Are a software company's four SaaS offerings for optometry practices — patient communication automation, online lens ordering, digital marketing sync, and a bundled marketing-consultant package — all taxable as data processing services in Texas?

Plain-English summary

A software company sells web-based tools to optometry and ophthalmology practices, with a small "plug-in" installed on the practice's computer that pulls data and sends it to the company's servers. It offers four distinct service packages: (1) patient relationship management — automated appointment reminders, recall notices, review requests, and marketing emails; (2) an online ordering platform letting patients buy contact lenses and have them shipped; (3) a digital marketing sync tool that keeps the practice's info, social media, and online reviews consistent across directories and search engines; and (4) a bundled "turnkey" package combining a dedicated marketing consultant with directory optimization, email campaigns, review management, and a mobile website build. The company asked whether each offering is taxable.

Texas ruled all four are taxable as data processing services, applying the "essence of the transaction" doctrine: when a bundled offering could touch multiple taxable (or even nontaxable) categories, the Comptroller looks at what the customer is primarily buying rather than picking apart every individual feature. Access to remote, server-hosted software (Software-as-a-Service, or SaaS) has long been treated as taxable data processing in Texas. Even offering 4's dedicated human marketing consultant — whose individual advisory work (like discussing email campaign results) wouldn't be taxable standing alone — didn't change the outcome, because it was sold as one lump-sum charge alongside genuinely taxable data-processing components (the directory-sync tool and a mobile website build). Under Texas's bundling rule, a lump-sum charge covering both taxable and nontaxable items, with no basis for a breakout, makes the entire charge taxable.

What this means for you

Healthcare-vertical SaaS and practice-management software companies

If your platform automates communications, scheduling, ordering, or online-presence management through remote server access, expect Texas to tax the whole subscription as data processing — regardless of how "instructional" or "consultative" individual features might sound in isolation.

Companies bundling software access with human consulting services

Bundling a taxable SaaS component with otherwise-nontaxable advisory or consulting work in one lump-sum price pulls the whole charge into the taxable bucket. If you want the consulting piece to stay nontaxable, price and invoice it separately from the software-access component.

Accountants and tax professionals

This ruling is a compact four-offering tour of the "essence of the transaction" doctrine applied consistently to reach the same SaaS-as-data-processing conclusion each time — useful as a template for analyzing any multi-feature SaaS bundle. The controlling authority (STAR 200805095L, 2008) treating SaaS generally as taxable data processing continues to anchor this area of Texas tax law.

Common questions

Q: Does labeling part of a bundle as "consulting" or "advisory" services protect it from tax?
A: Not if it's bundled into a lump-sum charge with taxable data-processing components. The label doesn't matter as much as the pricing structure — separately stating and pricing the nontaxable piece is what can keep it out of the tax base.

Q: Is all SaaS automatically taxable in Texas?
A: Texas treats SaaS as taxable data processing generally (per STAR 200805095L), though the specific taxable category can vary (data processing vs. information services) depending on what the software actually does.

Q: Does the 20% exemption apply to all four offerings?
A: Yes — Section 151.351's 20% exemption for information/data processing services applies across all four offerings once they're classified as taxable data processing.

Q: Does this ruling apply to my SaaS or practice-management platform?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts and offerings. A different feature mix or separately-itemized pricing could change the analysis.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.0101(a)(10), (a)(12) (information and data processing services)
• Tex. Tax Code § 151.0035 (Data Processing Service); § 151.0038 (Information Service)
• Tex. Tax Code § 151.351 (20% exemption)
• 34 Tex. Admin. Code § 3.342(a)(6)(B) (Information Services)
• STAR Accession No. 200805095L (May 28, 2008) (SaaS as taxable data processing)
• STAR Accession No. 9210L1204F03 (Oct. 7, 1992) (essence of the transaction / customer's primary interest)
• Comptroller's Decision No. 31,985 (1995); No. 110,019 (2015); No. 44,736 (2005); No. 103,588 (2012)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202003061L

Original ruling text

March 3, 2020

RE: Private Letter Ruling No. PLR 20180724152951

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. We are responding to your request dated July 18, 2018, as well as your subsequent email submission of Oct. 3, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights. [ENDNOTE 1]

Facts Presented

You requested guidance with respect to the taxability of Taxpayer’s service offerings provided to optometrists or ophthalmologists (“ODs”).

The facts are drawn from the Taxpayer’s inquiry and subsequent email, as well as information gathered from Taxpayer’s website.

