Is a not-for-profit cooperative that provides electronic messaging (store-and-forward and host computer polling) services only to its members exempt from Texas sales tax collection duties, and are those messaging services taxable telecommunications services?

Plain-English summary

A not-for-profit cooperative ran a data-only electronic messaging network for its members, offering two services: "store and forward" transmissions (a member sends a message that is stored on the Entity's computer for later delivery) and "host computer polling" (a member sends a message to a computer database -- maintained by the member itself, not the Entity -- and receives an automated reply). The cooperative asked the Comptroller a series of questions about whether it had to collect and remit Texas sales tax on these services.

The Comptroller's answer was a clear no across the board to the cooperative's exemption theories. Neither the Entity's not-for-profit/cooperative status nor its network's characterization as a "private network" exempts it from collecting and remitting sales or use tax. Both store-and-forward messaging and host computer polling are taxable telecommunications services in Texas, taxable whenever the communication originates in Texas -- regardless of whether the transmission is domestic or international, and regardless of whether the underlying databases are maintained by the Entity or by its members.

Whether the Entity itself has a collection duty turns on whether it is "engaged in business in Texas" under Tax Code § 151.107 -- for example, by owning telecommunications equipment or lines in the state. If it is engaged in business here, it must collect and remit; if not, it may voluntarily collect and remit, and if it doesn't, the burden shifts to the member to remit use tax directly. The letter also confirms that the Entity's own sale of telecommunications services to its members is taxable (it is not tax-exempt), though a member who resells or repackages that service in the regular course of its own business may be able to issue a resale certificate under Tax Code § 151.151.

The subject line inherited from the STAR system ("Electronic Mail Services — Provided Only For Nonprofit Cooperative Members") accurately describes the ruling's subject matter and was kept as-is; no correction was needed.

What this means for you

Nonprofit and member-owned network operators

Operating as a not-for-profit cooperative, or describing your network as "private" rather than public, does not by itself create a sales tax exemption. If you sell telecommunications services -- including store-and-forward messaging or computer polling services -- to members for a fee, those charges are generally taxable telecommunications services if the communication originates in Texas.

Businesses with multistate networks

Whether you must collect Texas tax depends on whether you are "engaged in business in Texas" under § 151.107 (for example, owning switching equipment, network access points, or leased lines here), not simply on whether a member happens to access your network from Texas over a leased or dedicated line running to another state. If you are not engaged in business in Texas, you can still voluntarily collect and remit; otherwise your member customers are responsible for remitting use tax themselves.

Accountants and tax professionals advising members reselling network access

If a member re-bills or passes through network access charges as part of a taxable service it sells to its own customers, look at whether a resale certificate under § 151.151 (and Rule 3.285) is appropriate, rather than assuming member-to-cooperative charges are automatically exempt.

Common questions

Q: Does not-for-profit or cooperative status exempt an electronic messaging network from Texas sales tax collection duties?
A: No. The letter states plainly that the cooperative is not exempt from collecting and remitting sales or use tax because of its not-for-profit/cooperative status or because its network is a "private network."

Q: Is store-and-forward electronic messaging taxable even though it isn't real-time or interactive?
A: Yes. The letter confirms store-and-forward messaging is a telecommunications service and is taxable if the communication originates in Texas, regardless of the lack of real-time interactivity.

Q: Are international messages taxable if they merely pass through or terminate in Texas?
A: Not necessarily. Long-distance telecommunications charges are taxable if they originate in Texas and are billed to a Texas telephone number or service/billing address; charges for long-distance service that does not originate in Texas are not subject to Texas tax, even if the message terminates here.

Q: If the cooperative doesn't own equipment in a member's state, does it still have to collect tax there?
A: According to the letter, the collection duty depends on whether the Entity is "engaged in business" in that state under Tax Code § 151.107 -- in this case, the taxpayer indicated the Entity likely did own telecommunications equipment or lines in Texas, making it engaged in business here. If an entity is not engaged in business in the state, it may collect voluntarily, but otherwise the member must remit the tax directly.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.107 (engaged in business in Texas)
• Tex. Tax Code § 151.151 (resale certificate)
• 34 Tex. Admin. Code § 3.285 (Resale Certificates)
• 34 Tex. Admin. Code § 3.286 (Sellers Responsibilities)
• 34 Tex. Admin. Code § 3.344 (Telecommunications Services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206L1176F05

Original ruling text

June 4, 1992

Dear **:

Thank you for your recent letter to Larry Koenig. I have been asked to respond.
Your facts are restated with responses below.

