Is a fintech company's payment card management program (authorizing and settling debit/prepaid card transactions for business customers) a taxable data processing service in Texas?

Plain-English summary

The Texas Comptroller ruled that a fintech company's payment card management program — letting business customers (like food delivery services) set spending controls and manage employee debit/prepaid cards — is a nontaxable payment processing service, not taxable data processing.

The company doesn't have regulatory authority to issue payment cards itself. Instead, it contracts with banks that do have that authority, and those banks sponsor the company's access to card payment networks. When a customer's employee uses a card, the network routes an authorization request to the company, which checks the customer's own spending rules and approves or declines the transaction; for approved transactions, the company transmits settlement information to release the funds.

Texas generally taxes "data processing services" (compiling, storing, retrieving information), and functions like authorizing and settling transactions could arguably look like data processing. But a 2021 law (Senate Bill 153) specifically carved payment-transaction settlement out of the data processing definition — excluding "the settling of an electronic payment transaction by a person who has entered into a sponsorship agreement with a federally insured financial institution for the purpose of settling that entity's electronic payment transactions through a payment card network." Because the company operates under exactly this kind of bank-sponsorship arrangement (rather than, say, running its own marketplace and simply facilitating payments without a bank sponsorship agreement), its authorization and settlement activities fall within the exclusion and are not taxable.

What this means for you

Payment processors, card program managers, and fintech companies

If your payment authorization/settlement activity is performed under an actual sponsorship agreement with a federally insured bank or financial institution that gives you access to card payment networks, your settlement services are likely excluded from Texas data processing tax under § 151.0035(b)(3)(D) — regardless of how much data compilation the underlying process involves.

Marketplace platforms and payment facilitators without a bank sponsorship arrangement

This ruling's title flags an important limit: the exclusion is built around bank-sponsored settlement arrangements specifically. A marketplace or platform that merely facilitates payments between buyers and sellers, without itself holding a sponsorship agreement with a federally insured institution for payment-card-network settlement, would need separate analysis — this ruling's favorable outcome doesn't automatically extend to that different business model.

Accountants and tax professionals for payment/fintech clients

Confirm the specific contractual relationship: does your client have its own sponsorship agreement with an issuing bank/financial institution for payment-card-network settlement (favorable, per this ruling), or does it merely route or facilitate payments through others' processing arrangements (needs separate analysis)? The § 151.0035(b)(3)(D) exclusion is written narrowly around the sponsorship-agreement structure.

Common questions

Q: Is processing and settling electronic payment card transactions a taxable data processing service in Texas?
A: Not when the processor operates under a sponsorship agreement with a federally insured financial institution for settling that institution's transactions through a payment card network — Tax Code § 151.0035(b)(3)(D), added by 2021's Senate Bill 153, specifically excludes that activity.

Q: Does this exclusion apply to any company that processes payments?
A: No — it's tied to the specific bank-sponsorship structure. A company issuing its own payment products without such sponsorship, or a marketplace that simply facilitates payments, would not automatically qualify under this exclusion.

Q: What changed in the law that made this exclusion possible?
A: Senate Bill 153 (87th Legislature, 2021) added the specific carve-out for settling electronic payment transactions under a bank sponsorship agreement — before that, this kind of activity's tax status under the general data processing definition was less clear.

Q: Can I rely on this ruling for my own payment processing business?
A: Only if you're the taxpayer it was issued to. It binds the Comptroller solely as to that taxpayer's specific business model and sponsorship arrangements and can't be relied on by others.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.101 (Use Tax Imposed)
• Tex. Tax Code § 151.010 (Taxable Item)
• Tex. Tax Code § 151.0101(a)(12) (Taxable Services — data processing)
• Tex. Tax Code § 151.0035(b)(3)(D) (Data Processing Service — settling electronic payment transaction exclusion)
• Tex. Tax Code § 151.0035(c)(3) (Data Processing Service — definition of settling an electronic payment transaction)
• 34 Tex. Admin. Code § 3.330(a)(1) (Data Processing Services)
• S.B. 153, 87th Legislature (2021) (added the payment processing exclusion)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202204028L

Original ruling text

April 29, 2022

RE: Private Letter Ruling No. PLR20200303153929

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Feb. 25, 2020 and additional information received on April 12, 2020 and Sep. 24, 2021. In accordance with Rule 3.10, Taxpayer Bill of Rights, the Comptroller will provide detrimental reliance relief to ** (Taxpayer).

