Apr 25, 2016
From KPMG TaxWatch
The Texas Court of Appeals recently addressed whether a company’s bill pay services constituted taxable data processing services. The taxpayer contracted with banks to provide bill pay services to bank customers using an electronic platform. The bill pay service provided users with access to the taxpayer’s bill-pay system to add payees, make payments, view payments and perform other tasks related to bill payment. The services provided by the taxpayer to the banks included conducting “soft” credit checks, facilitating bill payments by issuing paper checks or using the Automated Clearing House, providing professional support services to assist bank customers, and preparing reports for the bank. For these services, the taxpayer charged the banks monthly infrastructure fees, transaction fees, various processing charges, hosting fees, and charges for telecommunications minutes and VPN lines. On audit, the Texas Comptroller determined that the taxpayer had engaged in taxable data processing services and assessed sales tax. The taxpayer tendered partial payment of the assessment. After unsuccessfully challenging the audit determination through administrative proceedings, the taxpayer filed suit against the Comptroller seeking refund of the tax paid. The trial court concluded that the bill pay services were not taxable data processing services, and the Comptroller appealed the trial court’s judgment.
Texas law imposes tax on data processing services, which are statutorily defined to include certain activities such as word processing, data entry, data retrieval, data search, information compilation, and other computerized data and information storage and manipulation. The Comptroller’s regulations define data processing as the “processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.” The regulations further provide that data processing does not include use of a computer by a provider of services when the computer is used to facilitate the performance of the service. The Court of Appeals concluded that the trial court had properly determined that the “essence of the transaction” was a service that involved the use of a computer and was not data processing. This was supported by unchallenged findings made by the trial court that the taxpayer employed thousands of professionals providing services centered on the bill payment. The court concluded that the bill payment services did not consist of any of the services enumerated in the definition of data processing, and to the extent that it did provide any of those services, they were ancillary to the nontaxable professional services it was providing. For more information on Hegar v. CheckFree Services Corporation, please contact David Davis at (214) 840-6791 or Chadron Woodfork at (713) 319-3846.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.