Is the bill-paying portion of a freight-bill auditing company's services taxable as a data processing service if that bill-paying feature is offered to all customers at no extra charge?

Plain-English summary

A freight-bill auditing company ("Company A") asked the Comptroller to review its revised customer services contract. Company A audits and pays freight bills for its clients, using a computer as a tool along with its knowledge of transportation principles and state/federal rules and regulations.

Under the revised contract, Company A's "Schedule C" lists benefits provided to customers at no extra cost, including an optional bill-paying service: at the customer's option, Company A will pay the customer's freight bills if the customer wires the total payment amount, on the same day requested, to a bank account designated by Company A.

In an earlier letter, the Comptroller had told this same taxpayer that using a computer to pay a client's freight bills was a taxable data processing service, per Hearing No. 31,134 (June 2, 1994). But under the revised contract structure, the Comptroller ruled that the bill-payment portion of the service is not taxable, as long as customers who don't use the bill-payment option are charged the same amount per bill as those who do use it. In other words, because bill-paying is now a no-additional-charge feature bundled uniformly into the audit fee (rather than a separately-priced service), it escapes the "taxable data processing service" characterization.

What this means for you

Freight-bill auditing or similar service businesses

If you bundle an optional, computer-assisted task (like paying a bill on a customer's behalf) into your service at no extra charge — and you charge the same price whether or not a customer uses that option — the bundled task may not be treated as a separately taxable data processing service. Pricing structure matters: charging extra for the computer-assisted feature could tip it back into taxable data processing.

Businesses that use computers as a tool within a professional service

The letter distinguishes between using a computer "as a tool" to apply professional/industry knowledge (audit and payment processing here) versus offering a freestanding, separately-charged data processing service. How the service is packaged and priced can affect its tax treatment.

Common questions

Q: Is a freight-bill auditing company's optional bill-paying feature taxable as a data processing service?
A: Not under this ruling's facts — as long as the fee charged is the same whether or not the customer uses the bill-paying option.

Q: Didn't the Comptroller previously say this was taxable?
A: Yes. An earlier letter to the same taxpayer found that using a computer to pay a client's freight bills was a taxable data processing service under Hearing No. 31,134 (June 2, 1994). This later letter reached a different conclusion because the taxpayer had revised its contract so the bill-paying feature is a no-extra-charge benefit rather than a separately priced service.

Q: Can I rely on this letter for my own business?
A: No. This opinion is based on the facts presented, and other facts, though similar, may provide a different result; it applies only to the taxpayer to whom it was issued.

Citations and references

Other references:

• Hearing No. 31,134 (June 2, 1994) — a Comptroller hearing decision, referenced as the basis for treating computer-assisted bill-paying as a taxable data processing service under the taxpayer's prior contract structure. (No Texas statute or administrative rule is cited by name in this letter.)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9602L1404C06

Original ruling text

Dear **:

This is in response to your request that we review
COMPANY A (***) revised contract for services. COMPANY A audits and pay freight
bills for its clients. You use a computer as a tool to provide this service
and apply your knowledge of transportation principles, state and Federal rules
and regulations.

Schedule C of the revised contract lists benefits to
customers that are provided at no cost. One of the benefits listed is bill
paying. At the customer's option, COMPANY A will pay the customer's freight
bills if the customer initiates on the same day requested by COMPANY A, a bank
wire transfer to the bank designated by COMPANY A in the total amount requested
for payment to COMPANY A's account at the designated bank. In my earlier letter
to you I had informed you that use of a computer to pay a clients freight bills
was held to be a taxable data processing services in Hearing No. 31,134 (June
2, 1994).

Based on this change in your contract, the bill payment
portion of your services will not be taxable as long customers who do not take
advantage of your bill payment services are charged the same amount per bill as
those customers who do request this option.

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

You may call me toll-free at 1-800-531-5441, extension
3-4502. The direct line is 512/463-4502. You may also write to Tax Policy
Division, Comptroller of Public Accounts. My Internet address is:
[email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9602122L