Is a third-party service that uses Interactive Voice Recognition (IVR) technology to independently verify a consumer's phone-service-switch instructions -- billed to the telemarketing company, not the consumer -- a taxable data processing service?

Plain-English summary

A company provides independent, third-party verification that a consumer really did instruct a telemarketer to switch their long-distance telephone service -- a common industry safeguard against unauthorized "slamming." The telemarketer transfers the call and electronically sends the consumer's information to the verification company via an ISDN data link; the verification company's system checks that the phone number matches, confirms the previous carrier information against what the telemarketer submitted, and captures the consumer's yes/no and other verbal responses using Interactive Voice Recognition (IVR) technology, with some responses reviewed by human operators in random batches for quality control (errors get flagged and can trigger a full batch review). The results are reported back to the telemarketing company, which is billed for the service (not the consumer). The Comptroller ruled that this constitutes a taxable DATA PROCESSING SERVICE under Tax Code § 151.0035, pointing to Rule 3.330 for more detail. Notably, Rule 3.330(f) lets the telemarketing customer give the verification company an exemption certificate instead of paying Texas sales tax if that customer derives a MULTISTATE BENEFIT from the verification service (e.g., it verifies switches for consumers across many states, not just Texas).

What this means for you

Third-party verification companies serving telemarketers

Independent verification services that extract, match, and confirm consumer information -- even when delivered through interactive voice technology rather than pure back-office data entry -- are taxed as data processing services under § 151.0035. Charge and collect Texas sales tax on your fees to the telemarketing company unless it gives you a valid multistate-benefit exemption certificate under Rule 3.330(f).

Telemarketing companies purchasing verification services

If your verification service covers consumers across multiple states (not just Texas-based transactions), you may be able to furnish an exemption certificate under Rule 3.330(f) to avoid Texas sales tax on the charge -- confirm with your tax advisor whether your usage qualifies as a "multistate benefit."

Accountants and tax professionals

This is a useful, general illustration that "data processing service" reaches interactive, IVR/voice-driven verification workflows, not just traditional batch data entry -- the taxable character comes from extracting and matching data, regardless of the interface used to do it.

Common questions

Q: Is IVR-based third-party verification of a telemarketing sale a taxable service?
A: Yes, per this letter -- it's a taxable data processing service under Tax Code § 151.0035.

Q: Does it matter that some responses are checked by live operators rather than pure automation?
A: No, per this letter -- the overall process of extracting, matching, and confirming consumer data is still taxed as data processing regardless of the mix of automated and human review.

Q: Can the telemarketing company avoid the tax?
A: Possibly, per this letter -- if it derives a multistate benefit from the service, it may give the verification company an exemption certificate under Rule 3.330(f) instead of paying tax.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0035 (definition of taxable data processing service)
• 34 Tex. Admin. Code Rule 3.330 (data processing services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9703404L

Original ruling text

March 13, 1997

Dear ***:

Thank you for your recent letter which is restated in part with response below.

Our company provides independent verification of a consumer's instruction to

switch their long distance telephone service in response to a telemarketing

solicitation. Charges for our service are billed to the company that employs

the telemarketer.

The telemarketer receives a favorable response from the consumer, obtains the

pertinent information, and enters the data into their system.

The telemarketer explains to the consumer that an independent company must

confirm their instruction to switch their long distance service and they will

be connected to our company at that time.

At the same time the call is transferred to our company, the telemarketer sends

the information supplied by the consumer to our company via an ISDN electronic

data link. Our computer system extracts and assimilates certain information

that must be confirmed by the consumer to our company.

Once our system confirms that the telephone number actually called matches the

telephone number sent to us by the telemarketer for that consumer, our system

begins the verification process(see attached sample script), which the consumer

responds to verbally. After this process the consumer is reconnected to the

telemarketer(most third-party verification companies use "live operators" who

are conferenced in by the telemarketers).

Our system, using Interactive Voice Recognition (IVR) technology, will

verify/confirm some of the consumers responses as follows:

1. telephone number stated by the consumer matches the telephone number actually

called,

2. previous carrier stated by consumer matches information provided to

telemarketer by customer, and

3. yes or no responses to statements/questions.

4. Other responses by the consumer must be "listened to" in order to obtain "oral"

verification. Our verification representatives listen to the responses in

random batches. The responses must match the information on the computer

screen such as name, address, city and identifier.

5. Incorrect or unclear responses are rejected and sent to quality control.

Also, errors are programmed into each batch for quality control purposes.

6. Errors that are not identified will cause rejection of the entire batch

and will continue to do so until all errors have been identified. Unclear

responses will require an operator verification.

7. Our company reports the results of the verification process to the

telemarketing company.

8. Access to our system can be accomplished through a wide range of existing

technologies. The technology used will be determined by each of our customers.

In our telephone conversation of March 13, 1997, you stated that number

verification was done by your system contacting the telemarketers computerized

switch through which the call was made and determining that the number

proported to have been called was currently connected through that switch. You

also stated that the responses to the verification script were recorded on

compact disc and maintained for at least a year.

Response: This constitutes a taxable data processing service as defined in Tax

Code Section 151.0035. I am enclosing Rule 3.330 regarding Data Processing

Services for your reference. Please note that subsection (f) of Rule 3.330

makes provision for a customer deriving multi-state benefit to give an

exemption certificate in lieu of paying sales tax. Electronic copies of the

Tax Code and rules are available through our web site.

This opinion is rendered based on the facts presented. If there are additional

or different facts, the opinion may change.

Sincerely,

Al Van Allen

Tax Policy Division