Is a mobile app that lets multi-level-marketing distributors view their sales and downline data, sold alone or bundled with a dashboard and personal website, a taxable data processing service?

Plain-English summary

A company that sells nutritional products through a network of independent distributors wanted to offer its distributors a paid "mobile application program" (MAP) — $4/month — giving them access to their own sales figures and their "downline" (the distributors below them whose sales generate income for them). It also planned a $15/month bundle adding a real-time "dashboard" and a personal website distributors could use for presentations and recruiting. The company licenses the underlying MAP technology from another company. It asked how both offerings should be taxed.

The Comptroller ruled both the standalone MAP and the bundle are taxable data processing services. Texas taxes "data processing services," defined to include computerized information storage, retrieval, and manipulation — and giving distributors access to their stored sales/downline data (and, in the bundle, real-time dashboards and a hosted personal website) fits squarely within that definition. Texas gives data processing services a 20% statutory exemption, so tax applies to 80% of whatever is charged for the MAP or the bundle. On the input side, because the company is reselling data processing services to its distributors, it can buy the underlying licensed MAP technology tax-free from its own supplier by issuing a resale certificate, rather than paying tax twice on the same service.

What this means for you

MLM, network-marketing, and franchise-style businesses offering member portals

A paid app or dashboard that shows members their own sales, referral, or downline data is a taxable data processing service in Texas — collect and remit tax on 80% of the charge (the 20% exemption applies automatically; you don't need to separately itemize which 20%).

SaaS and app companies bundling multiple data-access features into one fee

Bundling a dashboard, app, and hosted website together for one flat monthly fee doesn't change the analysis if all the components are, at bottom, ways of storing, retrieving, or presenting data for the customer — the whole bundle gets taxed as data processing services.

Businesses that license technology and resell it as a service

If you license a data-processing platform from a vendor and then charge your own customers to use it, you can generally buy the underlying license tax-free with a resale certificate (Section 151.006(a)(1)), since you're reselling the service rather than consuming it yourself — avoiding double taxation on the same transaction chain.

Common questions

Q: Is a distributor-facing sales/downline-tracking app always taxable?
A: Under Texas's broad "data processing services" definition (storing, maintaining, and retrieving information for a fee), yes — this ruling treats that kind of access as squarely within the taxable category.

Q: How much tax applies to a data processing service charge?
A: 80% of the charge is taxable; Texas provides an automatic 20% exemption on data processing services under Section 151.351.

Q: If I license the underlying technology from another company, do I pay tax twice — once on my license and again on what I charge my customers?
A: No, not if you're reselling the service. You can issue a resale certificate to your own supplier and buy the licensed technology tax-free, then collect tax from your customers on 80% of your own charge.

Q: Can another MLM or membership-app business rely on this ruling?
A: No. It's a private letter ruling binding on the Comptroller only for the taxpayer and facts submitted, and it cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101(a)(12) (Data Processing Services — taxable)
• Tex. Tax Code § 151.0035 ("Data Processing Service"); 34 Tex. Admin. Code Rule 3.330(a)(1)
• Tex. Tax Code § 151.351 (20% exemption on data processing services)
• Tex. Tax Code § 151.006(a)(1) ("Sale for Resale")
• STAR Accession Nos. 200801068L (Jan. 17, 2008); 9905476L (May 28, 1999)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201808008L

Original ruling text

August 13, 2018

RE: Private Letter Ruling No. 20171017131055

* Taxpayer No. *

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 request dated Oct. 9, 2017, as well as the subsequent submission on Dec. 5, 2017. You also provided information via telephone on July 19, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance with respect to the taxability of a “mobile application program,” when sold on its own and when sold as part of a bundled service.

Facts Presented

** (Taxpayer) sells nutritional and dietary products to customers through a multi-level network of independent distributors. Taxpayer plans to offer its distributors a “mobile application program” (MAP). The MAP will allow distributors access to their sales data and their “downline” information. In a multi-level network, the term “downline” refers to the distributors whose sales or referrals also generate income for distributors higher in the organization. [ENDNOTE: 2]

Access to the MAP will cost $4.00 per month after the first 30 days. If a distributor does not pay the fee for the MAP, the distributor will not be able to access the data. Taxpayer will provide this MAP through a licensing agreement that it has with COMPANY A. COMPANY A owns all right, title, and interest to the MAP.

Taxpayer distributor data is stored for access on Taxpayer’s servers in CITY, Texas. The mobile application servers will store data on COMPANY B Cloud servers. When a distributor signs up for the MAP, Taxpayer grants the distributor access to the distributor’s stored data on the mobile application server. Some distributor sales data will be stored for read-only access on the mobile application servers. All other data will be accessed directly from Taxpayer’s servers.

Taxpayer will also offer its distributors a “bundle” of services for one fee. The bundle of services will include the dashboard, a personal website, and the MAP. The monthly fee for these services will be $15.

The dashboard service provides a distributor with immediate 24/7 access to information on all activity on the distributorship, as well as online tools to track, manage, and grow the business. Distributors can view data concerning sales and sponsoring volume of their downline. Personal websites allow the distributor to give presentations through a mobile device. Personal websites also allow the distributor to add customers and downline distributors. The distributor may access the website but not download the source code.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: What is the taxability of the MAP and bundled service?

Ruling: The MAP and bundled service are taxable data processing services.

Analysis: Section 151.0101(a)(12) states that data processing services are taxable. Section 151.0035 defines a data processing service. The comptroller construes that definition in Rule 3.330(a)(1), which follows, in pertinent part:

(1) Data processing services - the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. It specifically includes . . . computerized data and information storage or manipulation . . ..”

The information stored on the MAP allows distributors “access to their sales data and their downline information” for a fee. Taxpayer is providing the access to its own database maintained for its distributors. The provision of the stored database and the provision of a personal website meet the definition of data processing services under Section 151.0035 and Rule 3.330(a)(1) and are taxable under Section 151.0101(a)(12). See also STAR Accession Nos. 200801068L (January 17, 2008) and 9905476L (May 28, 1999).

There is a 20% exemption on taxable data processing services. See Section 151.351. Taxpayer must collect and remit tax on 80% of the value of the charge for the MAP and for the bundled service.

Taxpayer purchases taxable data processing services from COMPANY C when it enters into the license agreement with COMPANY C for the MAP. A data processing service provider may purchase data processing services tax-free when it resells the services. See Section 151.006(a)(1) (“Sale for Resale”). Therefore, Taxpayer may issue a resale certificate to COMPANY C in lieu of paying tax on its purchase of the MAP because Taxpayer is reselling the service to its distributors.

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 No. 20171017131055.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTES:

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.

2. https://www.wordwebonline.com/en/DOWNLINE