You requested guidance on the taxability of Taxpayer’s payment card management program.

Facts Presented

Taxpayer offers a payment card management program (PCM Program) among its services. The PCM Program offers customers, such as food delivery services, the ability to manage and customize debit and prepaid cards used in their business.

The PCM Program allows customers to establish their own business rules to deny or authorize transactions initiated through payment cards used by customers’ employees. It allows customers to customize cards with spend controls that limit users by restricting spending amounts, locations, and frequencies.

Taxpayer does not have the authority to issue payment cards. Taxpayer contracts with issuing banks that have regulatory approval to issue payment cards to Taxpayer’s customers in the PCM Program.

Taxpayer also works with the issuing banks and payment card networks to authorize, process, and settle its customers’ card transactions. Issuing banks sponsor Taxpayer’s access to card networks.

Taxpayer is subject to the same regulatory authority governing the issuing banks and the payment card networks. This includes being subject to audit examination and regulatory enforcement actions initiated against Taxpayer.

Taxpayer is subject to standards set by several card associations, including the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a data security benchmark obligating companies that process, store, or transmit payment card information to maintain security measures designed to protect cardholder data. Taxpayer could be subject to fines or penalties if applicable card association rules are not followed.

When a card under the PCM Program is presented at a retailer to make a purchase, the card network sends a request to the Taxpayer for transaction authorization. Taxpayer reviews the limitations set by their customers and either approves or declines transactions based on the limitations. For authorized transactions, Taxpayer transmits settlement information to release the appropriate funds.

Taxpayer’s tiered fee schedule is based on transaction volume. Customers with a low volume of transactions are charged a monthly lump sum management fee. As transaction volume increases, the fixed monthly fee is phased out, and Taxpayer solely earns its revenue from interchange fees. The interchange fees are a percentage of the value of each transaction that Taxpayer earns through its agreements with the issuing banks. As transaction volume further increases, Taxpayer shares some of the interchange fee revenue with customers.

Question, Ruling, and Analysis

A restatement of your question is shown below followed by our ruling and analysis.

Question: Is the PCM Program a taxable data processing service?

Ruling: Taxpayer’s PCM Program is a nontaxable payment processing service.

Analysis: Sales or use tax is imposed on the sale or use of each taxable item in this state. Sections 151.051 (Sales Tax Imposed) and 151.101 (Use Tax Imposed). A taxable item is comprised of both tangible personal property and taxable services. Section 151.010 (Taxable Item). The term “taxable services” only applies to services listed in Section 151.0101 (“Taxable Services”). Data processing services are enumerated as taxable services under Section 151.0101(a)(12).

Data processing includes 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. Section 151.0035 (Data Processing Services). Rule 3.330(a)(1) (Data Processing Services), states data processing includes, “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.”

Senate Bill 153, 87th legislature (2021) clarified that the processing of an electronic payment transaction is not data processing. Under Section 151.0035(c)(3), the settling of an electronic payment transaction includes the authorization, clearing, or funding of a payment made by credit card or debit card. Section 151.0035(b)(3)(D) states that data processing does not include settling of an electronic payment transaction by a person who has entered into a sponsorship agreement with a federally insured financial institution for the purpose of settling that entity’s electronic payment transactions through a payment card network.

Taxpayer maintains sponsorship agreements with issuing banks and card networks to facilitate its PCM Program. Taxpayer does not have regulatory authority to issue payment cards and must maintain these agreements with the banks who issue the cards to Taxpayer’s customers. These agreements allow Taxpayer to access the card networks to receive and transmit authorization and settlement information for transactions.

Because Taxpayer is sponsored by issuing banks to settle electronic transactions pursuant to Section 151.0035(b)(3)(D) and authorizes payment card transactions per Section 151.0035(c)(3), its PCM Program is a nontaxable payment processing service.

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. 20200303153929.

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.