Is a pay-per-view order-verification and database service that a company runs for cable operators taxable as a Texas 'data processing service'?

Subject

Cable Pay — Per — View Events Processing System (Processing Orders, Billing System, Setting Up And Maintaining Database)

Plain-English summary

Corporation A ran a National Transaction Center ("NTC") in Georgia that handled pay-per-view order requests for cable customers around the country. When a cable customer dialed the toll-free number to order a pay-per-view event, the NTC's automatic number identification ("ANI") system recognized the calling number and figured out which event was being requested based on the time and location of the call. Corporation A then prepared and sent a movie request record -- including a unique identifier pulled from a database supplied by the cable operators' own billing systems (located in California and Colorado) -- to those billing systems, which made the final call on whether to approve the order and directed the cable operator to show the movie. Corporation A also set up and maintained a database and voice files for each cable system it served, and provided the online connection needed to instantly qualify each pay-per-view call.

An auditor assessed Texas sales tax on the charges Corporation A billed to Texas cable operators for this order-verification work. Corporation A argued its role was really just "retrieval and storage of data, customer records and purchases" performed for the billing provider, not something more.

The Comptroller sided with the auditor. Under Tex. Tax Code § 151.0035, "data processing" includes data entry, data retrieval, data search, information compilation, and other computerized data and information storage or manipulation -- and it applies whether the processing is performed by the provider of the computer/computer time or by the purchaser or other beneficiary of the service. Because Corporation A used computers and equipment to receive and store cable customers' data on behalf of the cable operators, assigned unique identifiers to each transaction using the billing systems' own database, and compiled and transmitted records of pay-per-view orders, its service fell squarely within that definition. The Comptroller also noted it didn't matter that Corporation A's contract was with the cable operators (the purchasers) rather than with the cable operators' customers or the billing systems (other beneficiaries who accessed the system) -- the charges were still taxable data processing charges.

What this means for you

Companies providing order-verification, routing, or database services to cable or media operators

If your service involves receiving a request, looking up or verifying information against a database, compiling a transaction record, and transmitting that record on to another system, the Comptroller is likely to treat that as a taxable "data processing service" in Texas -- regardless of whether you call it verification, routing, or transaction processing.

Businesses relying on third-party call centers or transaction processors

If you're the cable operator (or similar business) paying a vendor for this kind of order-verification and database-maintenance work, expect Texas sales tax to apply to those charges, and confirm with your vendor how tax is being billed and remitted.

Accountants and tax professionals

The key statutory hook here is the broad definition of "data processing service" in Tex. Tax Code § 151.0035, which reaches data entry, retrieval, search, and compilation performed by a service provider on behalf of a purchaser -- contractual privity with the ultimate end customer is not required for the charge to be taxable.

Common questions

Q: Does it matter that Corporation A's contract was only with the cable operator, not the cable customers or the billing system?
A: No. The Comptroller said it was immaterial that Corporation A had contracts with the cable operators (the purchasers) but not with the cable operators' customers or the billing systems (other beneficiaries of the service).

Q: What made this a "data processing service" rather than something else?
A: Corporation A used computers to receive and store customer data, assigned unique identifiers to transactions using a database provided by the billing systems, and compiled and transmitted records of pay-per-view orders -- activities that fall within the statutory definition of data processing in Tex. Tax Code § 151.0035.

Q: Who made the final decision to approve a pay-per-view order?
A: The cable operators' billing systems made that call; the letter states "final authority for movie approval rests with the cable operator." The NTC's role was to gather and verify order information and pass it along.

Citations and references

Statutes:

• Tex. Tax Code § 151.0035 (definition of "data processing service," covering data entry, data retrieval, data search, information compilation, and computerized data storage or manipulation)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9604L1411B01

Original ruling text

April 30, 1996

VIA Facsimile

Dear *****:

Thank you for your letter concerning your firm's Texas sales and use tax
responsibilities.

CORPORATION A, through its National Transaction Center ("NTC") located in
*****, Georgia performs the following functions to facilitate the order
processing of pay-per-view events for customers located throughout the country:

1. Cable customers dial an "800" number to the NTC to request a pay-per-view
   event. These individuals have no contractual relationship to CORPORATION A
   or the NTC.

2. At the time the call is received, an automatic number identification
   ("ANT") system performs the following tasks:

Recognizes the number from which the call is being made. Identifies the event
the caller is requesting based on the time of call an location of caller.

3. Using the above information, CORPORATION A prepares
   and transmits a movie request record to the cable operators' billing system.
   The billing systems are located in California and Colorado. Included in this
   record is a unique identifier taken from a database provided to CORPORATION A
   by the billing systems. This identifier is added to ensure that the billing
   system communicates authorization for the proper event when it transmits the
   movie order to the cable operator.

4. The billing systems determines:

If this customer can purchase and event (based on ANI). If the event is
available

The billing system then sends order confirmation or rejection to CORPORATION A.

5. The NTC communicates to the customer, through voice messages, that the order
   has been approved or not.

After the verification is completed and the record is
delivered to the billing company, the function of the NTC is completed. The
process described above takes less than 30 seconds to perform. Final authority
for movie approval rests with the cable operator.

Once the record is received by the billing system, the
remainder of the order processing takes place by the billing system. This
includes verification of the customer's cable device, verification of the
customer's address and credit status, and verification of the cable company to
which the caller is a customer. Finally, it is the billing system which
communicates with the cable company to direct showing of the requested movie.

The auditor assessed CORPORATION A $***** in
sales tax on the charges to our Texas cable operators for the order
verification services provided to the cable operator's third party billing
system.

In your letter of November 7, 1995, you stated: "Our activity with the billing
provider is the retrieval and storage of data, customer records and purchases."

The following are excerpts from your publication entitled "*****"
Intelligent ANI":

***** Intelligent ANI employs sate-of-the art technology to provide fast,
convenient pay-per-view order processing.

. . . .

To meet these expectations cable systems must provide
automated self-service pay- per-view transaction processing.

. . . .

When you implement the ** Services,
CORPORATION A sets up and maintains a specific database and set of voice files
for your cable system, which resides in the CORPORATION A**
System....likewise, we maintain your databases and voice files to assure they
are synchronized with your pay-per-view programming.

. . . .

Regardless of whether you have a dedicated on-site
billing computer or you are linked to a remote billing service, we provide the
necessary on-line connection so each pay-per-view call is instantly qualified.

. . . .

Through *****, subscribers are able to add
addressable services quickly and conveniently without customer service
representative intervention.

. . . .

With ***** subscribers can obtain their account
balance and the amount and date of their last payment, bypassing your customer
service representatives.

Texas Tax Code Section 151.0035 defines "data processing" to include:

word processing, data entry, data retrieval, data
search, information compilation, payroll and business accounting data
production, and other computerized data and information storage or
manipulation. "Data processing service" also includes the use of a computer or
computer time for data processing whether the processing is performed by the
provider of the computer or computer time or by the purchaser or other
beneficiary of the service.

(Emphasis added.)

The services your firm provide do fall within the
definition of data processing and are taxable. CORPORATION A does use
computers and other equipment to receive and store cable customers' data
(records) on behalf of the cable operators. Using a database provided by
billing systems, your firm assigns a unique identifiers to the transactions.
Your firm compiles records of business transactions for the cable operators and
transmits records of pay-per-view orders to the cable operators. It is
immaterial that the your firm has contracts with the cable operators (the
purchasers of the services), but not with the cable operators' customers or the
billing systems (other beneficiaries of the services) who may have access to
the system.

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 1-800-531-5441, extension 3-4683. The direct line
is 512/463-4683. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9604237L