Can an internet-calling and messaging company source its Texas sales tax based on a customer's IP-registration address, and can it advertise a tax-included price without violating the ban on advertising that it 'absorbs' the tax?

⚠️ Note on superseded guidance

STAR flags this ruling as partially superseded on December 8, 2020. House Bill 2358 (86th Legislature, 2019) amended Tax Code § 151.704 — the anti-tax-absorption advertising law discussed in Question Two below — to affirmatively allow retailers to advertise that they are paying the customer's sales tax, under certain conditions, effective October 1, 2019 (see also 34 Tex. Admin. Code Rule 3.286, effective 2020). This ruling was issued in 2017, before that change, so its Question Two analysis reflects the older, stricter version of the law. The sourcing holding in Question One is not flagged as superseded and remains a useful illustration of IP-address-based sourcing for internet-only services.

Plain-English summary

The Texas Comptroller addressed two separate questions for an internet-based calling/messaging service with no reliable customer address data: how to source its sales for Texas tax purposes, and whether its "tax included" invoice language was legal.

Sourcing by IP address — still good law. The taxpayer's app-based VoIP, Wi-Fi, and messaging services didn't always come with a customer's billing or residential address, but the taxpayer did capture the IP address used when a customer registered an account, linked to a physical location through a third-party service. The Comptroller allowed the taxpayer to use that "Registration IP address" location in place of a business or residential address for sourcing prepaid wireless telecommunications sales to Texas.

Tax-included pricing — the underlying law has since changed. At the time of this 2017 ruling, Texas law made it a crime for a retailer to advertise, or even imply, that it would absorb or refund part of the sales tax. The taxpayer's invoices said charges "include any tax you are required to pay" without stating it was paying the tax itself, so the Comptroller found no violation. But the Comptroller flagged a real problem: the invoices didn't clearly itemize the tax amount or state that the price included tax as required by rule, meaning the Comptroller could treat the entire invoiced amount as taxable (with no tax-included credit) if audited — and the customer, not just the retailer, could end up owing the difference. Since this ruling, the law itself changed: 2019's House Bill 2358 now lets retailers affirmatively advertise they're paying the tax for the customer, under specified conditions — a bigger allowance than what existed when this ruling was issued.

What this means for you

Internet/app-based service providers without reliable customer address data

If you sell prepaid telecommunications-type services over the internet and can't collect a reliable billing or residential address, this ruling supports sourcing to Texas based on a customer's IP-registration address linked to a physical location, when that's the best data available.

Businesses using "tax included" pricing on invoices

Don't just say "tax is included" — Texas requires either a separately itemized tax amount or a specific written statement that the price includes sales tax. Skipping this can make your entire invoiced amount presumptively taxable in an audit, potentially leaving your customer on the hook for uncollected tax.

Retailers considering advertising that they pay sales tax for customers

Check current law rather than this ruling's 2017-era analysis. Tax Code § 151.704 was loosened by 2019's HB 2358 to allow advertising that the retailer is paying the tax on the customer's behalf, under conditions spelled out in Rule 3.286 — broader than what this ruling analyzed.

Accountants and tax professionals

Use this ruling for its still-good IP-address sourcing analysis (Question One) and its recordkeeping warning about vague "tax included" language, but cite current Rule 3.286 and the amended § 151.704 — not this ruling's Question Two discussion — for the current anti-tax-absorption-advertising rules.

Common questions

Q: Can I source internet sales tax based on a customer's IP address if I don't have their billing address?
A: Yes, per this ruling, if you don't otherwise have the purchaser's business or residential address — you may use the physical address associated with the customer's registration IP address as a substitute for prepaid telecommunications sourcing.

Q: Does saying "tax included" on an invoice satisfy Texas's invoice requirements?
A: Not by itself. The invoice must either separately itemize the sales tax amount or include a written statement that the stated price includes sales tax — a vague "all taxes included" is not sufficient, and the whole invoiced amount is presumed taxable (without a tax-included offset) if you can't show otherwise.

Q: Can a retailer advertise that it's paying the sales tax for customers?
A: Not under the version of the law discussed in this 2017 ruling — but the law has since changed. As of October 1, 2019, HB 2358 allows retailers to advertise that they're paying the tax for the customer, under certain conditions.

