Are a company's natural gas meter chart calculation, chart audit, consulting, and training services taxable as data processing, given that a computer is used to help calculate the final figures?

Plain-English summary

A company serving natural gas producers and transporters had been told its services were taxable data processing. After it asked the Comptroller to reconsider and Dallas East Audit staff visited the company's site in person, the Comptroller reversed course based on what the on-site review actually showed.

The company's core service is chart calculation: it receives gas meter charts recording flow, pressure, and temperature data, and operators with an average of 15+ years of specialized (non-engineering) chart-interpretation experience manually review each chart for abnormal or inconsistent readings before calculating gas volume (MCF/MMBTU). A computer/integrator is used in the process, but only as a tool the operator relies on after — and based on — their own judgment call about how to interpret irregular chart patterns. Chart audits work the same way, verifying someone else's prior interpretation. Consulting includes acting as an expert witness in legal proceedings, and training teaches chart interpretation and MCF calculation.

The Comptroller found that Rule 3.330(a) excludes from taxable "data processing" any service where a computer is merely used to facilitate the performance of another service or the application of specialized knowledge — the rule specifically gives computer-assisted geophysical interpretation as an example of a nontaxable service, and gas chart interpretation was treated the same way. Because chart calculation, audits, consulting, and training are all built on skilled human interpretation rather than computerized data compilation, none of them are taxable data processing. The company's detail reports (reconciliations, summaries, prorations) are likewise not taxable when they're tied to these nontaxable interpretive services, even though the company itself thought the reports might be its one piece of genuine data processing.

What this means for you

Natural gas measurement and chart-interpretation companies

A computer being part of your workflow doesn't automatically make your service taxable data processing. If the real value you provide is skilled human interpretation — reviewing chart irregularities, applying specialized experience, making judgment calls the computer can't make on its own — that service can qualify as nontaxable, with the computer treated as merely facilitating it.

Any technical service provider using computers as a calculation tool

Rule 3.330(a)'s "facilitation" exclusion isn't limited to gas measurement — the rule cites geophysical interpretation as one example. If your business applies specialized scientific, technical, or professional knowledge and a computer just helps you finish the calculation, that combination can stay outside the taxable data processing category.

Businesses that got an unfavorable taxability determination based on a desk review

This letter shows that an in-person, on-site review of how a service is actually performed can change the outcome — the original position here was reversed once auditors saw the actual chart-interpretation workflow firsthand.

Common questions

Q: Is a service taxable data processing just because a computer calculates the final numbers?
A: Not necessarily. Rule 3.330(a) excludes a service from data processing when the computer is used to facilitate the performance of another service or the application of specialized knowledge — here, human chart interpretation.

Q: Are chart audits treated the same as the original chart calculations?
A: Yes — verifying someone else's prior chart interpretation uses the same skilled-interpretation process and gets the same nontaxable treatment.

Q: Are the detail reports (reconciliations, summaries) taxable?
A: No, when they're related to the performance of the nontaxable interpretive services, such as a summary of chart interpretations.

Q: Can I rely on this letter for my own gas measurement or similar interpretive business?
A: No. This opinion is based on the specific facts submitted, and other facts, though similar, may yield different results; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• 34 Tex. Admin. Code Rule 3.330(a) (data processing exclusion where a computer facilitates another service or the application of specialized knowledge; cites computer-assisted geophysical interpretation as an example)

Subject

Natural Gas Measurement Service — Chart Calculation, Audit Of Charts, Consulting — Not Data Processing Service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9712981L

Original ruling text

December 11, 1997

Dear **:

Thank you for your October 27, 1997 letter asking us to reconsider our position
regarding the taxability of your company's services after reviewing the process
on-site.

Karla Shain and Mary Kasner of our Dallas East Audit office have recently
completed their visit to the company's location. Based on their review, the
services provided by the company include chart calculations, audits of charts,
detail reports, consulting, and training.

The chart calculations involve chart interpretation by operators with
specialized training and a great amount of experience (most of the operators
have 15 years or more experience in chart interpretation). The service
involves interpretation by these operators rather than the mere use of a
computer for information compilation and other computerized data and
information manipulation. As explained in subsection (a) of Rule 3.330 on data
processing, data processing does not include the use of a computer by a
provider of other services when the computer is used to facilitate the
performance of the service or the application of the knowledge of the physical
sciences, accounting principals, and tax laws. In fact, the rule specifically
lists the use of a computer to provide interpretive or enhancement geophysical
services as an example of nontaxable services. Therefore, the chart
calculations, audits of charts, consulting, and training services are not
taxable because these services are not data processing services. In addition,
preparation of detail reports (reconciliations, summaries, etc.) are not
taxable when these reports are related to the performance of nontaxable
services (e.g., summary of interpretations of the customer's charts).

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

cc: Karla Shain, Dallas East Audit

INTEROFFICE MEMO
John Sharp
State Comptroller

November 24, 1997

TO: David Somerville, Tax Policy Division

FROM: Karla Shain, Dallas East Audit Office

SUBJECT: ABC COMPANY
TP# **

Both myself and my supervisor, Mary Kasner, conducted an on-site tour of the
taxpayer's business with
MANAGER, Office Manager. The taxpayer provides various services to producers
and transporters of natural gas. Below is an overview of their services:

Chart Calculations: The taxpayer receives gas meter charts containing recorded
data from their customers. A database is maintained to track the specific
meter information, such as, plate size, orifice size, pipe size, type of gas or
liquid measured, chart type (gauge or absolute pressure; daily, weekly, or
monthly) for each customer's chart. The meter information affects the formulas
used by the computer to calculate MCF or MMBTU. The chart is manually reviewed
to identify abnormal or inconsistent flows, temperatures, or any other
deviations. The deviations affect the way a chart is interpreted. Sometimes
the customer's field tech. makes notes on the charts about the actual activity.
The charts are then sent to the integration stations. The integrator operator
must use their experience and knowledge to make critical judgments about the
recorded data in order to obtain the most accurate information.

The operators are not engineers but have received specialized training on chart
interpretation. Mr. MANAGER stated most of the operators have been there 15+
years. He also explained this is where their company is superior in this
field. Their competitors simply do not have the experience and expertise to
make accurate interpretations. He went on to explain how ENGINEER, an engineer
who established the company in 1981, was a pioneer in this field.

The charts are then put on the integrator and the operator traces the chart
while interpreting its pattern. The integrator reads this and uses
mathematical formulas to record three figures: differential, pressure, & time
on the chart. In some instances the operator may use an integrator directly
tied to a computer to recalculate these figures if the chart deviations require
so. The charts are then sent to the data entry station where the three figures
are entered and the MCF is calculated. The customer is furnished a volume
statement printed or on diskette. The customer is charged a fee for each chart
calculated.

Audits: The taxpayer receives meter charts which have already been interpreted
by the customer or another firm. They use the same procedures as above to
verify the accuracy of the original calculations. If they disagree, they
provide reasons for the differences, such as, not taking deviations into
account. The customer is charged a fee for each chart audited.

Detail Reports: The taxpayer prepares various reports such as reconciliations,
summaries, & prorations from the customer's data which do not require
specialized knowledge or interpretations. The taxpayer feels this may be the
only actual data processing. The customer is charged a fee for each report.

Consulting: The taxpayer provides various consulting services such as
appearing as an "expert witness" in legal proceedings.

Training: The taxpayer provides in-depth training on the interpretation of
meter charts and the calculation of MCF.

We hope the information provides a clearer picture of the taxpayer's business.
Please let me know if you have any questions. I would also appreciate
receiving a copy of your response to the taxpayer.