacing what used to be a paper-based comparison process). The Comptroller noted these services produce a record of a transaction and so "may constitute data processing services," but for taxability purposes referred back to the same response given for the order execution services (i.e., not taxable as an information, data processing, or telecommunications service).

What this means for you

Financial data and market-information providers

If your service's core value to customers is delivering current, specialized financial information (like real-time quotes and bids) via electronic retrieval, the Comptroller is likely to treat that as a taxable information service under 34 TAC 3.342 — even if the underlying data feeds into other services you offer.

Providers of order-routing, execution, or trade-settlement services to closed broker-dealer networks

Services that merely transmit, verify, and route securities orders and trade confirmations between broker-dealers — without gathering, maintaining, or compiling information for broader distribution — were found not taxable as information services, data processing services, or telecommunications services in this ruling. Key facts the Comptroller leaned on: access was restricted to a closed group of subscribing broker-dealers, delivered over a dedicated/private communications network, and the information was proprietary to subscribers rather than publicly available.

Accountants and tax professionals

This ruling illustrates the Comptroller separately analyzing multiple services bundled under one company: the real-time quote/bid service was taxable as an information service, while the order-execution and settlement-support services (offered only to a closed broker-dealer subscriber base) were not taxable under the information service, data processing service, or telecommunications service categories. Note that the settlement support services were acknowledged as potentially fitting the data-processing definition (producing a "record of a transaction") but the ruling's ultimate response pointed back to the non-taxable conclusion reached for order execution.

Common questions

Q: Is a real-time stock/commodity quote and bid service taxable in Texas?
A: Yes, according to this ruling. The Comptroller treated it as a taxable information service under 34 TAC 3.342 because the essence of the service is delivering specialized, current financial information via electronic data retrieval or research.

Q: Are securities order-execution services taxable as information services, data processing, or telecommunications services?
A: In this ruling, no. The company's order-execution services — which route buy/sell orders between broker-dealers, validate order data, and send trade confirmations — did not meet the Comptroller's definitions of a taxable information service, data processing service, or telecommunications service, largely because access was restricted to a closed subscriber base over private lines and the company was not gathering, maintaining, or compiling information for wider distribution.

Q: What about trade settlement/comparison services?
A: The settlement support services (comparing both sides of a trade and sending confirmations to parties and clearing agencies) were noted as potentially meeting the data processing services definition because they produce a record of a transaction, but the ruling's stated response for taxability was the same as for the order execution services — i.e., not taxable.

Q: Does this ruling apply to any company offering financial data services?
A: No. This is a letter ruling addressed to a specific taxpayer based on the facts that taxpayer presented, and per the disclaimer it can only be relied upon by the taxpayer to whom it was issued. Other facts, even if similar, may lead to a different result.

Citations and references

No statutes are cited in the original ruling text. The ruling references the following Texas Administrative Code rules:

• 34 TAC 3.342 (Information Services)
• 34 TAC 3.330 (Data Processing Services)
• 34 TAC 3.344 (Telecommunications 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/9210L1204F03

Original ruling text

October 7, 1992

Dear ***:

This is in response to your letter regarding the taxability of the various
services provided by your client. I have restated your fact situation below:

STATEMENT OF FACTS

*** operates computer facilities that collect, validate, and
distribute to the public information relating to the last price at which either
the ** or **** were sold (hereafter referred to as "last
sale information").

A separate but substantial portion of ***'s business involves the
provision of specialized computer services that deliver securities orders for
execution to a narrow subset of broker-dealers subscribers. Similarly,
** offers other services to selected broker-dealers that facilitate
the clearance and settlement of completed securities transactions (hereafter
referred to as "settlement support services"). Excluding the last sale
function, the other services offered by * are only accessible to a
closed group of subscribers (via a dedicated communications network), and not
to the general public. The information transmitted by ***** in
connection with its trade execution and comparison services is proprietary to
its subscribers and is not publicly available.