Q: Can I rely on this ruling for my own business?
A: Only the taxpayer it was issued to could ever rely on it, and even then, the tax-advertising portion no longer reflects current law given the 2019 statutory amendment. The IP-sourcing portion remains a useful illustration of the Comptroller's reasoning.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.061 (Sourcing of Charges for Mobile Telecommunications Services)
• Tex. Tax Code § 151.704 (Prohibited Advertising; Criminal Penalty) — PARTIALLY SUPERSEDED by H.B. 2358 (2019), effective 2019-10-01
• 34 Tex. Admin. Code § 3.344(b)(13), (h)(6) (Telecommunications Services — sourcing of prepaid wireless)
• 34 Tex. Admin. Code § 3.286(d)(2)(B) (Seller's and Purchaser's Responsibilities — itemized tax requirement, effective 2020)
• Comptroller's Decision No. 100,294 (2012) (invoice amount presumed taxable absent itemized tax)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201711002L

Original ruling text

STAR Superseded Information

Supersede type: partial

Document superseded on: 12/08/2020

Issue(s) that caused the document to be superseded: prohibition for retailer to assume, absorb, or refund a part of the sales tax

Reason(s): HB 2358, 86th Legislative Session (2019) amended Tax Code Section 151.704 to allow retailers to advertise they are paying the tax for the customer provided certain circumstances are met. Effective 10/1/2019. Also see Rule 3.286 (01/01/2020).

November 9, 2017

RE: Private Letter Ruling No. 2017010107

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your private letter ruling request originally dated September 12, 2014, and resubmitted with supplemental information on October 15, 2014. Detrimental reliance relief is provided in accordance with Rule 3.10, the Taxpayer Bill of Rights.

Facts Presented

** (Taxpayer), a Nevada corporation, provides both subscriptions and pay-as-you-go services to U.S. purchasers (Users). Taxpayer provides multiple services (collectively, Services). These include:

Voice over Internet Protocol (VoIP) Calling

** Wi-Fi

Text Messaging

Video Messaging

Instant Messaging

Users must have an account to access Taxpayer’s Services. In addition, Taxpayer’s Terms and Conditions require Users to have a device that can access the Internet, such as a desktop or laptop computer, a tablet, or a mobile telephone.

Although Users can supply address information when they register for an account or purchase services, Taxpayer does not require Users to supply a billing address, residential address, or business address, and does not check the accuracy of User-supplied information.

Taxpayer retains each User’s Internet protocol identification at the time the User registers for an account (the Registration IP address). Taxpayer links the Registration IP address to a physical address through a third-party service provider. Taxpayer uses this information to determine the User’s location for a number of purposes, including the application of Texas sales tax. Taxpayer states that with respect to a User’s physical location, the Registration IP address is more reliable than User-provided information.

When a User purchases subscription services, Taxpayer sends the User a confirmation email at the time of purchase. These emails are the only documentation the User receives from Taxpayer. Taxpayer does not send Users confirmation of pay-as-you-go purchases. Users may also access invoices through their online accounts. Taxpayer does not provide anything else which would be the equivalent of a cash register receipt or a monthly bill.

Taxpayer states that its billing system is limited in how it can describe taxes and fees to Users, but it offers no further explanation of the limitations. Taxpayer further states that invoices issued for subscription plans indicate that “tax has been applied, but does not separately itemize taxes.” Taxpayer provided a sample invoice which sets out the subtotal, “0% VAT,” and a total. The “” references a statement included on the face of the invoice:

The charges include any tax you’re required to pay. For more details

see https://**.

The Internet address provided links to a webpage entitled “Taxes and Fees, United States.” This webpage includes the statement:

At ** we want it to be simple to share experiences with the people that matter to you, wherever they are. You can pay as you go or buy a subscription, whatever works for you. But no matter how you choose to pay, our rates include the cost of your product as well as all of the taxes and fees that we are obligated to collect from you. There is nothing to add. Please note that taxes are subject to change.

