Were Oklahoma data-processing services supplied to Texas financial institutions subject to Texas use tax beginning January 1, 1988?

Plain-English summary

The company provided a broad outsourced data-processing system to financial institutions from an Oklahoma data center. After reviewing the servicing agreement and marketing brochure, the Comptroller said the services became taxable on January 1, 1988.

Because the work was performed in Oklahoma, charges to Texas customers were subject to Texas use tax. Assuming the company had representation in Texas, it had to obtain a use-tax permit and collect use tax from those customers.

What this means for you

The historical answer combined service classification with cross-border sourcing and a Texas-presence assumption.

Common questions

Were the services taxable? Yes, beginning January 1, 1988.

Was the charge treated as sales tax or use tax? Use tax, because the services were performed in Oklahoma for Texas customers.

Did the provider need a permit? Yes, assuming it had representation in Texas.

Citations and references

• 34 Tex. Admin. Code Rule 3.330 — historical data-processing-services rule.
• 34 Tex. Admin. Code Rule 3.346 — historical use-tax rule.
• 34 Tex. Admin. Code Rule 3.286 — historical seller-responsibilities rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8712L0849F01

Original ruling text

December 31, 1987

Dear **:

Thank you for your inquiry regarding the taxability of the data processing
services provided by your company.

I have reviewed the data processing servicing agreement and the marketing
brochure enclosed with your letter. The data processing services your company
is providing will become taxable on January 1, 1988.

You indicated that the services are performed in Oklahoma. Therefore, the
service charges to your Texas customers will be subject to use tax. Assuming
that COMPANY has representation in Texas, a use tax permit should be obtained
and use tax collected from Texas customers.

I have enclosed Rule 3.346 Use Tax, Rule 3.286 Seller's Responsibilities, and
Rule 3.330 Data Processing Services for your reference.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call our toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may write me at
the Tax Policy Division.

Sincerely,

(Mrs.) Jo Ann Dieck
Tax Policy Division

October 2, 1987

Bob Bullock

Capital Station
Austin, Texas 78774

Attention: Tax Policy Section

Recently, COMPANY received notification that, effective January 1, 1988, data
processing services were to be subject to sales tax. On October 1, 1987, I
telephoned your Tax Assistance office at (512) 463-4600 and one of your
representatives informed me that the specific services encompassed under the
title "data processing services" were yet to be defined, so he suggested that I
request a ruling from you on whether or not the computer and other services
COMPANY provides to its customers are in fact going to be taxable as of January
1, 1988.

COMPANY, in general, provides a full range of data processing services to
financial institutions. The services are physically performed at our data
center in **, Oklahoma. I have enclosed a copy of a portion of our
data processing servicing agreement and a marketing brochure for your review so
as to enable you to understand the nature of and services provided by our
company.

I would appreciate it very much if you would look over the COMPANY documents I
have sent you and let me know whether or not the services we provide fall under
the new sales tax statute. If you have any questions, I can be reached at our
toll free number (**).

Thank you in advance for your assistance on this matter. I will look forward to
receiving your reply very soon.

Sincerely,

Finance and Administration:

The Finance and Administration Division is responsible for the internal
accounting and auditing function, personnel, security, word processing and
property management.

In addition to the divisions outlined above, the COMPANY organization employs a
full-time internal auditor who functions within the Finance and Administration
Division.

General Services Description:

COMPANY'S financial institution processing services have been developed to
provide user-oriented services which eliminate the need for clients to have
traditional in-house data processing departments. COMPANY offers an integrated
approach which includes techniques to tailor their services to each
institution's respective needs. There are approximately 65 home office sites
and 360 total sites on the COMPANY network.

An overview of the services provided by COMPANY to their user institutions is
presented below:

Communications network:

• There are approximately 1,300,000 open accounts as of April 1, 1987 and
  approximately 2,300 remote terminals in the COMPANY system.

