Is a service that compiles and reports weekly underground natural gas storage capacity data from multiple subscribers a taxable information service, or does it qualify as a nontaxable proprietary compilation or geophysical survey?

Subject

Geological And Geophysical Data Relating To Underground Natural Gas "Storage" Inventories — Compiling, Processing And Providing Weekly Reports To Subscribers — Not A Nontaxable Geophysical Survey

Plain-English summary

A Texas company (the "Client") collected data from underground natural gas storage operators across North America -- storage sites located in depleted oil and gas fields, aquifers, abandoned salt mines, and salt caverns. An independent third party stripped identifying details from the individual operator submissions before passing them to the Client, who then aggregated everything into a weekly report showing available natural gas storage capacity by geographic region. The Client sold access to these reports, plus related seminars and training, to members of the natural gas industry through a subscription/membership model.

The Client's representative argued the reports should be tax-exempt for two reasons under Comptroller Rule 3.342(d): (1) the information was "proprietary" because it was compiled specifically for the Client's business, and (2) the information was "geophysical survey information," which is exempt.

The Comptroller rejected both arguments and held the weekly reports are a taxable information service under Rule 3.342(b)(2):

• Not proprietary: The exemption in subsection (d)(1) only covers information gathered or compiled "on behalf of a particular client" (singular). Because the Client sells the same weekly report to any number of subscribers -- for example, all ten Southeast Texas subscribers out of 200 total Texas subscribers would receive identical storage information for that region -- the data isn't proprietary to any one client. It's a shared product sold broadly to industry subscribers.
• Not a geophysical survey: A "geophysical survey," per the Manual of Oil and Gas Terms, involves the "accurate measurement and recording of certain physical quantities in the outer rock shell of the earth" to learn the nature and contour of underground geological structures. Neither the Client nor the storage operators use geophysical surveys to determine week-to-week, month-to-month, or year-to-year available storage capacity. The Comptroller compared the Client's service to a service reporting on available office lease space or commercial crude-oil storage tank capacity -- informational reporting, not scientific survey data.

What this means for you

Data aggregators and information service providers in oil and gas

If you compile industry data from multiple sources and resell reports or subscriptions to more than one customer, that sale is very likely a taxable information service under Rule 3.342(b)(2) -- even if the underlying facts you're reporting on (like geology or storage capacity) sound technical or scientific. The "proprietary" exemption requires the data be gathered for one specific client who cannot resell it; selling the same compiled report to many subscribers defeats that exemption.

Businesses claiming a "geophysical survey" exemption

The exemption for geophysical survey information applies to data derived from actual scientific measurement of underground rock structures -- not to reports built from data that storage operators already know and simply submit to be aggregated. If no one in the transaction is actually conducting a geophysical survey to produce the numbers, the exemption doesn't apply.

Accountants and tax professionals

This letter illustrates how Rule 3.342(d)'s two nontaxable-information carve-outs are narrowly construed: (d)(1) requires compilation for a single identifiable client with no resale rights, and (d)(2) requires the information to be "primarily derived from" actual scientific/exploratory measurement, not just data reporting dressed up in technical industry language.

Common questions

Q: Why didn't the "proprietary information" exemption apply here?
A: Because the exemption in Rule 3.342(d)(1) requires the information to be gathered or compiled "on behalf of a particular client" (singular) and not resold. The Client here sold the identical weekly report to many subscribers, so the information wasn't proprietary to any one customer.

Q: The data relates to geology and underground gas storage -- why isn't it a "geophysical survey" exemption?
A: Because a geophysical survey involves direct scientific measurement of underground rock structures. The Client's reports instead aggregate storage-capacity data that operators already know and submit -- no geophysical surveying is performed to produce the weekly numbers.

Q: Does it matter that the underlying data comes from confidential, anonymized operator submissions?
A: No -- the Comptroller's analysis focused on whether the finished product (the weekly report) was sold to one client or to many subscribers, not on how the raw data was sourced or anonymized.

Citations and references

Statutes/rules:

• Comptroller Rule 3.342 - Information Services, including subsection (b)(2) (taxable information services) and subsection (d) (nontaxable information exceptions, paragraphs (1) and (2))

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9604L1407D01

Original ruling text

April 3, 1996

Dear **:

This is in response to your letter supplementing your earlier letter of
February 15, 1996, regarding services performed by your client (Client). Your
Client's business (as stated in your earlier letter) is as follows:

Client is a Texas corporation engaged in the business of compiling and
processing customer provided geological and geophysical data relating to
underground natural gas storage inventories within North America. Because of
the unique nature of the natural gas storage, the underground storage
reservoirs are of varied geologic types, including depleted oil or gas fields,
aquifers, abandoned salt mines, and salt caverns. Client provides a tremendous
enhancement to the natural gas industry by providing weekly reports of the
available underground storage throughout North America.

The underground storage data is gathered from the Client's customers - the
various storage operators throughout the industry, pursuant to a
confidentiality agreement whereby such data is forwarded to an independent
third party data recipient. The data recipient removes any identification from
the individual data reports before forwarding such reports to Client. Client
aggregates this data in to a weekly report containing natural gas storage
capacity by geographical region. Client then offers this aggregated data to
its customers via membership participation, whereby the weekly reports are only
accessible to Client's members. Membership participation is restricted to
members of the natural gas industry, and there is no general solicitation. In
addition, the Client offers to provide their customers with in-house seminars,
individual training, and specialized reports which assist these customers in
understanding the geophysical variables that govern underground natural gas
storage and their implications to production and exploration.

