United States: Texas Appeals Court Affirms Bill Pay Services For Banks Are Not Taxable Data Processing Services

On April 19, 2016, the Texas Court of Appeals ruled in favor of a taxpayer claiming a refund of $3 million in sales tax assessed during an audit on bill pay services the taxpayer provided for banks to allow banking customers to pay their bills online.1 The Court of Appeals affirmed the District Court's judgment that the bill pay services were nontaxable professional services rather than taxable as data processing services. This decision continues the process of defining and narrowing the meaning of what constitutes a data processing service in Texas.

Background

Texas imposes sales tax on 17 different enumerated taxable services.2 Unless a service is one of the enumerated taxable services, the service is not taxable. Data processing services became taxable services in Texas effective January 1, 1988.3 Twenty percent of the charge for data processing services is exempt.4 The statutory definition of data processing services has changed over the years but was broad enough to include technological changes such as taxing the creation of Web pages and software as a service (SaaS). Many taxpayers, like the one in this case, utilizing computers to perform their services sometimes run afoul of Texas and its broad interpretation of data processing services.

The taxpayer was a provider of bill pay services for banks that allowed their banking customers to pay their bills online. The taxpayer claimed that bill pay services provided to banks for on-line banking customers did not meet the definition of data processing services in either the statute or administrative rule.5 The taxpayer requested an administrative hearing on the issue but lost.6 The taxpayer then filed suit in District Court and won.7 The Texas Comptroller of Public Accounts appealed the District Court's decision to the Texas Court of Appeals and argued that the District Court erred in determining that the taxpayer's bill pay services were not taxable data processing services.

Bill Pay Services Not Taxable

In affirming the District Court's decision, the Court of Appeals held that bill pay services provided to banks were not taxable data processing services because the essence of the service was more than computerized storage or the manipulation of data. The Court of Appeals agreed with the District Court that the taxpayer was providing professional services involving the skill and knowledge of thousands of employees and the use of the computer was merely to facilitate the nontaxable service.

The Court of Appeals reviewed the findings of fact from the District Court's trial, including the testimony of two employees familiar with the taxpayer's business. The findings of fact revealed that the taxpayer's activities involved in providing bill pay services included an electronic delivery platform to facilitate the bill pay service, the actual bill pay service, and other activities such as invoices, reports to banks and customer service for the bank's customers. The technology platform was neither sold nor licensed to the banks under the terms of the electronic commerce service agreement with the banks. The taxpayer used an automated clearing house (ACH) to debit users' accounts and credit payees' accounts, but in 20 percent of the cases provided paper checks to payees. The taxpayer employed over 3,000 skilled and accredited or certified professionals who were not a minor part of the service and were described as the "secret sauce" of the service. These professionals managed the actual bill pay process making decisions at multiple stages of the process, including a team to deal with errors and other customer issues that arise after bill payment occurs. The professionals were responsible for complex government regulations, and for critical monitoring and detection of fraud, money laundering, and other financial risks.

In reaching its decision, the Court of Appeals focused on the definition of "data processing service" found in the Texas statute8 and the Texas Comptroller's administrative rule.9 The Court of Appeals agreed with the District Court that the "essence of the transaction" of the bill pay service was beyond data entry, retrieval, search, information compilation, business accounting data production, or computerized data or information storage or manipulation, even if users' billing and payment data was retained and available for retrieval for 90 days and the taxpayer's compliance with banking regulations required certain data to be kept for seven years. The taxpayer was considered to have used its electronic commerce system (i.e., computers) to facilitate the performance of a nontaxable professional service for the banks. The Court of Appeals rejected the Comptroller's argument that bill pay services were data processing services and affirmed the District Court's decision.

Commentary

Technology continues to change over time and the use of computers to facilitate services that are not one of the defined taxable services enumerated in the Texas statute will only increase. Texas has a broad definition of data processing services, but the "true object" or "essence of the transaction" tests are important considerations that the Texas courts have historically used in determining taxability. The District Court and Court of Appeals concluded that the taxpayer's bill pay services for banks were not data processing services. Other service providers in similar circumstances may also be able to show that the "essence of the transaction" indicates their services are not data processing services.

Taxpayers doing business in Texas utilizing computers to facilitate their services may want to review their services in light of this decision. Service providers may find that the services they currently believe are taxable as data processing services might not be subject to tax. Purchasers may find they do not owe Texas tax and may be entitled to a refund. The Texas sales tax implications of this case likely go beyond bill pay services and may well benefit other taxpayers. Because the Comptroller did not file a motion for rehearing with the Court of Appeals or a petition for review with the Texas Supreme Court, the Court of Appeals' broad reading of what constitutes a professional service is final.

Footnotes

1 Hegar v. CheckFree Services Corp., Texas Court of Appeals, 14th District, Houston, No. 14-15-00027- CV, April 19, 2016.

2 TEX. TAX CODE ANN. § 151.0101(a).

3 H.B. 61, Laws 1987, effective Jan. 1, 1988.

4 TEX. TAX CODE ANN. § 151.351.

5 TEX. TAX CODE ANN. § 151.0035; 34 TEX. ADMIN. CODE § 3.330, amended effective Aug. 24, 2000.

6 Decision, Hearing No. 105,009, Texas Comptroller of Public Accounts, Aug. 28, 2012.

7 CheckFree Services Corp. v. Combs, 53rd District Court of Travis County, Austin, No. D-1-GN-13- 003667, Sep. 2, 2014.

8 TEX. TAX CODE ANN. § 151.0035. "'Data processing service' includes word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, the performance of a totalisator service with the use of computational equipment required by the Texas Racing Act [citation omitted], 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. 'Data processing service' does not include the transcription of medical dictation by a medical transcriptionist. 'Data storage,' as used in this section, does not include a classified advertisement, banner advertisement, vertical advertisement, or link when the item is displayed on an Internet website owned by another person."

9 34 TEX. ADMIN. CODE § 3.330(a)(1). The rule defines "date processing services" as "the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. It specifically includes word processing, payroll and business accounting, and computerized data and information storage or manipulation. The charge for data processing services is taxable regardless of the ownership of the computer. Examples of data processing services include entering inventory control data for a company, maintaining records of employee work time, filing payroll tax returns, preparing W-2 forms, and computing and preparing payroll checks. Data processing does not include the use of a computer by a provider of other services when the computer is used to facilitate the performance of the service or the application of the knowledge of the physical sciences, accounting principles, and tax laws, e.g., the use of a computer to provide interpretive or enhancement geophysical services or the use of a computer by a CPA firm, enrolled agent, or bookkeeping firm to produce a financial report, prepare federal income tax, state franchise or sales tax returns, or charges for temporary secretarial personnel who as part of their function use word processing equipment. Data processing services does not include Internet access services or data processing services provided in conjunction with and incidental to the provision of Internet access service when billed as a single charge."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.