Is the fee a college-admissions testing company charges students to take its test by computer (instead of paper) — including scoring and sending results to schools — subject to Texas sales tax as a data processing service?

Plain-English summary

A company produces a well-known secondary-education admissions test used to show college readiness. Traditionally administered on paper, the company is adding a proctored, computer-based option using downloadable testing software. After the test, the company compiles the examinee's answers, produces an assessment score, and — as part of the same fee — can send that score to the student's high school and up to four colleges the student names. The company asked whether the fee it charges examinees for this computer-based testing service is subject to Texas sales tax, given that compiling answers and producing a score sounds a lot like the taxable "data processing" category.

The Comptroller ruled the fee is not taxable. Yes, the service technically involves data-processing-like activities — compiling test responses, generating a score, delivering that score to the student and to schools. But Texas's rule is that when data-processing-type activities merely facilitate an underlying service that isn't itself on the taxable-services list, the whole service stays untaxed. Here, the real service being sold is an assessment of a student's college readiness — administering and scoring a standardized test — which isn't one of Texas's enumerated taxable services. The data compilation and scoring exist only to produce that assessment, not as a freestanding computerized-data product being sold on its own.

One important wrinkle: being a nontaxable service provider doesn't mean the company escapes tax on its own inputs. If it separately purchases data processing services (or other taxable services or items) to help run its own testing operation, it owes sales/use tax on those purchases, the same as any other business that buys taxable services to deliver a nontaxable service to its own customers.

What this means for you

Testing, assessment, and certification companies

Providing an assessment or evaluative service — even one that heavily uses computers to compile answers and calculate scores — isn't automatically taxable data processing if the core product being sold is the assessment itself, not data manipulation as a service. The distinguishing question is always: does the computerized activity serve as the product being sold, or does it merely support delivery of a nontaxable underlying service?

Businesses selling nontaxable services with taxable inputs

Remember that providing a nontaxable service to your customers doesn't exempt you from paying tax on the taxable services and property you buy to produce it. You may owe tax as a purchaser even while correctly not charging tax as a seller.

Accountants and tax professionals

This ruling tracks the same "computer as a tool to facilitate a nontaxable underlying service" reasoning seen in other Texas rulings on professional/specialized services (e.g., insurance pre-authorization). Useful as a template for any client whose core offering involves computerized scoring, grading, or assessment as a byproduct of a substantively nontaxable professional service.

Common questions

Q: Would selling the scoring/data-compilation piece separately change the answer?
A: Potentially — this ruling turns on the scoring and data compilation being bundled into and facilitating the underlying testing/assessment service, not sold as a standalone computerized-data product.

Q: Does the company owe any Texas sales tax at all on this business?
A: Yes, indirectly — it must pay sales/use tax on taxable services or property (including data processing services) it purchases to run its testing operation, even though it doesn't charge tax on its own fee to examinees.

Q: Does this ruling apply to other online testing, training, or certification services?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts. Other testing or training providers should evaluate whether their core offering is a nontaxable assessment/education service or a taxable data-processing/information product in its own right.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.0101(a)(12) (data processing as a taxable service)
• Tex. Tax Code § 151.0035(a) (Data Processing Service)
• 34 Tex. Admin. Code § 3.330(a)(1) (Data Processing Services)
• Comptroller's Decision No. 33,295 (1996)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202404020L

Original ruling text

April 18, 2024

RE: Private Letter Ruling No. PLR20240206093134

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 Feb. 2, 2024, regarding the taxability of the fee charged for Taxpayer’s computer-based testing service. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

Facts Presented

** (Taxpayer) produces a secondary education admissions test that helps prove the examinee’s readiness for college. Examinees pay Taxpayer a fee in exchange for the opportunity to take the test. The test has historically been administered in-person with supervision, via pencil and paper. Taxpayer will begin offering the option to take the test in-person with supervision, via a computer.

The computer-based test will be proctored and administered through Taxpayer’s downloadable application software, which is installed onto the test-taking device prior to the testing time.

After the test, Taxpayer conducts an analysis of the examinee’s responses to the test and provides the examinee with an assessment score. The assessment score helps prove the examinee’s readiness for college. Included in the fee paid to take the test is the option for Taxpayer to send the examinee’s score to their high school and to up to four institutions of higher learning, as instructed by the examinee. Examinees may use this included service when applying to institutions of higher learning.

Question, Ruling, and Analysis

Your question is shown below, followed by our response and analysis.

Question: Is the fee charged to examinees for Taxpayer’s computer-based testing service subject to sales and use tax?

Ruling: No, the fee for Taxpayer’s computer-based testing service is not subject to Texas sales and use tax.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). The list of taxable services provided by Section 151.0101 includes data processing services. Section 151.0101(a)(12).

Section 151.0035(a) (Data Processing Service) provides that a data processing service includes, in part, “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.” See also Rule 3.330(a)(1) (Data Processing).

Taxpayer’s testing service includes elements of data processing. It compiles students’ responses to test questions, generates an assessment score rating the examinee’s performance, and provides the responses and scores to the examinee. However, these activities are performed to facilitate Taxpayer’s testing service to provide an assessment of a student’s readiness for college. Testing or providing an assessment of a student’s readiness for college does not fall under the services listed as taxable services in Section 151.0101. Therefore, Taxpayer’s testing service is not subject to Texas sales and use tax.

As the provider of a nontaxable service, Taxpayer owes sales or use tax on all taxable items, including taxable services like data processing services, used to perform the service. Section 151.051. See also Comptroller Decision No. 33,295 (1996).

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. 20240206093134.

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.