My response to your earlier letter concluded that this was a taxable
information service under Subsection (b)(2) of Section 3.342 -Information
Services.

You contend that I failed to recognize the specific exception provided in
Comptroller Rule 3.342(d) regarding nontaxable information. This subsection
provides:

(d) Nontaxable information.

(1) The sale of 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 and may not be sold to others by the person who gathered
or compiled the information. Any subsequent sale of such information by the
client for whom the information was gathered or compiled is subject to tax.
Examples include opinion polls and management consultant reports.

(2) Any sale of information primarily derived from laboratory, medical, or
exploratory testing or experimentation or any similar method of direct
scientific observation of physical phenomena is not subject to tax. Examples
of information the sale of which is exempt from tax under this subsection
include, but are not limited to, geophysical survey information, polygraph
test, and medical test results.

You contend that the services provided by Client "are of a proprietary nature
on behalf of one or more specific clients" as exempted by subsection (d)(1).
Secondarily, you contend that Client is providing a "sale of information
primarily derived from geophysical survey information" as exempted in (d)(2).

Response: With respect to subsection (d)(1), the information compiled by your
client is not proprietary because it is not "...gathered or compiled on behalf
of a particular client" (note singular usage of client), because any number of
subscribers to your Client's service receive the same information.
Additionally, Client can sell the information to anyone who subscribes to
Client's service. For example, if your Client has 200 gas producer subscribers
in Texas, ten of whom are located in Southeast Texas and are looking for
storage of their gas in that sector of Texas, all ten would receive the same
information with regard to available storage in that area.

Webster's Ninth New Collegiate Dictionary defines "proprietary" as follows:

1. of, relating to, or characteristic of a proprietor ...

2. used, made, or marketed by one having the exclusive right ...

3. privately owned and managed and run as a profit-making organization ..."

The information compiled by Client does not "relate to a proprietor" or "to one
having the exclusive right" to the information, since it is available to a
multitude of subscribers to Client's service.

With regard to Client's service being a geophysical survey, the fourth edition
of the Manual of Oil and Gas Terms defines "geophysical survey" to be "[t]he
accurate measurement and recording of certain physical quantities in the outer
rock shell of the earth, the object being to learn the nature and contour of
underground geological structures." Client is compiling and reporting on the
availability of underground natural gas storage space rather than reporting on
"information primarily derived from geophysical survey information" because
neither Client, or the gas storage facility operators, use geophysical surveys
to determine available gas storage capacity on a weekly, monthly or yearly
basis. The information dispersed by Client is not materially different from
services that may report on the availability of office lease space in
metropolitan areas or the availability of crude oil storage capacity at
commercial oil storage tank farms.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division

February 29, 1996

Dear **:

This is in response to your request for a ruling on the taxability of
compilation services provided by your client ("Client").

Client is a Texas corporation engaged in the business of compiling and
processing customer provided geological and geophysical data relating to
underground natural gas storage inventories within North America. Because of
the unique nature of the natural gas storage, the underground storage
reservoirs are of varied geologic types, including depleted oil or gas fields,
aquifers, abandoned salt mines, and salt caverns. Client provides a tremendous
enhancement to the natural gas industry by providing weekly reports of the
available underground storage throughout North America.

The underground storage data is gathered from the Client's customers - the
various storage operators throughout the industry, pursuant to a
confidentiality agreement whereby such data is forwarded to an independent
third party data recipient. The data recipient removes any identification from
the individual data reports before forwarding such reports to Client. Client
aggregates this data in to a weekly report containing natural gas storage
capacity by geographical region. Client then offers this aggregated data to
its customers via membership participation, whereby the weekly reports are only
accessible to Client's members. Membership participation is restricted to
members of the natural gas industry, and there is no general solicitation. In
addition, the Client offers to provide their customers with in-house seminars,
individual training, and specialized reports which assist these customers in
understanding the geophysical variables that govern underground natural gas
storage and their implications to production and exploration.

You contend that Client is not providing a data processing service since Client
provides "enhancement of geophysical services" i.e., the storage of natural
gas. Alternatively, Client services do not meet the definition of a taxable
information service since the reports put out by Client involve the
"processing, reformatting, or manipulation of data provided by the customer",
which is excluded in Rule 3.342 - Information Services.

RESPONSE: Client is providing a taxable information service to its members.
Subsection (b) of Section 3.342 - Information Services, defines taxable
information services as:

Information which is gathered, maintained, or compiled and made available by
the provider of the information service to the public or to a specific segment
of industry for a consideration is subject to sales tax. Except as provided in
subsection (d)(3) of this section, the total charge for information services
whether by subscription or on an as-needed basis is taxable. Examples of such
information include, but are not limited to, the following:

(1) newsletters;

(2) scouting reports and surveys, including those used in sports and the oil
and gas and related industries;

The information that Client provides is available storage capacity by region,
gathered from underground natural gas storage service providers, and made
available to gas producers (Client's customers). The storage information is
not gathered or compiled on behalf of a particular client and is therefore not
considered proprietary information.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9604185L