United States

Texas: Receipts from Services Sourced to Customer Location

May 15, 2017
From KPMG TaxWatch

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Recently, the Texas Comptroller issued guidance on how a taxpayer should apportion receipts from providing payment risk and fraud prevention services. The taxpayer, a Texas-headquartered company, provided real time risk and fraud prevention solutions that allowed lenders, retailers, and other businesses to make instantaneous decisions about whether to accept payment from or extend credit to their customers. The taxpayer’s customers received the results of the web-based services by accessing the taxpayer’s secure website on their own computers at their own locations. The taxpayer requested a ruling that, for franchise tax purposes, the taxpayer’s receipts from sales of its services were apportioned to the location of its customers.

Under Texas law, receipts from a service are apportioned to the location where the service is performed. If services are performed both inside and outside Texas, then such receipts are sourced to Texas on the basis of the fair value of the services that are rendered in Texas. Citing a 1980 decision, the Comptroller noted that, in determining where a service is performed, “the focus is on the specific, end-product act for which the customer contracts and pays to receive, not on non-receipt producing, albeit essential, support activities.” Although the processing of information via the taxpayer’s servers was essential to performing the taxpayer’s services, the Comptroller determined this was a support activity and therefore the location of the taxpayer’s servers did not determine where the taxpayer’s receipts should be sourced. Rather, the relevant end product was the display of the taxpayer’s response to a customer’s fraud or risk prevention-related request. This information was received at the customer’s location on the customer’s own computer screen. As such, the Comptroller determined that when a Texas customer submitted an inquiry and the taxpayer responded to that inquiry at the customer’s Texas location, the service was performed in Texas. When an out-of-state customer submitted an inquiry and the taxpayer responded to that inquiry at the customer’s out-of-state location, the taxpayer’s service was performed outside of Texas. In this instance, the taxpayer’s service was not performed both inside and outside of Texas and there was no need to perform a fair value analysis. Please contact Doug Maziur at 713-319-3866 with questions on this private letter ruling.

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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.