Was a confidential, client-tailored medical literature search a nontaxable proprietary-information service when its source material came from public-access databases?

Plain-English summary

The business planned narrow, client-specific medical database searches for malpractice attorneys, physicians, and malpractice insurers. It delivered lists or copies of relevant articles, kept requests and results confidential, and did not resell each client's results.

The Comptroller nevertheless treated the work as a taxable information service. Rule 3.342(d)(1)'s proprietary-information exclusion required the client to have enforceable property rights in the gathered information. Here, the articles came from a public-access database, publishers retained the proprietary rights, and neither the researcher nor the client owned the raw information. A written promise not to release or resell the results did not change that conclusion.

The business had to obtain a sales-tax permit and collect tax. It could give a resale certificate for online database services and other items or services that it transferred to clients as part of the taxable service.

What this means for you

Customization and confidentiality were not enough. Under this letter, the exclusion depended on the client's ownership rights in the underlying information, not merely on a tailored search process or contractual restriction.

Common questions

Did a unique search make the information proprietary? No. Did confidentiality make it exempt? No. Would a written nonresale agreement change the result? No. Could the provider buy transferred database inputs for resale? Yes.

Citations and references

• Texas Tax Code § 151.0038 (information services)
• Rule 3.342(d)(1) (proprietary-information exclusion)
• Rule 3.325 (refund procedures, cited in the appeal discussion)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9110L1139A01

Original ruling text

October 22, 1991

Dear ****:

Thank you for your recent letters, and your input in our telephone
conversations. As you requested, I asked our Taxability Response
Committee to review your letters, the applicable statute (Tax Code Sec.
151.0038), Rule 3.342, and this opinion. The Committee has approved
this opinion.

According to the given facts, you plan to do medical database searches
for clients such as medical malpractice attorneys, physicians, and
medical malpractice insurance carriers who seek information on a specific
medical situation or patient problem. The searches are extremely narrow
in scope and, due to the unique needs of each client, each search
yields different results. Each search is tailored to the particular
needs of that client, patient, or disease situation.

You provide to each client a list and/or copies of articles from
medical journals and other publications that are relevant to the client's
search request. You indicate that your client's individual search requests
and results are kept confidential and may not be resold by you.

Question:

Is this a taxable information service, or is it a nontaxable "proprietary"
information service within the meaning of Rule 3.342 (d)(1)?

Answer:

Your service is a taxable information service within the meaning of
the statute and the rule.

The service does not fit within the exclusion described in Rule 3.342
(d)(1), which provides that the sale of information gathered or complied
on behalf of a particular client is not subject to tax if the information
is of a proprietary nature to that client and may not be sold to others.

The information that you gather from a public-access database is not
"of a proprietary nature" to your clients. To meet the terms of the
exclusion, your clients would have to have enforceable property rights
in the raw information you gather such that they could prevent you
from selling it to another client, even in another form or report.
Your clients do not have such a proprietary interest in the information.
Rather, the publishers of the articles in question retain the
proprietary rights in the articles, which are simply licensed to the
database provider for resale to any subscriber. Neither you nor your
client holds an enforceable proprietary interest in this raw information.

For the same reason, your service would be taxable even if you signed
a written agreement with a client that prohibited you from releasing
or reselling the search results to any third party. Your clients still
have no proprietary interest in the raw information that you gather.

You are required to hold a sales tax permit and to collect tax on sales
of information services. You may issue a resale certificate to purchase,
tax free, on-line database services and other items and services that
you transfer to your clients as part of your services.

You specifically requested a discussion of the proper procedures for
appealing an unfavorable letter opinion. I have enclosed a copy of
our publication, "The Rules of Practice and Procedure", which discusses
the redetermination process (by which you are entitled to an administrative
hearing to redetermine the amount of a tax deficiency assessed in an
audit) and the refund process (by which you may appeal the denial of a
tax refund). The pamphlet also discusses the prerequisites of filing a
lawsuit against the Comptroller of Public Accounts in the State District
Court of Travis County. See also enclosed Rule 3.325 on refunds.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions,
feel free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division