The Texas Fourteenth Court of Appeals issued its opinion Tuesday in Hegar v. CheckFree Services Corporation. It held that an online bill pay service was not a taxable data processing service under the Texas sales tax. The court based its ruling on the fairly extensive role of individuals with specialized, professional knowledge in providing the online bill pay service. The court’s opinion clarifies the circumstances under which a service becomes a taxable data processing service under the Texas sales tax. This opinion may be especially important to taxpayers given the relative lack of guidance regarding the taxation under the Texas sales tax of services provided online. We discuss the court’s opinion and its implications for taxpayers below.
Texas taxes certain specified taxable services under the Texas sales tax. One type of taxable service is “data processing services.” The Texas Tax Code defines data processing services to include “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production . . . and other computerized data and information storage or manipulation.” A Texas Comptroller rule states that data processing services do 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 physical sciences, accounting principles, and tax laws . . .” Generally, the Texas Comptroller has taken the position that a service that requires the application of specialized professional knowledge is not a data processing service.
In this case, the taxpayer performed online bill pay services on behalf of banks, who provided the online bill pay services to their customers. The banks’ customers used the service to make payments from their bank accounts to other parties. The banks’ customers accessed the online bill pay service through an online electronic delivery platform operated by the taxpayer that customers could access through each bank’s online banking system. Customers initiated payments online through the electronic delivery platform the taxpayer operated. The taxpayer then made the payments for the customers, either through electronic funds transfer from the customer’s account, or by sending a paper check drawn on the customer’s account to the payee. The taxpayer provided support for the electronic delivery platform’s hardware and software. Its employees also monitored the transactions to prevent fraud and ensure compliance with banking regulations. The taxpayer also gave the banks extensive reports on their customers’ bill pay transactions.
The Court’s Opinion and Its Implications
The Fourteenth Court of Appeals upheld the trial court’s decision that the taxpayer didn’t provide taxable data processing services under the Texas sales tax. (The case was transferred from the Third Court of Appeals to the Fourteenth Court of Appeals, which originally had jurisdiction, via a system that transfers some appellate cases from courts with high case loads to courts with lower case loads). The court found, based on the trial court’s uncontested factual findings, that the taxpayer “provides a professional service — facilitated by the use of computers and an electronic commerce system — that requires the oversight and management of thousands of certified specialists to achieve the goal of paying the bills of the banks’ customers.” The court noted that any services the taxpayer provided that fit the statutory definition of data processing services were incidental to the professional services the taxpayer provided. Therefore, since the “essence of the transaction” was the purchase of professional services, the taxpayer’s services were not subject to Texas sales tax.
This opinion offers some much-needed guidance regarding the extent to which services provided through electronic means are taxable as data processing services under the Texas sales tax. It helps to clarify that not all services provided using computers are taxable as data processing services under the Texas sales tax. Some taxpayers may have paid tax in error on these types of services, and may possibly have refund claims as a result. Taxpayers who believe they may have paid tax in error or are otherwise uncertain about their Texas sales tax obligations may wish to seek the advice of a Texas tax professional, such as a Texas tax attorney, to clarify their tax obligations.