Is a fee charged for a computer-generated mortgage cost-savings analysis, used as a sales tool for an equity-acceleration program, subject to Texas sales tax as a data processing service?

Plain-English summary

A taxpayer acted as a sales agent for a company ("ABC Corp.") that sold mortgage equity-acceleration programs. As part of the sales pitch, the taxpayer would sit down with homeowners and use a computer to prepare a mortgage analysis — a printout showing the interest savings the homeowner could realize by enrolling in one of the acceleration programs. The taxpayer asked the Comptroller whether this service was taxable, and if so, under what statute.

The Comptroller's answer turned on whether a charge was made. If a homeowner sits through the consultation, receives the computer-generated cost-savings printout, but declines to enroll and is not charged anything, no sales tax is due — there's simply no taxable sale. But if the homeowner is charged for the consultation and receives a copy of the analysis (which is produced by inputting the customer's own data — current payment, interest rate, mortgage balance, etc. — into the computer), that charge is for a taxable data processing service under Tax Code § 151.0035. The ruling quotes the statute's broad definition, which reaches "the use of a computer or computer time for a processing" regardless of whether the provider or the customer is the one operating the computer, in addition to more traditional data processing activities like data entry, retrieval, search, and information compilation.

The letter also separately addresses the taxpayer's compensation: the sales commission ABC Corp. pays the taxpayer for successfully enrolling homeowners in the acceleration program is not subject to sales tax — that's ordinary commission income, not a charge for a data processing service.

What this means for you

Financial advisors, mortgage brokers, and sales agents

If you use a computer to generate a personalized financial analysis (interest savings, payoff timelines, amortization comparisons, etc.) and give it away for free purely as a sales tool with no charge to the prospect, that free consultation is not itself a taxable sale. But the moment you charge a client — even a nominal consultation fee — for that computer-generated analysis, you are providing a taxable data processing service and must collect Texas sales tax on the charge.

Businesses selling equity-acceleration, refinance-analysis, or similar mortgage programs

Structure your pricing carefully. A model where the cost-savings analysis is offered free as a marketing tool, and revenue instead comes from a commission paid by the loan or program provider when a customer enrolls, avoids the data processing tax on the analysis itself (the commission is not taxable). Charging separately for the analysis or consultation converts that charge into a taxable service.

Accountants and tax professionals advising clients on data processing tax exposure

This letter is a useful illustration of how broadly Texas defines "data processing service" under § 151.0035 — it isn't limited to bulk data entry or IT services. Any computer-driven manipulation of a customer's inputted data to produce a report or analysis, sold for a charge, can fall within the definition, per 34 Tex. Admin. Code § 3.330.

Common questions

Q: If I give a homeowner a free mortgage-savings printout and they don't buy anything, do I owe sales tax?
A: No. The letter states that if no charge is made when a homeowner declines to enroll, no sales tax is due.

Q: What makes the mortgage analysis a "data processing service" instead of just a sales aid?
A: The analysis is generated by inputting the customer's own data (current payment, interest rate, mortgage balance, etc.) into a computer to produce a report. Tax Code § 151.0035 defines data processing service to include this kind of computerized manipulation and use of computer time, and the ruling holds that a charge for this output is taxable.

Q: Is the commission the sales agent earns from the mortgage-acceleration company taxable?
A: No. The letter states the sales commission received from ABC Corp. for enrolling homeowners in their program is not subject to tax.

Q: Does it matter who actually operates the computer — the seller or the customer?
A: No. The ruling quotes § 151.0035's language that data processing service includes the use of a computer or computer time for processing "whether the processing is performed by the provider of the computer or computer time or by the purchaser or other beneficiary of the service."

Citations and references

• Tex. Tax Code § 151.0035 (definition of taxable "data processing service," quoted at length in the ruling)
• 34 Tex. Admin. Code § 3.330 (data processing services rule, referenced as the basis for the Comptroller's prior response that the service was taxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9406L1304G01

Original ruling text

June 6, 1994

Dear **:

This is in response to your letter providing additional information on how you
intend to provide your business service. We had previously responded that your
service was taxable under Rule 3.330, involving data processing services.

As a sales agent for ABC Corp, you would provide consultations to clients to
show them the savings that can be realized if they purchase one of the equity
acceleration programs with auditing. The only time you would use your computer
in the service is to prepare a mortgage analysis which you would use as a sales
tool and provide free to your clients so they can see the advantages of
accelerating their mortgage or loan on one of these programs. ABC Corp.
contracts the processing of information and payments from clients to a large
corporation and ** does all the auditing.

You are asking for a written response as to whether your business is subject to
tax and a reference to the section of law that makes consultations and a use of
a computer to complete an analysis used a sales tool a taxable service.

Response: It is not clear from this letter or your earlier letter whether a
charge is made to homeowners who sit through your consultation, receive a
computer printout of the cost savings available to them under your program, but
decline to enter your program. Obviously, if no charge is made when a homeowner
declines to enroll in your mortgage reduction service, no sales tax would be
due.

If a charge is made for the consultation, and the homeowner is provided a copy
of the analysis of the potential interest savings under your program (which are
derived by inputting the customer's data, i.e., current payment, interest rate,
mortgage balance, etc.) you are considered to be providing a data processing
service.

Section 151.0035 of the Tax Code, "Data Processing Service" provides that "Data
Processing Service" includes word processing, data entry data retrieval, data
search, information compilation, payroll and business accounting data
production, and other computerized data and information storage or
manipulation. "Data processing service" also includes the use of a computer or
computer time for a processing whether the processing is performed by the
provider of the computer or computer time or by the purchaser or other
beneficiary of the service. Emphasis added.

The sales commission that you receive from ABC Corp. for enrolling homeowners
in their program would not be subject to tax.

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
1-800-531-5441, extension 3-4502 The regular number is 512/463-4502. You may
also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9406393L