Taxpayer offers web-based software that allows ODs to automate key communications. Principal service offerings include ** (Offerings 1, 2, 3 and 4).

In performing its services, Taxpayer installs a small piece of prewritten software (“plug- in software”) on the ODs’ computer that captures data from their system and sends it to Taxpayer’s server.

Offering 1

Taxpayer describes Offering 1 as web-based software used for patient relationship management. This service includes four features: Automatic Appointment Messaging, Online Appointment Scheduling, Simple Review Management, and Turnkey Patient Outreach Emails.

Automatic Appointment Messaging includes four elements: Open Seat, Automatic Reminders and Confirmations, Automated Recalls, and Rx Ready Notices.

Open Seat allows ODs to fill schedule gaps resulting from cancellations by emailing or texting patients when there is an opening. Automatic Reminders and Confirmations reminds patients by email, text, or voice message about their appointments and confirms that they plan to come in. Automated Recalls has Taxpayer read the actual recall date for a patient in the OD’s practice management software and automatically cues up a recall email, phone call or text message. Rx Ready Notices provides email, text, and phone messages that inform patients their prescriptions are available.

Online Appointment Scheduling provides intelligent appointment requests. Appointment links are placed on the OD’s website, social media pages, and directories. Patients can look online or via mobile device to see exactly when an appointment is available.

Simple Review Management includes two elements: Customized Patient Surveys and Social Media Marketing. Customized Patient Surveys sends surveys to the OD’s patients via text and/or email. The OD can “[r]eview the automatically aggregated patient survey reports to stay in-the-know on (their) patient’s experience.” Social Media Marketing directly links patients to the most popular online review sites and allows for automatic sharing of positive reviews. Additionally, ODs can “[s]end automatic ‘thank you’ messages to patients right after their appointment.”

The Turnkey Patient Outreach Emails feature facilitates communication between office visits with custom branded, prewritten email campaigns. For example, the email may contain information about the symptoms of dry eye and the OD’s options for treating it. The emails may also be used to notify patients of special offers.

Offering 2

Offering 2 is a secure, cloud-based commerce solution that allows patients to order lenses from their OD on their phone, computer, or tablet and to receive shipments to their door.

Offering 3

Offering 3 is a digital marketing solution that drives online visibility. Offering 3 synchronizes practice information across multiple online local business directories, manages top social media pages, and monitors the OD’s online reputation. It also integrates OD’s information with the top search engines, local service sites, and mapping applications.

Offering 3 is accomplished through three elements: improving online visibility, outsourcing the OD’s social media, and managing reviews.

Improving online visibility makes sure an OD’s digital presence is complete, accurate, and consistent. This can include adding OD profile and location information, pictures, and videos to online local business directories that are integrated with the top search engines, local service sites, and mapping applications.

Managing reviews provides ODs with a presence on review sites and forwards monthly review report cards with various metrics based on all reviews received. ODs are provided links so that they may read and respond to each review. This service offering may include the creation of an application programming interface (API) which allows the OD to pull reviews from various sites and aggregate them for review and analysis.

Offering 4

Offering 4 provides ODs a turnkey digital solution that includes a dedicated marketing consultant (Offering 4 Consultant) to help acquire, retain, and engage the OD’s patients. Offering 4 includes: Offering 4 Consultant, Online Directory Optimization, Custom Email Marketing Campaigns, Social Media and Reputation Management, and a mobile-friendly website.

The Offering 4 Consultant works with the OD to execute the Offering 4 solution and help meet quarterly business goals. The Offering 4 Consultant also develops a mobile-friendly website for the OD’s practice.

Online Directory Optimization and Social Media and Reputation Management services largely mirror those offered in the Offering 3 service offering, with the addition of the Offering 4 Consultant.

The Custom Email Marketing Campaigns feature provides follow up by the Offering 4 Consultant, after a marketing campaign has been sent to the OD’s patients, to discuss the campaign analytics and its success.

Questions, Rulings, and Analyses

Our restatements of your questions are below, followed by our responses and analyses.

Question One: What is the taxability of the Offering 1 service offering?

Ruling One: Offering 1 constitutes Software-as-a-Service (SaaS) which is taxable as a data processing service.