RULINGS REQUESTED

1. The execution services provided by ** to Texas customers do nt
   meet the definition of a taxable information service as outlined by 34 TAC
   3.342. The rule states, "information which is gathered, maintained, or
   compiled and made available by the provider of the information service to the
   public or specific segment or industry for a consideration is subject to sales
   tax." It is not disputed that **'s collection, validation, and
   distribution of last sale information from a securities market falls within the
   foregoing definition. However, the information transmitted through
   **'s order execution services consists of buy or sell orders in
   individual securities directed to market makers for negotiation and/or
   execution, and the responses thereto. Access to this information is restricted
   to subscribing qualified broker-dealers that participate in an electronic
   securities market via a dedicated communications network. ** is
   not performing the function of gathering, maintaining, or compiling
   information, but merely provides a vehicle for the transmission of orders for
   execution between broker-dealers and the responses thereto. The services also
   perform the function of validating orders to make sure the proper information
   is included, sending confirmation of trades to the parties, and sending the
   trade information to one of the settlement support services. In addition,
   ** has the capability of broadcasting information to all the market
   makers in a security. None of these functions involve the gathering,
   maintaining, or compiling of information. In addition, these services are not
   provided to the general public, but a limited number of subscribers involved in
   the buying and selling of securities.

**'s settlement support services consist of receiving information
from broker-dealers relating to securities transactions. These services
compare the two "sides" to a trade and send confirmation of the trades to the
parties and to the clearing agencies and send the appropriate information to
the last sale information service. Basically, the settlement support services
capture trade details that historically were submitted in paper form to effect
the comparison of completed transactions. As with the execution services,
these settlement support services primarily support the transmission of
information between parties and the clearing agency and do not constitute the
gathering, maintaining, or compiling of information. As is true of
**'s execution services, access to the settlement support services
is limited to selected broker-dealer participants in an electronic securities
market. Accordingly, neither **'s execution nor settlement support
services should be subject to Texas sales and use tax as an information
service.

RESPONSE:

**'s services contain elements of taxable data processing,
telecommunications, and information services. However, **'S broker
and dealer-trader customers are primarily interested in receiving "real time"
quotes and bids on stocks/commodities that are available for trade and in
inputting orders to sell or buy. Therefore, the essence of **'s
service is to provide specialized and current financial information to its
customers via electronic data retrieval or research. This service is taxable
as an information service under section (a) (2) of the enclosed Rule 3.342
Information Services. Sales tax would be due on sales of this service to
**'s Texas customers.

2. The execution services provided by ** to Texas customers do not
   meet the definition of taxable data processing services as stated in 34 TAC
   3.330. The rule states, "data processing services means the processing of
   information for the purpose of compiling and producing records of transactions,
   maintaining information, and entering and retrieving data." The functional
   essence of **'s order execution services is the delivery of orders
   to buy or sell securities in the form of electronic messages. This delivery
   process enables the execution of orders by broker-dealers that participate in
   an electronic securities market. These execution services do not involve the
   processing of information for the purpose of compiling and producing records of
   transactions, maintaining information, or entering and retrieving data, but
   involve the verification and transmission of orders and related information
   thereto. Thus, such execution services should not be subject to Texas sales
   and use tax as a data processing service.

In the case of **'s settlement support services, the primary
function of these services is to compare trade data from the parties and to
transmit such information to the parties and to the clearing firms. As such, a
record of a transaction is produced, and thus these services may constitute
data processing services.

RESPONSE:See response to #1 above.

3. The order execution and settlement support services provided by
   ** do not meet the definition of a taxable Telecommunications
   Service as defined by 34 TAC 3.344. That rule defines a telecommunications
   service as an "electronic or electrical transmitting conveyance, routing, or
   reception of signals, data, or information utilizing wires, cable, radio waves,
   satellites, fiber optics, or any other method now in existence..."

The definition is directed at communications services resembling a public
utility, i.e., a service potentially available to a broad base of end users.
In contrast, the order-execution and settlement support services provided by
** are available only to selected broker-dealers over private
telecommunication lines leased from various local and long distance telephone
companies. As such, it is only the telephone companies that are providing a
service that arguably comes within the scope of the term "Telecommunication
Service". Neither the order-execution nor settlement support services should
be categorized as a "Telecommunication Service" within the meaning of the
above-referenced rules.

RESPONSE:See response to #1 above.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

If you have other questions or need more information, you may call me at
1-800-252-5555, extension 3-4502. The regular number is 512/463-4600. You may
also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division