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.


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.


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.


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."

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