If an information provider subcontracts the gathering of proprietary information to a third party, does the information stop being 'proprietary' for Texas sales tax purposes?

Subject

Proprietary Information — Definition — Must Be Gathered From Private Sources (Other Than From Client Itself) And Client Should Then Have Right To Control Future Use

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9311045L

Plain-English Summary

This is a short, corrective letter from Wade Anderson, Assistant Director of Tax Administration, dated November 16, 1993. It overrules an earlier letter that had been written by Al Van Allen on July 21, 1993.

Van Allen's original letter had taxed charges for gathering proprietary information on the theory that, because the information provider subcontracted the actual information-gathering work to a third party, the information lost its proprietary character. Anderson disagreed and overruled that position. His stated reasoning: information retains its proprietary character even when it is gathered by (or for) a person who then sells that proprietary information to a client. In other words, using a subcontractor to do the gathering does not, by itself, strip the information of its "proprietary" status.

The letter is very brief and does not explain the broader legal test for what makes information "proprietary" in the first place, nor does it cite any statute or rule. It simply corrects the narrower point that subcontracting the gathering work is not, alone, a reason to treat the information as non-proprietary (and therefore differently taxed).

What This Means For You

If you sell proprietary information services in Texas and use subcontractors to gather the underlying information: This letter indicates the Comptroller's position that using a subcontractor to gather information for you, which you then sell to a client, does not by itself cause that information to lose its proprietary character for tax purposes.

Note on scope: This letter is extremely brief, redacted, and does not cite any statute, rule, or define "proprietary information" in full. It only addresses and overrules one specific point — that subcontracting the gathering work does not defeat proprietary treatment. It does not provide a complete definition of "proprietary information" or explain the tax consequences that follow from that classification.

Q&A

Q: Does subcontracting the gathering of information to a third party make that information non-proprietary?
A: No. The Comptroller's letter overruled an earlier letter that had taken this position, holding that the information keeps its proprietary character even when gathered by a subcontractor for a provider who then sells it to a client.

Q: What happened to the original letter that taxed these charges?
A: It was overruled. The July 21, 1993 letter from Al Van Allen had taxed charges to gather proprietary information because the gathering was subcontracted to a third party; this November 16, 1993 letter from Wade Anderson expressly overrules that position.

Original ruling text

November 16, 1993

Dear **:

On July 21, 1993, Al Van Allen wrote a letter taxing charges to gather
proprietary information because the information provider subcontracted the
information gathering to a third party. I am overruling that letter because it
is my opinion the information retains its proprietary character even when the
information is gathered for a person selling the proprietary information to a
client.

If you have any further questions, please call me.

Sincerely,

WADE ANDERSON
Assistant Director
Tax Administration

cc: Al Van Allen, Tax Administration Division