Is a service that verifies the bond ratings in a customer's portfolio a taxable information service, even if the customer considers their portfolio contents confidential?

Plain-English summary

A business wrote in about a service it provides to its customers: the company verifies the bond ratings of the bonds in a customer's investment portfolio. The customer would send in a diskette listing the bonds in their portfolio along with the bond ratings; the company's staff would review that information, verify whether the bond ratings were correct, and return the diskette to the customer with any needed corrections. The company already treated this as a taxable information service, but one of its customers pushed back, arguing the service was proprietary in nature and so shouldn't be taxed.

The Comptroller disagreed with the customer's proprietary-information argument. The bond rating information itself is general information available to any subscriber of the company's services — it is not proprietary. While the contents of the customer's specific portfolio (which bonds they hold) is no doubt confidential, that confidentiality doesn't change the taxability of the bond ratings themselves or the fact that the underlying rating information is generally available. So the bond-rating-verification service remained a taxable information service.

What this means for you

Financial information and bond rating verification services

If your business verifies or confirms bond ratings (or similar publicly/generally available financial data) against a customer's holdings, that service is likely a taxable information service in Texas — even if the customer's own portfolio data is confidential, because it's the general availability of the underlying rating information (not the confidentiality of the customer's specific holdings) that drives the taxability analysis.

Businesses relying on a "proprietary information" argument to avoid tax

This letter shows that confidentiality of customer-specific data (like what's in their portfolio) is not the same as the underlying reference information (like bond ratings) being proprietary. If the reference data is generally available to any subscriber, packaging it into a customer-specific verification service doesn't make it exempt.

Accountants and tax professionals advising information-service providers

Use this letter as an example of how the Comptroller draws the line between "proprietary" and "generally available" information for purposes of the taxable information service category — the confidentiality of a customer's own data doesn't convert generally available reference information into a nontaxable service.

Common questions

Q: Is a service that checks/verifies bond ratings against a customer's portfolio holdings taxable in Texas?
A: Yes. The Comptroller treated this as a taxable information service.

Q: The customer argued the service was proprietary and shouldn't be taxed. Did that argument work?
A: No. The Comptroller found the bond rating information is general information available to any subscriber, so it is not proprietary.

Q: Does the confidentiality of the customer's specific portfolio contents change the tax result?
A: No. The letter states that although the customer's portfolio contents are no doubt confidential, that does not affect the taxability of the bond ratings or the general availability of the information.

Q: What exactly did the service involve?
A: The customer provided a diskette listing the bonds in their portfolio and the bond ratings; the company's staff reviewed the information, verified the ratings were correct, and returned the diskette with any corrections.

Q: Can this business or its customer rely on this letter going forward?
A: No. This opinion is based on the facts presented, and other facts, though similar, may yield different results. STAR letters can generally only be relied on by the taxpayer to whom they were issued, and policy may have changed since 1992.

Citations and references

No specific statutes or rule numbers were cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1191G10

Original ruling text

September 9, 1992

Dear **:

Thank you for your recent letter which is restated in part with response below.

** provides a service to our customers whereby we verify the bond
ratings of their portfolio. We currently consider this a taxable information
service.

One of our customers feels this is proprietary in nature and should not be
taxed. The customer provides us with a diskette that contains a listing of the
bonds in their portfolio and the bond ratings. Our staff reviews this
information and verifies that the bond ratings are correct. The diskette is
then returned to the customer with any corrections.

Response: The information regarding bond ratings is general information
available to any subscriber of **. It is not proprietary
information. The information your customer provides regarding the contents of
their portfolio is no doubt confidential but, that does not affect the
taxability of the bond ratings or the general availability of the information.

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 TAX transmissions is (512) 475-0900. You may write
to me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division