A financial-document company converts customer documents into electronic format and transmits them to government regulatory agencies, and separately offers software and training so customers can format their own documents. Is the electronic formatting/transmission service taxable, does it matter if the customer is inside or outside Texas, and how is the software/training service taxed?

Plain-English summary

A company that serves the financial reporting industry converts customer-supplied documents into the electronic filing format required by government regulatory agencies (like SEC filings) and transmits the finished filings to the agency over dedicated phone lines. It also separately offers software and training so customers can format their own documents before transmission. The company asked the Comptroller two sets of questions: is the electronic-formatting/transmission service taxable, and does it matter whether the customer receiving the benefit is inside or outside Texas; and is the software/training service taxed the same way.

Electronic formatting and transmission. Converting documents into electronic format is taxable data processing under Tex. Tax Code Sec. 151.0035, which broadly covers word processing, data entry/retrieval/search, information compilation, and other computerized data manipulation — regardless of whether the company or the customer is the one actually running the computer processing. The transmission fee to the regulatory agency is part of the taxable sales price of that data processing service (Sec. 151.007(a)(2), Rule 3.330(d)(3)). BUT Sec. 151.330(e) exempts data processing services performed for use OUTSIDE Texas. If the service supports a separate, identifiable segment of the customer's business (not just general administration), that segment's location controls — and if the customer's relevant business operates both in and out of Texas, the service is nontaxable to the extent it's used outside Texas (Rule 3.330(f)). The fact that the formatting service is sometimes bundled with printing on the same invoice doesn't change this — the "true object" of the service is the electronic formatting/transmission, with printing merely incidental.

Software and training. Selling, leasing, or licensing the formatting software is taxable if the software is delivered to the client in Texas. Charges for computer program maintenance (error correction, improvements, technical support) by the company that sold the software are taxable, but separately stated training/instruction charges are NOT taxable (Rule 3.308).

If the service is really just data transmission. If what the company is actually providing is solely the electronic transmission of data (not formatting), that's a taxable telecommunications service under Sec. 151.0103 and Rule 3.344. In 1997, telecommunications providers were also subject to a Telecommunications Infrastructure Fund (TIF) assessment enacted by the 1995 Legislature (H.B. 2128) — an annual $75 million assessment split between telecommunications utilities and commercial mobile service providers, calculated as a percentage of taxable telecommunications receipts, which would have applied to companies electronically transmitting data for a charge.

Currency note: STAR's own record for this letter flags that the TIF assessment discussed above was repealed effective September 1, 2008, by House Bill 735 (80th Legislature) — that portion of this 1997 letter is now obsolete, though the underlying data-processing and telecommunications-services taxability analysis may still be informative.

What this means for you

Data processing and document formatting companies serving out-of-state or multistate customers

Your electronic document formatting/conversion service is taxable data processing — but if your customer's relevant business segment operates outside Texas, you may be able to exempt the portion of the service used outside the state under Sec. 151.330(e) and Rule 3.330(f). Track WHERE the benefiting business segment is located, not just where your own processing happens.

Software companies bundling licensing with training

Software delivered in Texas is taxable, and maintenance/support is taxable, but separately stated training charges are exempt — keep these clearly itemized.

Telecommunications/data-transmission service providers

The TIF assessment discussed in this letter no longer exists (repealed 2008) — treat this letter as historical/background on the sales-tax classification questions (data processing vs. telecommunications services), not as current guidance on any TIF obligation.

Common questions

Q: Is converting documents into electronic format for regulatory filing taxable in Texas?
A: Yes, as data processing services under Sec. 151.0035.

Q: Does it matter if my customer is located outside Texas?
A: Yes — Sec. 151.330(e) exempts data processing services used outside Texas, based on where the benefiting business segment is located and conducted (Rule 3.330(f)).

Q: Is separately stated training on formatting software taxable?
A: No — separately stated training/instruction charges are not taxable under Rule 3.308.

Q: Is the Telecommunications Infrastructure Fund assessment mentioned in this letter still in effect?
A: No. STAR's own record for this letter notes the TIF assessment was repealed effective September 1, 2008 by House Bill 735.

Citations and references

• Tex. Tax Code Sec. 151.0035 (definition of Data Processing Service)
• Tex. Tax Code Sec. 151.007(a)(2) (sales price includes taxable service charges); 34 Tex. Admin. Code Rule 3.330(d)(3) (data processing transmission fees)
• Tex. Tax Code Sec. 151.330(e) (exemption for services used outside Texas); 34 Tex. Admin. Code Rule 3.330(f) (benefit-of-service location test)
• Tex. Tax Code Sec. 151.0103 and 34 Tex. Admin. Code Rule 3.344 (telecommunications services)
• 34 Tex. Admin. Code Rule 3.308 (computer program maintenance and separately stated training)
• Telecommunications Infrastructure Fund assessment (House Bill 2128, 1995; repealed effective 09/01/2008 by House Bill 735, 80th Legislature)

Subject

Benefit Of Service — Services Performed For Use In Texas And/Or Oos

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9711964L

Original ruling text

ALERT - Statutory change — Effective September 1, 2008, the
Telecommunications Infrastructure Fund (TIF) assessment no
longer applies. House Bill 735, 80th Regular Legislative Session,
repealed the TIF assessment.

