What did the 1995 internal Comptroller memo say about whether inventory counting services are taxable data processing services?

Plain-English summary

This document is not a taxpayer-specific letter ruling — it's an internal February 23, 1995 memo from Ledford Kelly, routed via Harold Lee at Audit Headquarters, addressed to all Comptroller managers, supervisors, and auditors, on the subject of "Inventory services."

The memo tells staff that in two recent hearing decisions (Nos. 30,695 and 32,269), it was decided that inventory counting services provided by inventory specialists (identified only by a redacted "****" in the text) are non-taxable services, not taxable data processing services. The administrative law judge (ALJ) relied on five facts as evidence that these services were not data processing services: (1) the services were historically provided without a computer and some clients still receive them without one; (2) the services involve much more than entry, retrieval, storage, and manipulation of data in a computer — including count planning, count training, memorization of cost codes, actual sight counting, recounting, manual preparation of worksheets and control sheets, and preparation of the final inventory report; (3) the service has been formally recognized as an independent service by the accounting industry; (4) employees, from freshman counters to company management, possess and exercise skill, knowledge, and expertise in providing the service; and (5) the inventory report prepared from the collected data is considered a financial report.

The memo further notes that several audits then in the hearing process would be dismissed based on this decision, and it directs auditors to review the decision when auditing taxpayers that provide or receive such services, noting it is likely most of these services would no longer be considered taxable. It lists Shannon Lollar (475-1050) as the contact for questions, and notes the document's previous accession number was 9502075L.

What this means for you

If you provide or receive inventory counting services

This memo reflects 1995 internal Comptroller audit guidance that inventory counting services — as distinguished from taxable data processing services — were treated as non-taxable based on the five ALJ factors listed above (manual/skill-based nature of the work, historical practice, industry recognition as a distinct service, and the financial-report character of the final product). It does not itself analyze any specific taxpayer's facts; it instructs auditors to apply the hearing decisions' reasoning going forward.

If you are researching the data-processing-services vs. non-taxable-services distinction

This memo is useful as historical context showing how the Comptroller's Audit Division at the time distinguished inventory counting services from data processing services under hearing decisions 30,695 and 32,269. It does not cite any statute or rule, and it is over three decades old, so it should not be relied on as current policy without independent verification.

If you are looking for guidance on a specific sales/use tax question

This is an internal administrative/audit memo, not a letter ruling addressed to a taxpayer. It contains no citation to any statute or rule, and it cannot be relied on as authority for any particular tax position.

Common questions

Q: Is this a binding letter ruling I can rely on?
A: No. It is an internal Comptroller audit memo instructing staff to apply recent hearing-decision reasoning to inventory counting services audits. It carries no letter-ruling reliance protection.

Q: Were inventory counting services considered taxable data processing services?
A: According to this memo, no — based on hearing decisions 30,695 and 32,269, the inventory counting services described were found to be non-taxable services rather than taxable data processing services.

Q: What factors did the ALJ rely on?
A: The memo lists five: (1) the services were historically, and sometimes still are, provided without a computer; (2) the work involves far more than computer data entry/retrieval/storage/manipulation, including manual counting, worksheets, and report preparation; (3) the service is formally recognized as independent by the accounting industry; (4) employees at all levels exercise skill and expertise in providing the service; and (5) the resulting inventory report is considered a financial report.

Q: Who was this memo sent to, and who can be contacted about it?
A: It was sent to all Comptroller managers, supervisors, and auditors, from Ledford Kelly via Harold Lee at Audit Headquarters. The memo lists Shannon Lollar (475-1050) as the contact for questions, though this contact information is from 1995 and may no longer be current.

Citations and references

No statutes or rules are cited in this document. It references two internal Comptroller hearing decisions, Nos. 30,695 and 32,269, by docket number only.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9502L1346E14

Original ruling text

DATE: February 23, 1995

TO: All managers supervisors, and auditors

FROM: Ledford Kelly
Via: Harold Lee
Audit Headquarters

SUBJECT: Inventory services

In recent hearing decisions (30,695 and 32,269), it was decided that the
inventory services provided by inventory specialists (specifically ****)
would be considered to be non taxable services. The ALJ gave the following
facts as evidence that these services were not data processing services:

1. The services were historically provided without the benefit of a computer
   and some clients are still provided the services without a computer.

2. The services involve much more than the entry, retrieval,
   storage and manipulation of data into and from a computer, e.g., count
   planning, count training and memorization of cost codes, the actual sight
   counting, recounting, manual preparation of worksheets and control
   sheets, and preparation of the final inventory report.

3. The service has been formally recognized as an independent service by the
   accounting industry.

4. Employees, from freshman counters to company management, possess and
   exercise skill, knowledge and expertise in providing the service.

5. The inventory report prepared from the data collected by its employees is
   considered a financial report.

There are currently several audits in the hearing process that will be
dismissed based on this hearing decision. Please review this decision
when auditing taxpayers that are provided and/or providing such services. It
is likely that most of these services will no longer be considered to be
taxable. If you have any questions, you can contact Shannon Lollar at 475-1050.

NOTE: Previous Accession Number 9502075L