How did Texas allocate the forfeited value of unused credit reports between taxable Texas reports and nontaxable out-of-state reports?

Plain-English summary

A one-year contract entitled the customer to a fixed number of credit reports. When the customer used fewer reports than purchased, the question was how much of the forfeited contract value should be treated as taxable Texas usage.

The Comptroller approved this formula: divide the number of Texas reports actually ordered by the total number of reports actually ordered. Apply that percentage to the unused or forfeited contract amount to find its taxable share.

The request's example used a $1,000 contract for 100 reports. The customer used 80 reports—50 Texas and 30 out of state—leaving $200 forfeited. Texas reports were 62.5% of actual usage, so $125 of the forfeiture was taxable. At the example's 8% rate, that added $10 of tax; combined with $40 on the 50 used Texas reports, total tax was $50.

What this means for you

The historical method allocated the unused contract value according to actual Texas usage rather than treating all forfeiture as Texas or nontaxable. The denominator was reports actually ordered, not the full quantity available under the contract.

Common questions

What was the taxable percentage? Texas reports ordered divided by all reports ordered.

What amount did that percentage apply to? The unused or forfeited portion of the contract price.

Did the Comptroller approve the taxpayer's proposed method? Yes. The response expressly agreed with the conclusions.

Citations and references

• No statute or administrative rule is cited in the letter text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8711L0843C04

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller November 2, 1987

Dear ***:

I received your letter asking for a formal written opinion on how unused
portions of a credit report contract will be taxed.

As discussed during the meeting with the policy committee, to determine
what
portion of the unused reports are subject to Texas tax, take the number
of
Texas reports ordered and divide by the total number of reports ordered.
The
answer equals the taxable percentage. This percentage is the tax base
upon
which tax must be computed. I agree with your conclusions.

Please feel free to contact me if you have additional questions. You may
write me, call toll free 1-800-252-5555 from anywhere in Texas or phone
512/463-4633.

Sincerely,
(Mrs.) Wanda Hutcheson
Tax Policy Division

October 23, 1987

Ms. Wanda Hutcheson
Tax Policy Division
State of Texas Comptroller's Department
111 West 6th Street
Austin, TX 78701

Re: State Sales Tax Policy

Dear Ms. Hutcheson:

This letter is a follow-up to our meeting with the Tax Policy Committee
last Friday on behalf of the Dallas, Houston and San Antonio Associa-
tions of ***.

Per your request, I am asking for a formal written opinion on how the
unused portion of a credit report contract will be taxed. Our contracts
are for a 1 year period. Assuming, for the sake of discussion, that our
member contracts to buy 100 reports for $1,000 and that during the course
of the year only 80 reports are used, leaving a forfeiture of 20 reports
or $200. Further assume that of the 80 reports ordered, 50 reports were
ordered on subjects within the state of Texas.

It was the opinion of the Committee that the fair way to tax the forfeit-
ed portion of the contract was to use the formula that the taxable
percent
age figure represents the number of Texas reports ordered divided by the
total number of reports ordered. As an example, using the above figures,
50 reports were ordered within the state of Texas, 80 reports were
ordered
overall. Therefore, the taxable percentage is derived by dividing the
total number of Texas reports ordered (50) by the total number of reports
ordered (80) which gives a percentage of 62.5% so that the $200 forfei-
ture would be taxed as if 62.5% of it had been used for Texas reports,
the idea being that the amount forfeited increases the cost per report
ordered from $10.00 to $12.50.

A mathematical example using the above criteria is set forth below:

100 reports = $1,000
80 reports used = -800
50 in state reports used
(taxable in Dallas @8%=$40) = $500
30 out of state reports used
(non-taxable) = 300
20 reports forfeited
(taxable at % below) = 200
Total forfeiture $ 200

80 total/50 in state = .625 of 62.5%
$200 x .625 = $125 taxed @ 8% = $10
Taxable in state reports = 40
Total tax paid $50

80 reports used (1 reports=$12.50) = $1,000
50 in state reports (taxable) = $625
30 out of state (non-taxable) = 375

Total tax paid ($625 x 8%) = $50

As you can see by the example, the total tax due the state will be
exactly the same by assuming that the cost per report is increased
by forfeiture. Therefore, the percentage of forfeiture is a fair
and just method of assessing tax on the forfeited portion of a
credit report contract.

If you have any questions regarding any of the examples given above,
please feel free to call me. Obviously, we would appreciate your
written response as quickly as possible. Thank you in advance for
your consideration.

Cordially,