November 3, 1997

Dear****:

This is in response to your request for a clarification of the taxability of
the following services performed by your client ("Company"): (1 ) typesetting
and layout of financial documents into electronic format, as specified by
government regulatory agencies for publicly held companies, and (2) training of
customer employees in the software which formats this information into
electronic filing format. In both services, your client provides the ultimate
transmission of the final document to the government regulatory agency through
dedicated telephone lines.

I. The pertinent facts relating to the electronic formatting service are as
follows:

Basically, the electronic formatting service involves converting a document
(typesetting and layout) of customer provided documents into electronic format
and ultimately transmitting the information to the government regulatory
agency. In some cases, hard copy proofs of the information that gets
electronically transmitted to the regulatory agency will be prepared and
forwarded to the customer. Finally, in some instances the electronic formatting
service will be bundled with a package deal that involves printed matter as
well.

The electronic formatting service can be billed as a stand alone service or
bundled with printing.

The following are sample line items from an invoice. This particular invoice
involves both the electronic formatting service and printing, but in theory,
the line items could be "unbundled" for billing purposes.

1. Creation and submission headers and document headers, electronic
   organization of document, running of validation program, transmission of 58
   pages to government regulatory agency and mail message retrieval from
   governmental regulatory agency.
2. 1, 500 Form 10-K copies; 8 3/8" x 10 7/8 ", 20 page plus 4 page separate
   cover, cover printed black ink on 65# white cover stock; text printed black
   ink throughout on 35# white financial opaque stock, saddle stitched.

It would seem the true object of item I above is really a service to transform
customer supplied information into the format as specified by the government
regulatory agency. The fact that this service is sometimes bundled with
printing is merely incidental.

All formatting and transmission of this information to the government
regulatory agency is done at Company's headquarters. The customer for whom the
service is being performed may or may not be located within the state. You are
asking if the electronic formatting service is subject to tax, is it only
subject to tax when performed for customers in Texas, or would customers
outside Texas also be subject to sales and use tax since the service takes
place within your state?

Response: A charge for converting documents into an electronic format is
taxable as data processing. Texas Tax Code 151.0035 - defines a "Data
Processing Service" to include:

... 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 data
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.

A fee for electronically transmitting the data to the regulatory agency is
taxable as part of the sales price of the taxable service. See Texas Tax Code
151.007(a)(2) and the enclosed copy of Rule 3.330(d)(3).

Tax Code Section 151.330(e) provides an exemption from sales tax for services
that are performed for use outside the State of Texas. To the extent a data
processing service is used to support a separate, identifiable segment of a
customer's business (other than general administration or operation of the
business) the service is presumed to be used at the location where that part of
the business is conducted. If that part of the business is conducted at
locations both within and outside the state, the service is not taxable to the
extent it is used outside Texas. See subsection rule 3.330(f).

II. The pertinent facts relating to the training and software service are as
follows:

As a complement to the electronic filing service, the Company offers software
and training to their customers. This allows customers the ability to format
their own documents prior to transmission to the regulatory agency. The Company
still provides the actual transmission service to the regulatory agency.

Is the training and software service subject to tax; is it only subject to tax
when performed for within your state, or would customers outside your state
also be subject to sales and use tax since the service takes place within your
state?

Response: Sales tax is due on the sale, lease or license of a computer program
in Texas. If Company makes a charge to it's clients for this software, sales
tax is due on the charge for the software if delivered to the client in Texas.

Charges for computer program maintenance by the person who sold the computer
program are taxable. Maintenance means providing error correction,
improvements, or technical support. Separately stated charges for instruction
or training on the software's use are not taxable. See Rule 3.308, copy
enclosed.

If the actual service being provided by Company is solely to transmit data
electronically, tax would still be due on this service as a taxable
telecommunications service. Please refer to 151.0103 of the Texas Tax Code and
Rule 3.344 regarding telecommunication services. The Texas Legislature in 1995
enacted legislation (H.B. 2128) requiring the Comptroller's office to collect
an annual Telecommunications Infrastructure Fund (TIF) assessment of $75
million from telecommunication utilities and $75 million from commercial mobile
service providers. Telecommunication utilites are defined to include telephone
companies, long distance carriers and other sellers of telecommunication
services. This would include companies that electronically transmit data for a
charge. The TIF assessment is on the service providers and is calculated as a
percentage of telecommunication service receipts subject to sales tax. We can
provide you with copies of the rules and rates on the TIF assessment if you
need them.

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

I hope this information answers your questions. If you need additional
information, please
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. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division