United States

Texas: Automated Online Fraud Risk Assessment Services Not Subject to Sales and Use Tax

Jan 23, 2017
From KPMG TaxWatch

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In a recently issued private letter ruling, the Texas Comptroller of Public Accounts ruled that a company using software to provide fraud detection and risk assessment services to online retailers was not providing a taxable service. Specifically, the company gathered information from devices used by a client’s purchasers and recommended whether the online retailer should complete a sales transaction. To gather this information, the company provided retailers with software that worked with the retailers’ existing software used to process online transactions. The company also maintained a database of devices that were known to have been used in fraudulent transactions, and the software was used to compare attributes collected from the retailers against the database. Based on the results of the comparison, the company transmitted a recommendation to the client to either “Allow,” “Deny,” or “Review” the sales transaction.

Under Texas law, various specifically enumerated services are subject to sales and use tax, including information services, which are taxable at 80 percent of the amount billed. However, the sale of proprietary information gathered on behalf of a particular client is considered an exempt information service. The company requested a ruling that its service was a nontaxable proprietary information service. However, the Comptroller ruled that the company was not offering an information service at all because it was not selling information. Rather, the company’s service involved gathering information, comparing it to data that the company had compiled and analyzed, and providing a recommendation to retailers based on that comparison. The Comptroller concluded that the company’s service was not a taxable service under Texas law. For more information regarding this ruling, 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.