Analysis for Ruling One: Sales tax is imposed on each sale of a taxable item in Texas. Section 151.051 (Sales Tax Imposed). The term “taxable item” means tangible personal property and taxable services. Section 151.010 (Taxable Item). Section 151.0101 (“Taxable Services”) lists services that are taxable in Texas and includes information services and data processing services. Sections 151.0101(a)(10) and (12), respectively. See also Sections 151.0035 (“Data Processing Service”) and 151.0038 (“Information Service”). There is a 20 percent exemption on the provision of information services and data processing services. Section 151.351 (Information Services and Data Processing Services).

Section 151.0035 defines data processing service, in pertinent part, to include “. . . data entry, data retrieval, data search, information compilation, … and other computerized data and information storage or manipulation.” ‘Data processing service’ also includes the use of a computer or computer time for data processing whether the processing is performed by the provider of the computer or computer time or by the purchaser or other beneficiary of the service . . . .”

SaaS constitutes the remote access of software provided by another. The Comptroller has determined that SaaS is taxable as a data processing service. See STAR Accession No. 200805095L (May 28, 2008).

Offering 1 is a web-based software application for managing patient appointments and relationships. The different features of Offering 1 would meet the definition of more than one taxable service if provided separately and individually. For example, the Online Appointment Scheduling (Intelligent Appointment Requests) meets the definition of data processing services. See Comptroller’s Decision No. 31,985 (1995). The Simple Review Management features the provision of customized patient surveys that would constitute a taxable information service. See Rule 3.342(a)(6)(B).

In similar situations where multiple taxable services are performed, the Comptroller looks at the overall circumstance to determine the service that the customer is “primarily interested in.” See STAR Accession No. 9210L1204F03 (Oct. 7, 1992).

ODs are purchasing access to the web-based Offering 1 software to automate the management of patient appointments and relationships. The plug-in software that Taxpayer installs on an OD’s system captures and sends data to software on Taxpayer’s servers so the Offering 1 functions can be performed.

For example, ODs can utilize Taxpayer’s software to “[r]eview the automatically aggregated patient survey reports to stay in-the-know on patient’s experience,” or to “[s]end automatic ‘thank you’ messages to patients right after their appointment” based on information Taxpayer has gathered from an OD’s system.

ODs’ use of Taxpayer’s web-based software to automate the management of their patient appointments and relationships constitutes SaaS and is a taxable data processing service.

Question Two: What is the taxability of the Offering 2 service offering?

Ruling Two: The Offering 2 offering constitutes taxable data processing.

Analysis for Ruling Two: Offering 2 allows ODs access to Taxpayer’s software to set up and manage individual patient accounts for ordering contact lenses and for processing and collecting payments. Access to Taxpayer’s web-based software to provide the Offering 2 service constitutes SaaS and is taxable data processing. See also Comptroller’s Decision No. 110,019 (2015), which determined similar order processing services to be a taxable data processing service.

Question Three: What is the taxability of the Offering 3 service offering?

Ruling Three: The Offering 3 service offering is taxable as data processing.

Analysis for Ruling Three: As described in the Analysis for Ruling One, Taxpayer’s plug-in software installed on an OD’s system captures and sends data to software on Taxpayer’s servers so the Offering 3 services can be performed. These services include adding and automatically “syncing” an OD’s information on online directories and on social media as well compiling patient reviews for an OD to review. Access to Taxpayer’s software to perform these automated functions constitutes SaaS and is taxable as a data processing service.

Question Four: What is the taxability of the Offering 4 offering?

Ruling Four: The Offering 4 service offering is taxable as data processing.

Analysis for Ruling Four: The Offering 4 service offering is a lump-sum charge for both taxable and nontaxable services. This lump-sum charge is subject to tax as a data processing service.

The dedicated marketing consultant provides several services that would not be taxable if provided separately. For example, the consultant’s analysis of the success of custom email marketing campaigns would not be taxable services.

However, the Offering 4 service includes the taxable Offering 3 service. In addition, the creation and maintenance of a website are data processing services. Comptroller's Decision No. 44,736 (2005). The consultant’s development of mobile website for an OD is a taxable data processing service.

A lump-sum charge for taxable and nontaxable services is taxable. See Comptroller’s Decision No. 103,588 (2012) (“When an invoice includes charges for both taxable and nontaxable items with no basis for a breakout the entire charge is taxable.”). The Offering 4 service offering is therefore taxable as a data processing service.

Section 151.351 provides an exemption for 20 percent of the charge for data processing services. This exemption would apply to all of Taxpayer’s service offerings.

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 No. PLR 20180724152951.

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.