Facts: Our client (the Entity), provides electronic messaging services. The
Entity is a not-for-profit cooperative organized for the purpose of providing a
data only network over which its members transmit messages. The messages are of
two varieties:

• Store and forward transmissions, and
• Host computer polling

With store and forward service, a member may send a data message to another of
its locations or to another member. The message is switched over the network to
the Entity's computer center where the message is stored for delivery as
specified by the member. The member can select from a range of deferred
delivery options.

Host computer polling allows its members to send messages to computer data
bases and receive back computer-generated replies. The data bases are not
maintained by the Entity but, rather, by the members.

The network consists of several main switching/computer centers located in the
United States and foreign countries. The switching centers are linked via
communication pathways leased by the Entity.

The members access the network by means of a dedicated access line between
their locations and the network access point. The access line can be contracted
for and paid for by the member, or it can be contracted for and paid by the
Entity. If the Entity contracts for and pays for the access line, it, in turn,
rebills the member for the line without mark-up.

The Entity does not provide equipment to its members with which to access the
network. Rather, the members utilize their own equipment - typically, a
personal computer.

The Entity does not own property in any states other than where it has
switching centers or network access points.

The Entity recovers its operating expenses [from] members by requiring members
to pay monthly fees based on usage and number of connections. The usage fees
are based on the number of characters transmitted, but are not based on
distance or duration of transmission.

If at the end of the year recoveries exceed expenses, the excess will be
refunded to members. Conversely, if recoveries are insufficient, an additional
assessment will be collected.

Question 1: Is a not-for-profit cooperative exempt from collection/payment
responsibilities because:

a) Of its status as a not-for-profit cooperative Entity, or
b) Its network is considered a nontaxable private network?

Response: The cooperative is not exempt from collecting and remitting sales or
use tax for either of the above reasons.

Question 2: Does the Entity have collection/payment responsibility in your
state if it does not maintain a switching center or network access point in
your state? In such a situation, a member within your state would access the
network by means of a dedicated access line (private line?) to another state.
As stated previously, the member can contract for that line itself or the
Entity can do so on its member's behalf.

Response: The Entity must collect and remit tax if it is engaged in business in
Texas as explained in Tax Code Section 151.107. Please refer to "Attachment A"
for the text of that section. In our telephone conversation of May 5th, you
said that the Entity probably did own telecommunications equipment or lines in
Texas. That being the case, the Entity is engaged in business in Texas. If the
Entity is not engaged in business in Texas, they may voluntarily collect and
remit the tax. Failing this, the member is required to remit the tax directly
to the state.

Question 3: Does store and forward messaging constitute a taxable service
within your state? Please remember that real time, interactive communication is
not possible using this messaging format.

Response: Store and forward messaging is a telecommunications service and is
taxable if the communication originates in Texas.

Question 4: Does host computer polling constitute a taxable service within your
state? Please bear in mind that the data bases are not maintained by the
Entity.

Response: Host computer polling is a taxable telecommunications service in
Texas.

Question 5: If messages are generally considered taxable, are international
messages taxable? Specifically, are international messages taxable which:

a) Originate in-state
b) Terminate in-state

Response: Long-distance telecommunications services are taxable if they
originate in Texas and are billed to a Texas telephone number, or billing or
service address. The fact that the call is interstate or international does not
affect the taxability. Charges for long distance telecommunications that do not
originate in Texas are not subject to Texas tax.

Question 6: If the Entity leases network communication pathways in your state,
must it pay applicable taxes to its lessor? Does its status as a not-for-profit
cooperative or its network's characterization as a private network affect this
determination?

Response: As we discussed, the Entity is not a tax-exempt entity for sales and
use tax purposes. The sale of telecommunications services by the Entity to its
members is subject to tax. Tax Code Section 151.151, Resale Certificate, allows
a purchaser to give a resale certificate for the acquisition of a taxable item
if the purchaser intends to sell, lease, or rent it in the regular course of
business or transfer it as an integral part of a taxable service performed in
the regular course of business.

I am enclosing copies of Rules 3.285 (Resale Certificates), 3.286 (Sellers
Responsibilities), and 3.344 (Telecommunications Services) for your reference.

This opinion is based on the facts you presented. Other facts, though similar,
may yield different results.

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441. My direct line number is (512)
463-4680. The number for FAX transmissions is (512) 475-0900. You may write to
me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division