Is a marketing/information service that gathers leads from public sources and sells them to a specific client exempt as proprietary information?

Subject

Marketing Leads Sold To A Specific Client Are A Taxable Information Service, Not Proprietary Information

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307L1247G10

Plain-English Summary

A taxpayer wrote in asking about tax responsibilities for a new sales/marketing service business. The business would provide information to specific clients on products bought by the oil and gas industry — for example, representing a tank manufacturing company under an agreement not to provide the same services to any other tank manufacturer.

The Comptroller's office concluded that this is a taxable information service. The letter explains that marketing leads prepared for a particular client and sold to that client do not qualify for the proprietary information exclusion, even when the service provider agrees to limit the sale to that one client. Citing the rule that information gathered or compiled on behalf of a particular client is not taxable if it is proprietary in nature to that client, the letter notes that recent administrative hearings have held that information is not proprietary to a client when it is gathered from public sources (the "source of information test"), or when the service provider does not surrender ownership rights in the information to the client. To qualify as proprietary information, the marketing lead must be gathered from a source private (or proprietary) to the service provider or the client, and the client must also have ownership rights over the information or the right to control its future use by the service provider.

The letter closes with the standard caveat that the opinion is based on the facts presented, and that additional or different facts could change the result.

What This Means For You

Exclusivity alone does not make information proprietary. Agreeing to sell your research or leads to only one client — and not to competitors — does not, by itself, exempt the sale from tax. The letter makes clear that limiting the sale to a particular client is not enough to qualify for the proprietary exclusion.

Where the information comes from matters. If the underlying information is gathered from public sources, it fails the "source of information test" and is treated as taxable, regardless of how exclusively it is later sold.

Ownership and control are key factors. To be treated as non-taxable proprietary information, the client generally needs actual ownership rights in the information, or the right to control how the service provider uses that information in the future — not just an exclusive-sale arrangement.

This is a facts-and-circumstances determination. The letter is based on the specific facts described (a sales/marketing service providing product information to oil and gas industry clients); a business with different facts should not assume the same conclusion automatically applies.

Q&A

Q: Is a marketing/information service business subject to Texas sales tax?
A: Yes. The letter states that providing marketing leads prepared for and sold to specific clients is a taxable information service.

Q: If I agree to sell my research or leads exclusively to one client, does that make it exempt as proprietary information?
A: No. The letter says marketing leads prepared for a particular client and sold to that client do not qualify for the proprietary exclusion even when the service provider agrees to limit the sale to that particular client.

Q: When is information considered proprietary and not taxable?
A: According to the letter, information gathered or compiled on behalf of a particular client is not taxable if the information is of a proprietary nature to that client.

Q: Does gathering information from public sources affect whether it is proprietary?
A: Yes. The letter explains that recent administrative hearings have ruled that information gathered from public sources is not proprietary to the client under the "source of information test," even if it was gathered on that client's behalf.

Q: What else can prevent information from being treated as proprietary?
A: The letter states information is also not proprietary to the client if the service provider does not surrender the rights of ownership in the information to that client.

Q: What is required for a marketing lead to qualify as proprietary information?
A: The letter says it must be gathered from a source that is private (or proprietary) to the service provider or the client, and the client must also have the right of ownership over the information or the right to control its future use by the service provider.

Original ruling text

July 7, 1993

Dear ***:

Thank you for your letter questioning your tax responsibilities for your new
business. You stated that the business will be a sales/marketing service
company. You will provide information to specific clients on products bought
by the oil and gas industry. An example would consist of your firm representing
a tank manufacturing company under an agreement that guarantees that you will
not provide your services to any other tankmanufacturer.

Based upon the information you provided, it appears that you are providing
marketing leads prepared for and sold to specific clients. This is a taxable
information service. Marketing leads prepared for a particular client and sold
to that client do not qualify for the proprietary exclusion even when the
service provider agrees to limit this sale to the particular client.

The rule states "...information which is gathered or compiled on behalf of a
particular client is not subject to tax if the information is of a proprietary
nature to that client..." Recent administrative hearings have ruled that
information gathered on behalf of a particular client is not of a proprietary
nature to that client when the information is gathered from public sources
(source of information test) or when the service provider does not surrender
the rights of ownership to the information to that particular client. In order
for an information service (marketing lead) to qualify as proprietary
information it must be gathered from a source that is private (or proprietary)
to the service provider or to the particular client and the client must also
have the right of ownership over the information or the right to control future
use of the information by the service provider.

This opinion is based upon the facts presented. If there are additional or
different facts, this opinion may change. You may also write to Tax
Administration Division, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division