Below this statement is an alphabetical listing of states. Under each state name is either a tax type and rate, or a statement that Taxpayer is “currently not obligated to collect state taxes and fees” in the listed state. For example, the webpage provides the following information for Texas:

Texas

State Sales Tax

6.25%

Local Sales Tax

0% - 2.00%

The webpage does not indicate which state taxes and fees, if any, specifically apply to the User. The webpage also does not indicate the basis for Taxpayer’s determination of which state taxes and fees, if any, apply to the User. Taxpayer does not provide any information from which the User may readily determine the appropriate taxes and fees that were assessed or the jurisdiction for which they were assessed and collected.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question 1: May Taxpayer source its sales for purposes of the Texas sales and use tax based upon the physical address associated with a User’s Registration IP address?

Ruling: For purposes of the Texas sales and use tax, Taxpayer may use the physical address associated with a User’s Registration IP address to source its sales to the User.

Analysis:

Although Taxpayer is not a regulated telecommunications provider for federal and state regulatory purposes, Taxpayer believes that many of its services fall within the definition of telecommunications services for Texas tax purposes. For purposes of this ruling, we accept Taxpayer’s characterization of its services as telecommunications services.

Telecommunications services are sourced in a variety of ways under state and federal law, depending upon the type of telecommunications service being provided.

Taxpayer is not a home service provider, as that term is defined in Section 151.061 (Sourcing of Charges for Mobile Telecommunications Services). Consequently, the sourcing provisions of the Mobile Telecommunications Sourcing Act do not apply to the services Taxpayer provides.

All sales of Taxpayer’s Services are prepaid, and all take place via the Internet. Prepaid wireless telecommunications services purchased over the Internet are sourced to Texas if the purchaser’s primary business address or the residential address is in Texas. See Rule 3.344(b)(13) and (h)(6) (Telecommunications Services). Taxpayer does not always have a business or residential address of the purchaser. Taxpayer does, however, have the Registration IP address, which is the physical address from which the purchaser created the User account.

Under these facts, Taxpayer may use the Registration IP address associated with a physical address in Texas in place of the purchaser’s business or residential address as set forth in Rule 3.344(b)(13) and (h)(6).

Question 2: Does Taxpayer violate Section 151.704 (Prohibited Advertising; Criminal Penalty) when it advertises and charges a tax-inclusive price to a User, provided that Taxpayer discloses to User it is charging a tax-inclusive price and does not state, suggest, or imply that it is absorbing the tax?

Ruling: Taxpayer does not violate Section 151.704 when it charges Users a tax-inclusive price, provided that Taxpayer discloses to User it is charging a tax-inclusive price and does not state, suggest, or imply that it is absorbing the tax.

Analysis:

Taxpayer’s invoices include a statement that the charges include “any tax you [the User] are required to pay.” Section 151.704 makes it illegal for a seller to advertise, hold out, or state to a customer or to the public, directly or indirectly, that it will either assume, absorb, or refund a part of the tax or will not add the tax to the sales price of a taxable item.

The language on Taxpayer’s invoices does not advertise, state, or represent to the User that Taxpayer will pay or absorb the sales or use tax; therefore, the advertisement does not violate Section 151.704.

While Taxpayer’s invoices clearly set out the price of Taxpayer’s Services, and provide that a tax has been added to the sales price, they do not set out the amount of the sales tax or clearly state that sales tax is included. Taxpayer may want to amend their invoices for two reasons.

First, sales tax must be separately itemized or contain a written description that the stated price includes sales tax. It is not sufficient for a contract, bill, or invoice to state that “all taxes” are included. Rule 3.286(d)(2)(B) (Seller's and Purchaser's Responsibilities, including Nexus, Permits, Returns and Reporting Periods, and Collection and Exemption Rules). The entire amount on the contract, bill or invoice is presumed taxable unless sales tax is itemized. Id.; see also Comptroller’s Decision No. 100,294 (2012) (“[T]he total amount that is shown on the contract, bill, or invoice is presumed to be the taxable item’s sales price, without tax included.”). If tax were assessed on the total invoice amount, Taxpayer would owe the difference between the tax remitted and the tax due on the total sales price.

Second, Taxpayer’s invoices are not sufficient on their face to show that Users paid the tax due. If a User were audited, the User could be liable for tax on the sales price.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help and reference Private Letter Ruling #2017010107.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.