Is a scholarship-matching or financial-aid database search service taxable in Texas?

Plain-English summary

The Texas Comptroller ruled that a service helping students search for scholarships or financial aid — using access to a national database — is a taxable information service. The taxpayer had asked whether providing this kind of scholarship-matching service was subject to Texas sales tax.

The Comptroller's answer: yes. Providing scholarship matching services to students is taxable as an information service under Rule 3.342 (Information Services). The provider owes tax on the materials, supplies, and equipment used to deliver the service. It doesn't matter whether the provider owns the underlying database — that fact doesn't change the taxability analysis. However, because the scholarship information isn't proprietary (students with similar backgrounds, education, and financial circumstances receive similar scholarship information), the information itself can be purchased for resale by issuing a properly executed resale certificate to the supplier.

What this means for you

Businesses offering scholarship search or financial-aid matching services

If you run a service in Texas that searches a database (owned by you or a third party) to match students with scholarships or financial aid, treat those charges as a taxable information service. Collect and remit sales tax on the service, and pay tax on the materials, supplies, and equipment you use to provide it — unless you're reselling the underlying information under a valid resale certificate.

Accountants and tax professionals advising database/information-service clients

This letter illustrates two general Rule 3.342 principles: (1) ownership of the underlying database is irrelevant to whether the output is a taxable information service, and (2) non-proprietary information (i.e., information that similarly-situated customers would receive in substantially the same form) can be purchased tax-free for resale with a resale certificate, even though the ultimate sale to the end customer is taxable.

Common questions

Q: Is a scholarship-matching or financial-aid search service taxable in Texas?
A: Yes. The Comptroller classified it as a taxable information service under Rule 3.342.

Q: Does it matter if the business doesn't own the scholarship database itself?
A: No. The ruling states that owning the database is not relevant to the taxability of information services.

Q: Can the provider buy the scholarship information tax-free?
A: Yes, if it's for resale. The provider can issue a properly executed resale certificate to the supplier because the scholarship information isn't proprietary — similar students receive similar information.

Q: Does this ruling apply to my business specifically?
A: Not automatically. Texas STAR letters like this one can be relied on as a defense to penalty/interest only by the taxpayer to whom they were issued, and this letter is based on the facts as presented — different facts could change the outcome. It also may not reflect current Comptroller policy since 1992.

Citations and references

Rules cited:

• Rule 3.342, Information 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/9212L1209G10

Original ruling text

December 10, 1992

Dear **:

Thank you for your letter of November 25, 1992, concerning the taxability of
scholarship matching services.

Providing scholarship matching services to students are taxable as information
services. You are to pay tax on all materials, supplies and equipment used to
provide the service. See enclosed Rule 3.342, Information Services.

Owning the database is not relevant to the taxability of information services.
Information services can be purchased for resale by issuing a properly executed
resale certificate to the supplier. The scholarship information you provide is
not proprietary in nature because students with similar origin, education, and
financial backgrounds will receive similar scholarship information.

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

You may call me toll free at 1-800-531-5441, the direct line is 512/463-4600.
You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Bryant Lomax
Tax Administration Division