• The on-line services are provided six days a week, with the exception of
  FHLBB approved holidays. The services are between 8:00 a.m. and 7:00 p.m.
  (Central Time) Monday through Friday and 8:00 a.m. to 1:30 p.m. (Central Time)
  on Saturday. Services are not provided on Sunday.

• COMPANY currently supports both shared and stand-alone Automated Teller
  Machines (ATM), 24 hours a day through their membership in SERVICES (an
  electronic switching service).

• Customers are serviced with a polled, leased-line network which is
  maintained by COMPANY.

• Leasing of the network equipment is arranged by COMPANY.

• Transactions posted on-line actually update the account files at the time
  they are entered (real time).

Update and inquiry:

• All entries (i.e., receipts, disbursements and journal postings) are posted
  only once. The necessary accounting records in the various accounting functions
  are automatically updated accordingly.

• On-line inquiry can access all information stored within the account's file.

• File maintenance is accomplished on-line. Security is enforced on a
  field-by-field basis by providing three levels of supervisory access.

Support units:

• COMPANY has a Data Communications Support Department to resolve installation
  and maintenance problems with telephone companies regarding networks and data
  lines.

• COMPANY'S Customer Education section prepares and presents training classes
  to both new and existing users for all of its products and services.

• COMPANY'S Customer Conversion section works with the institution to convert
  their data to a form which is usable by COMPANY. This involves setting up all
  applications and the associated accounts, as well as comparing raw data dumps
  of all accounts from the previous system to the subsequent account records
  listings from COMPANY. It also involves generating trial balances and verifying
  that the trail balance totals agree to the originating information. This
  process also includes definition of the institution parameter block, which
  includes initial assignment of supervisor numbers, loan payment spread options
  and fiscal year-end, prior to initiation of on-line service.

Documentation:

• Documentation is maintained by COMPANY for teller terminals and their
  respective systems to explain transaction types, error correction procedures,
  file maintenance and new account entry.

• The System Guides provided by COMPANY suggest internal control and balancing
  procedures and explains input forms, terminal input screens and output reports.

System output:

• Remote printers are supported for printing reports at some client
  institution sites.

• Microfiche is utilized to provide an historical copy of all daily and
  monthly reports. In addition, a working paper copy is prepared for some
  reports.

• A complete, alphabetical, cross-index report, which lists every name of
  every account on file, is produced biweekly on microfiche.

• Summary Trial Balance reports are provided daily for all systems except
  General Ledger. In the case of General Ledger, a daily Detail Trial Balance is
  prepared. For systems other than General Ledger, a periodic Detail Trial
  Balance is produced.

• Transaction Histories and periodic Detail Trial Balance reports are both
  produced on microfiche.

• Positive and negative auditor confirmation selections are available on
  request by independent auditors.

• Savings Transactions Histories, produced quarterly, contain a year-to-date
  transaction history.

• A Loan Transaction History, produced annually, includes loan transactions
  for the year.

• A General Ledger Transaction History, produced weekly, shows a fiscal
  month-to-date history. In addition, it is produced monthly and shows fiscal
  year-to-date information.

COMPANY utilizes a standard "Computer Servicing Agreement" which contains the
following sections or Articles:

1. Services
2. Equipment.
3. Charges, Conversions, and Modification Services
4. Term of Agreement and Default.
5. Warranty and Liability.
6. Confidential Information, Disclosure, and Audit.
7. Notice.
8. Construction Provisions.

In addition, the Agreement contains the following exhibits:

Exhibit A - Off-Line Reports
Exhibit B - Service Price List
Exhibit C - Special Charges
Exhibit D - Item Processing Charges
Exhibit E - SERVICES On-line ATM/POS Charges

Personnel Policies:

During 1987, COMPANY job descriptions and salary administration policies are
being reviewed and updated by an outside consulting firm.

Long-Range Planning:

COMPANY has initiated an ongoing long-range planning process that occurs
through regular meetings of the Management Committee. Components of the process
include the development of a strategic business plan and supporting goals,
identification of factors that are critical to the successful attainment of
these goals, and development of effective methods to manage the long-range
planning process.