Is a computerized psychological-testing and scoring service for psychological professionals a taxable data processing service in Texas?

Plain-English summary

A taxpayer ("Company A") who holds a sales and use tax permit wrote to the Texas Comptroller's office asking for a ruling on whether its services were taxable. Company A provides a service for psychological professionals, clinicians, and others who administer psychological tests and personality inventories — instruments restricted to people with proper professional credentials, not "pop psychology" magazine quizzes. The taxpayer, who has a degree in psychology, uses that training to score and interpret the tests and prepare interpretive reports, work that can be done by hand (taking about three hours per inventory) but is done much faster (about 20 minutes) using a computer. The taxpayer argued the computer was simply a tool for completing a professional service, comparable to how an accountant uses knowledge of bookkeeping and tax law, and pointed to the Comptroller's own June 1995 "Sales Tax Bulletin" (#94-127) stating that professional services performed with the aid of a computer, such as engineering or bookkeeping, are not taxable.

The Comptroller's Tax Policy Division agreed. Its response explained that Rule 3.330, which covers data processing services, also carves out "Unrelated Services" that may still be performed using a computer without becoming taxable data processing. A service counts as "unrelated" if it (A) is neither a data processing service nor a service taxed under another part of Tax Code Chapter 151, (B) is commonly provided on a stand-alone basis, and (C) is distinct and identifiable — examples given include consultation, feasibility studies, design and development, or training. The Comptroller concluded that "the work you do appears to fall in this category and will not be treated as a taxable service," and told the taxpayer it could contact the local office to cancel its sales tax permit.

What this means for you

Psychologists, clinicians, and testing/scoring service providers

If you provide professional psychological testing, scoring, or interpretation services — work that requires professional credentials and judgment — using a computer only to speed up scoring or report preparation does not turn that work into a taxable data processing service. The Comptroller treated the computer as a tool, similar to how an accountant might use software to complete a professional analysis.

Business owners who use computers to deliver professional services

The key test from this letter is the three-part "Unrelated Services" standard under Rule 3.330: the service must not otherwise be taxed under Chapter 151, must be commonly offered on a stand-alone basis, and must be a distinct, identifiable service (the letter lists consultation, feasibility studies, design and development, and training as examples). If your computer-assisted service fits that pattern, it may likewise fall outside taxable data processing.

Accountants and tax professionals advising testing or consulting businesses

This letter shows the Comptroller applying its own published guidance (the June 1995 Sales Tax Bulletin on professional services performed with computer assistance) to a specific fact pattern involving licensed/credentialed test administration and scoring. It's a useful example of how the "Unrelated Services" exception to data processing tax is applied, but as with all STAR letters, it's based only on the facts the taxpayer submitted.

Common questions

Q: Does using a computer to score psychological tests make the service taxable data processing in Texas?
A: Not in this letter. The Comptroller found that computer-assisted scoring and interpretation of psychological tests for credentialed professionals is an "Unrelated Service" under Rule 3.330, not taxable data processing.

Q: What makes a computer-assisted service "unrelated" (and therefore not taxable data processing)?
A: Under Rule 3.330 as described in this letter, a service is "unrelated" if it isn't itself a data processing service or taxed elsewhere in Tax Code Chapter 151, is commonly offered on a stand-alone basis, and is a distinct, identifiable service (examples given: consultation, feasibility studies, design and development, training).

Q: Did the taxpayer have to keep its sales tax permit?
A: The Comptroller told the taxpayer it could contact the local office and cancel the sales tax permit, since the described work would not be treated as a taxable service.

Q: Can another business rely on this letter?
A: No. The letter states the opinion is rendered based on the facts submitted, and other facts, though similar, may yield different results.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.330 (Data Processing Services — "Unrelated 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/9509483L

Original ruling text

September 7, 1995

Dear *****:

Thank you for your recent bulletin board transmission. Your facts are included
by reference.

Rule 3.330 deals with data processing services and makes provision for
"Unrelated Services" that may nevertheless be performed using a computer.

A service will be considered as unrelated if:

(A) it is neither a data processing service, nor a service taxed under other
provisions of the Tax Code, Chapter 151;

(B) it is of a type which is commonly provided on a stand-alone basis; and

(C) the performance of the service is distinct and identifiable. Examples of
such a service would be consultation, development of and preparation of
feasibility studies, design and development, or training.

The work you do appears to fall in this category and will not be treated as a
taxable service. You may contact the ** office and cancel your
sales tax permit.

This opinion is rendered based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Al Van Allen
Tax Policy Division

September 6 1995

John Sharp

Austin, Texas

Re: Probable nontaxable services

Dear Sir:

I believe my first message to you may have been garbled. If so, please
disregard and consider the reformatted version below. Recently I acquired a
sales and use tax permit from your local office here in **. At that
time I believed, as did your clerk, that my business was a taxable service
business but after reading literature published by your office ["Sales Tax
Bulletin," June 1995, #94-127 (6/95)] I'm not as certain. Please review the
following and provide me with a ruling.

Company A will provide a service for psychological professionals, clinicians
and others who administer various psychological tests and personality
inventories in the course of their business. The evaluation instruments
administered by the above professionals are restricted and available only to
those with the proper professional credentials and are not of the "pop
psychological" variety found in magazines.

The service provided by Company A is of a professional nature that could be
compared to the type of service performed by an accountant. That is, in order
to perform this service one must have some knowledge of psychology and
psychological testing and the ramifications of such testing just as an
accountant must have a knowledge of bookkeeping, tax laws and other related
matters and their impact upon his work.

Company A's services will be performed on a computer simply because that is a
faster way to complete the task. Doing the service for one particular
personality inventory by hand using scoring devices takes approximately three
hours; by computer the same task takes about 20 minutes. Similar time saving
will be realized for other psychological instruments as well although most are
not as extreme as that mentioned above. The gist is that the computer is simply
a tool to complete a professional service.

I believe Company A's services should be nontaxable for the following reasons:

1 ) Your publication mentioned above states:

"When you provide a professional service, such as engineering or bookkeeping
and use a computer as a tool to complete that service, your charges are not
taxable." Company A' services are of a professional variety. I, d.b.a. as
Company A, have a degree in psychology and use my knowledge of this discipline
in the preparation of returns furnished for a fee. This service could be done
by hand but a computer greatly speeds the work.

2) The work done is closely akin to auditing in many senses in that data
derived from the scoring process is interpreted to some extent, evaluated,
sorted into multiple categories and an interpretive report is produced.

Please consider the above information and provide me with a ruling on this mail
system or by U.S. Postal Service at the above address.

Yours truly,