Is a Texas company's computer trading system for natural gas subscribers — including the software license, monthly access fee, advertising-space charge, and sales commissions — taxable under Texas sales and use tax?

Plain-English summary

This letter is a corrected replacement for an earlier letter dated January 23, 1995, which had given incorrect answers to two of the four questions asked. The taxpayer's client was developing a computerized system that lets subscribers trade natural gas on the spot market: the system pulls natural gas information from electronic bulletin boards onto one network, letting subscribers track market prices and transportation sources and post bids and asking prices. The client acts strictly as a third party to the trades between subscribers, and offers the service to both Texas and out-of-state subscribers.

The Comptroller's office addressed four specific charges:

1. Software license. The client's software is sold as a completed program consistent with the software definition in Rule 3.308(b)(1). The sale of the computer program license that provides access to the system is taxable when sold and delivered to subscribers in Texas. The sale and delivery of the software to subscribers outside Texas is not taxable, provided the client keeps proper mailing or shipping documentation to support the exempt out-of-state sales.

2. Monthly access fee. The taxpayer had asked the Comptroller to confirm the fee was taxable as an information service under Rule 3.342, taxable only for subscribers whose service benefit location is in Texas. The corrected letter says this was wrong: the monthly access fees are instead taxable as telecommunication services. Telecommunication services are defined as the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information using wires, cables, radio waves, microwaves, satellites, fiber optics, or any other method now in existence or later devised, and provision of such services is not limited to telephone companies. Because the client charges access fees for a service that electronically conveys and receives data and information, that service is taxable as a telecommunication service.

3. Advertising-space charge. The taxpayer had asked the Comptroller to confirm that charges for advertising space to announce a desire to buy, sell, or bid at auction on natural gas were nontaxable advertising charges under Rule 3.321. The corrected letter says this, too, was wrong: it is also taxable as a telecommunication service, because the client receives consideration from the customer for providing the means to convey information electronically, making the "advertising" charge part of the sales price of the telecommunication service.

4. Sales commissions. Commissions charged on a sliding scale, based on the volume of gas sold, are not subject to Texas sales and use tax.

The letter notes the opinion is based on the facts presented and could change if the facts are different or additional.

What this means for you

Businesses running online trading or bulletin-board networks

If you charge subscribers a recurring fee for electronic access to a network that conveys data and information (prices, bids, postings, etc.), don't assume that fee is a nontaxable "information service" charge. This letter treats an access fee for an electronic data-conveyance service as a taxable telecommunication service instead, even though the taxpayer had originally characterized it as an information service.

Businesses charging for "advertising space" within an electronic service

Labeling a charge as being for "advertising space" doesn't make it a nontaxable advertising charge if what the customer is really paying for is the ability to electronically transmit and receive information through your system. Here, the advertising-space fee was treated as part of the taxable telecommunication service's sales price.

Software vendors selling access-enabling programs

A software license that lets a customer access your service is taxable when sold and delivered to a Texas subscriber, but the sale to an out-of-state subscriber is not taxable — as long as you keep documentation (mailing or shipping records) supporting the exempt out-of-state sales.

Common questions

Q: Why does this letter contradict what the taxpayer originally proposed for Questions 2 and 3?
A: The letter explains that an earlier letter dated January 23, 1995 gave incorrect responses to Questions 2 and 3, and this letter is a corrected version replacing those answers — reclassifying both the monthly access fee and the advertising-space charge as taxable telecommunication services rather than as an information service or nontaxable advertising.

Q: Are commissions on gas sales taxed under this ruling?
A: No. The letter states the commissions received by the client, charged on a sliding scale based on the volume of gas sold, are not taxable.

Q: Does the software license get taxed the same way for every subscriber?
A: No. It's taxable when sold and delivered to subscribers in Texas, but not taxable when sold and delivered to subscribers outside Texas, provided proper mailing or shipping documentation supports the exempt sales.

Q: What makes a charge a "telecommunication service" under this letter?
A: The letter defines telecommunication services as the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information using wires, cables, radio waves, microwaves, satellites, fiber optics, or any other method now in existence or later devised, and notes this is not limited to services provided by telephone companies.

Citations and references

• Rule 3.308(b)(1) — definition of software referenced for the taxability of the software license.
• Rule 3.342 — information service rule the taxpayer originally cited for the monthly access fee (superseded in this letter's corrected analysis by telecommunication-service treatment).
• Rule 3.321 — advertising space rule the taxpayer originally cited for the advertising charge (superseded in this letter's corrected analysis by telecommunication-service treatment).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9502L1345E05

Original ruling text

February 2, 1995

Dear *****:

Recently, I mailed you a letter dated January 23, 1995. That letter
contained incorrect responses to Questions 2 and 3. Please disregard
that letter and accept this corrected version. I apologize for any
inconvenience caused by my previous letter.

I understand your client is developing a computerized system enabling
subscribers to trade natural gas on the spot market. The system is
designed to place natural gas information provided by electronic
bulletin boards onto one network and enable its subscribers to trade
natural gas on the network. Thus, subscribers may track market prices,
transportation sources, and post bids and asking prices.

You stated your client is strictly a third party to the transactions
between subscribers. The sole purpose of the system is to enable
subscriber to communicate and trade natural gas among each other. Your
client is in Texas and will provide the service to both Texas and out-
of-state subscribers.

You asked that we confirm the following:

(1) Our client's software will be sold as a completed program and is
consistent with the definition of software found in Section (b)(1) of
Rule 3.308. Please confirm that the sale of the computer program
license that facilitates access to the system is taxable when sold and
delivered to subscribers in Texas. Additionally, the sale and delivery
of the software to subscribers outside of Texas is not taxable.

Response: The sale of the software is taxable to Texas subscribers.
Your client should maintain proper mailing or shipping documentation to
support exempt sales of software outside of Texas.

(2) The monthly access fee charged for unlimited access to the computer
system is taxable under Rule 3.342 as an information service when
charged to subscribers whose service benefit location is located in
Texas. The fee is not taxable to subscribers whose service benefit
location is outside of Texas.

Response: This is incorrect. The monthly access fees are taxable as
telecommunication services. Telecommunication services are defined as
the electronic or electrical transmission, conveyance, routing, or
reception of sounds, signals, data, or information utilizing wires,
cables, radio waves, microwaves, satellites, fiber optics or any other
method now in existence or that may be devised. The provision of these
types of services is not restricted solely to telephone companies. If
your client is charging accession fees for a service whereby data and
information can be conveyed and received electronically, the service is
taxable as a telecommunication service.

(3) The charge for advertising space to announce a desire to buy, sell
or bid at auction natural gas is a nontaxable charge for advertising
space as defined in Rule 3.321 and are therefore not subject to Texas
sales and use tax.

Response: This also is incorrect. Again, this is taxable as a
telecommunication service. Your client receives consideration from his
customer for providing the means to convey information electronically.
As such, the charge for "advertising" is part of the sales price of the
telecommunication service.

(4) Commissions based on a sliding scale and charged on the basis of
the volume of gas sold are not subject to Texas sales and use tax.

Response: The commissions received by your client are not taxable.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct
line is 512/475-0037. You also may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Lindey Osborne
Tax Administration Division

NOTE: Previous Accession Number 9502059L