Is a consultant's fee for helping clients choose electrical equipment and find suppliers subject to Texas sales tax?

Subject

Consultation Services Vs. Information Services — Information (Availability Of Equipment/Parts, Prices,Shipping Options) Gathered For Individual Clients

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9402194L

Plain-English Summary

The taxpayer ran a one-person consulting business in the electrical power distribution industry. When a client needed electrical equipment (like transformers or circuit breakers), the taxpayer would help figure out what type of equipment was needed and would provide supplier information — including pricing and shipping/delivery options. The taxpayer did not represent any seller, and the fee was owed by the client whether or not the client actually bought the equipment.

The Comptroller drew a line between two things that can look similar but are taxed differently:

• Taxable information service: Selling information gathered for a customer about the availability of parts, pricing, and shipping is a taxable information service under Rule 3.342. The ruling specifically notes that even though this information was gathered for an individual client, that doesn't make it "proprietary" in a way that would take it out of the taxable category.
• Non-taxable consulting: A separately stated charge for analyzing a client's electrical power equipment needs, or for suggesting alternative ways to meet those needs, is not taxable.

The ruling also addresses what happens when both kinds of services are billed together for one price: if the taxable information-service portion is more than 5% of the total charge, the Comptroller presumes the entire combined charge is taxable. The opinion is expressly based on the facts as presented, and the Comptroller notes it could change if the facts were different.

What This Means For You

If your business gives clients pricing, availability, or shipping information about products (even research custom-tailored to that one client): That is a taxable information service under Rule 3.342. The fact that you gathered it specifically for that client, rather than reselling a generic report, does not make it exempt.

If your business purely analyzes a client's needs and recommends options or alternatives, without pricing/availability/shipping research: That analysis, if separately stated on the invoice, is not taxable.

If you bill a single combined fee that mixes both types of work: Watch the 5% threshold. If the taxable information-service component is more than 5% of the total charge, the Comptroller will presume the whole charge is taxable — so keeping the taxable and non-taxable portions separately stated on the invoice can matter a great deal.

Q&A

Q: Is it taxable to tell a client which suppliers carry the equipment they need, along with pricing and shipping options?
A: Yes. The Comptroller ruled that selling information about the availability of parts, pricing, and shipping — even when gathered for a specific client — is a taxable information service under Rule 3.342.

Q: Does gathering the information specifically for one client (rather than as a generic report) make it non-taxable as "proprietary" information?
A: No. The ruling states that although the information is gathered for individual clients, it "is not considered of a proprietary nature," so it remains a taxable information service.

Q: Is a fee for analyzing a client's equipment needs or suggesting alternatives taxable?
A: Not if it is separately stated. A separately stated charge for analyzing electrical power equipment needs or suggesting alternative methods of meeting those needs is not taxable. But if that charge is combined with taxable information services into one price, and the taxable portion exceeds 5% of the total, the whole combined charge is presumed taxable.

Citations

• 34 Tex. Admin. Code § 3.342 (Information Services) — cited in the ruling as "Rule 3.342"

Original ruling text

February 2, 1994

Dear Mr. **:

Thank you for your letter of January 17, 1994, concerning the taxability of
consultation services.

Your firm provides consulting services to customers within the electrical power
distribution industry when they are in the need of electrical equipment
(transformers, circuit breakers, etc.). You help determine the type of
equipment needed and provide supplier information. You do not represent sellers
and any fee is obtained from the buyer. Your fee is collectable whether or not
your client buys the equipment.

The sale of information gathered for a customer concerning the availability of
parts, pricing, and shipping is a taxable information service (Rule 3.342).
Although the information is gathered for individual clients, the information is
not considered of a proprietary nature. A separately stated charge for
analyzing the electrical power equipment needs of a client or suggesting
alternative methods of satisfying these needs is not taxable. Where both
nontaxable and taxable services are provided for a single charge and the
portion relating to taxable services represents more than 5% of the total
charge, the total charge is presumed to be taxable.

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, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division

January 17, 1994

Tax Policy Division

P.O. Box 13528
Austin, TX 78711

To whom it may concern,

I am writing this letter to request written confirmation that the service
business I started in 1993 is not subject to State of Texas sales tax. When I
received my Texas Sales and Use Tax Permit, the state representative indicated
that my business should not be a taxable service. The permit was in case the
time may come that I branch my services to include resale of some the equipment
I recommend. A few months back I received a publication from your office
(#96-259-C) regarding taxable services. When I called to confirm that my
service is not taxable, the person I talked with -Liz Crider, was very helpful
and sent me additional information regarding Data Processing Services (Rule
3.330), Brokers and Factors (Rule 3.352) and Information Services (Rule 3.342).
I asked for these rules to be sure that my assumptions to date have not been in
the wrong. She did not believe my business was taxable but suggested that I
receive confirmation in writing, hence the reason for this request.

Please note the following information:

** (DBA)

Taxpayer Number: **

** (Sole proprietor)
** (Residence)

I started my business in on a full time basis in August, 1993 - In short, a
synopsis of my business would be the following:

Provide consulting services to customers within the electrical power
distribution industry when they are in need of electrical equipment
(transformers, circuit breakers, etc.). Basically I act as a purchasing agent
and help them determine the type of equipment needed as well as provide
supplier information, pricing and delivery options. I work as an independent
and do not represent any sellers. My fee are billed to the company who is
looking for the equipment. My fee is collectable whether or not my client buys
the equipment.

My clients are primarily independent service companies who test and maintain
electrical power distribution electrical equipment for large power consumers
such as large factories. These service and engineering firms would utilize my
service to make informed choices when they purchase electrical equipment for
resale to the large power consumer. My client base extends throughout the
United States and Canada. Potential customers would include clients in Puerto
Rico, Mexico with additional possibilities in South America. The bulk of my
clients are out of state although I have some clients within Texas.

In conclusion, may I please have confirmation regarding my service's tax
status. Please feel free to call for any additional information.

Sincerely,