Is Texas sales tax due on billing and collection services that local exchange telephone companies provide to interexchange carriers, including the recording and rating components?

Plain-English summary

A local exchange telephone company asked the Comptroller's office to clarify how Texas sales tax applies to billing and collection services it provides to interexchange carriers, particularly when the various billing services are bundled together on a single bill. The taxpayer was aware of earlier 1990 and 1991 correspondence addressing these services as data processing but wanted a clearer statement of the Comptroller's position.

The Comptroller confirmed that recording and rating are taxable data processing services when performed with a computer — the local company uses the computer to gather information and apply the rate schedule provided by the carrier to each customer's charges. Other billing services, such as bill rendering, inquiry, billing analysis, and billing information, are not taxable, because in those cases the computer is merely used to facilitate the performance of other, non-data-processing services (citing Comptroller's Rule 3.330).

How the bundling of these services affects taxability matters a great deal. If the recording and rating charges are separately stated on the bill, tax is due only on that separately stated amount. But if recording and rating charges are combined with other, non-taxable charges and the recording/rating portion exceeds 5 percent of the total bill, the entire combined charge becomes subject to sales tax. Conversely, if the billing and collection services billed to the carrier do not include any recording or rating charges at all, no tax is owed on those services.

Finally, the Comptroller confirmed that it makes no difference whether the billing and collection services are provided under a regulatory "tariff" or under a private "contractual" agreement — the nature of the service provided, not the legal arrangement under which it is delivered, determines whether tax is owed.

What this means for you

Local exchange telephone companies billing interexchange carriers

If your billing and collection services to interexchange carriers include recording and rating (using a computer to gather data and apply the carrier's rate schedule to customer charges), that portion is taxable as a data processing service. Other billing functions like bill rendering, inquiry, billing analysis, and billing information are not taxable on their own.

Businesses structuring bundled billing charges

How you state charges on the bill matters for tax exposure. Separately stating recording and rating charges limits tax to just that amount. Bundling recording and rating with non-taxable billing services is risky: if the taxable portion exceeds 5 percent of the total bundled charge, the entire bundled charge becomes taxable, not just the recording/rating share.

Accountants and tax professionals reviewing telecom billing contracts

This letter confirms that taxability turns on the substance of the service performed, not on whether it's delivered under a tariff or a private contract. When advising telecom clients, focus on whether recording/rating functions are present and how they're stated or bundled on the bill, since that determines the sales tax outcome under Comptroller's Rule 3.330.

Common questions

Q: Is tax due on billing and collection services because they include a rate element covering recording and rating?
A: Yes. Recording and rating are taxable data processing services when performed with a computer, because the local company is using the computer to gather information and apply the carrier's rate schedule to each customer's charges.

Q: Is tax avoided if the billing and collection services do not include any recording or rating charges?
A: Yes. If the billed services don't include charges for recording or rating, no tax is owed on them.

Q: Does it matter whether the services are provided under a tariff or under a contract?
A: No. The nature of the service provided determines taxability; it is immaterial whether the service is provided under "tariff" or "contract."

Q: What happens if recording/rating charges are bundled with non-taxable billing charges?
A: If recording and rating are separately stated, tax applies only to that amount. If bundled with non-taxable charges and the recording/rating portion exceeds 5 percent of the total bill, the entire bundled charge is subject to sales tax.

Citations and references

• Comptroller's Rule 3.330 — cited in the letter as the basis for distinguishing taxable data processing (recording and rating) from non-taxable billing services (bill rendering, inquiry, billing analysis, billing information).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9410L1316D11

Original ruling text

October 5, 1994

Dear ****:

Recently, you asked for direction concerning the taxation of billing and
collection services provided by local exchange carrier telephone companies to
interexchange carriers. You were acquainted with earlier correspondence from
1990 and 1991 that addressed the taxation of these services as data processing
and wanted clarification of the Comptroller's position regarding these
services, particularly when the various services were bundled together. You
asked the following questions:

1. Whether tax is applicable because there is a rate element which includes
   recording and rating?

Answer: Yes. In our letter dated October 21, 1991, we stated that recording and
rating were considered taxable data processing services when performed with a
computer. In performing recording and rating services, the local company is
simply using the computer to gather information and apply the rate schedule
provided by the carrier to the charges to each customer. Other billing services
were not considered taxable, i.e., bill rendering, inquiry, billing analysis,
and billing information. These latter services were not considered taxable
because the computer is used to facilitate the performance other services.
See Comptroller's Rule 3.330.

If the recording and rating services are separately set out, tax should be
collected on them. On the other hand, if they are combined with other
non-taxable charges and the charges for recording and rating exceed 5 percent
of the total bill, the entire charge is subject to sales tax.

2. Whether tax is not applicable because there is not a rate element which
   includes only recording or rating services?

Answer: Yes. If the billing and collection services which are billed to the
carrier do not include charges for recording or rating services, tax is not
owed.

3. Is the taxability affected by whether the services are provided under
   "tariff" or by "contractual" agreement?

Answer: No. The service provided determines whether tax is owed. It is
immaterial whether the service is provided under "tariff" or "contract."

I hope this satisfactorily answers your questions. Please contact me if you
need more information.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

NOTE: Previous Accession Number 9410582L