A medical-information researcher compiles reports from public-access databases into a bound booklet sold to only one client at a time, with the information not resalable by either her or that client. She also plans to do similar market research using databases and interviews. Does the fact she sells each report to just one client, with no resale rights, make her service exempt from sales tax as proprietary information?

Plain-English summary

A medical-information researcher had been charging and paying Texas sales tax on her services, but wondered whether she should have been treating them as exempt. She researches public-access databases for clients requesting medical information, compiles it into a bound booklet, and sells that booklet/service to only one client at a time — with the compiled information not available for resale by either her or that client. She also planned to start a related marketing-research service, using databases and interviews, again selling each compiled report to only one client with no resale rights.

The Comptroller ruled that both services are taxable information services, not exempt proprietary information. Rule 3.342(d)(1) excludes from tax only information that is genuinely "of a proprietary nature" to the client — meaning the client must hold enforceable property rights in the raw information strong enough to stop the researcher from selling similar information to someone else, even repackaged differently. Here, that proprietary interest didn't exist: the real proprietary rights in the underlying articles belonged to the original publishers, who simply licensed the content to the database provider for resale to any subscriber. Neither the researcher nor her clients held any enforceable proprietary interest in that raw information — selling only to one client, or even signing a written non-disclosure/non-resale agreement with the client, doesn't create that missing proprietary interest. The same analysis applied to the planned market-research service using databases and interviews: charges for that information would likewise be non-proprietary and taxable.

What this means for you

Information/research businesses that compile from public sources

Selling your compiled report to only one client, or promising not to resell it to anyone else, does NOT by itself make your service exempt "proprietary information." The exemption requires the CLIENT to hold enforceable property rights in the underlying raw data — which generally isn't possible when your source material (articles, public database content) is itself owned by third-party publishers who license it for broad resale/subscription access.

Businesses that have been paying tax and are reconsidering their exemption status

Don't assume a service is exempt just because deals are structured one-client-at-a-time with no resale rights for that client. Check whether the CLIENT (not you) has an enforceable proprietary interest in the raw information — that's the actual test.

Accountants and tax professionals

This letter is a useful pairing with 9804657L (also in this corpus) on the Rule 3.342(d)(1) proprietary-information exclusion: that letter found genuine proprietary information services exempt for reports gathered specifically for one client where the underlying data itself wasn't independently owned by third parties, while this letter denies the exemption where the source data (published articles licensed through a database) is independently owned and broadly licensed regardless of any one-client sale arrangement.

Common questions

Q: If I only sell my compiled research report to one client, is that automatically exempt as proprietary information?
A: No — selling to only one client, by itself, doesn't create the proprietary interest the exemption requires.

Q: What does make information "proprietary" enough to be exempt under Rule 3.342(d)(1)?
A: The client must hold enforceable property rights in the raw information strong enough to prevent the researcher from selling similar information to anyone else, even in a different form.

Q: Does a written non-resale agreement with my client change the result?
A: No — even a signed agreement prohibiting resale doesn't create a client-side proprietary interest in publicly-sourced raw information.

Q: Does this same reasoning apply to market research derived from interviews, not just databases?
A: Yes — the Comptroller applied the same non-proprietary, taxable-information-service analysis to the planned market-research service using databases and interviews.

Q: Can I rely on this letter for my own information-research business?
A: No. It's based on the facts presented, and the letter notes other facts, though similar, may provide a different result.

Citations and references

• 34 Tex. Admin. Code Rule 3.342(d)(1) (proprietary-information exclusion — requires the client to hold enforceable property rights in the raw information)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9804632L

Original ruling text

April 20, 1998

Dear **:

This is in response to your request for a letter ruling on behalf of one of
your client's who has been charging and paying state sales tax for the services
she renders. It has come to your attention that your client's services may be
tax exempt. The information and questions you provided are restated below,
followed by my response:

Your client's business is a medical informational service. She researches
public data bases for clients who request medical information and compiles the
information for them. The final product is a bound booklet of medical
information. She sells the service, and booklet, to only one client and the
compiled information is not available from her or her client for resale.

As an adjunct to the medical informational business, your client also intends
to conduct marketing research, where she will research data bases and conduct
interviews for market research purposes. Again, the compiled report will be
prepared and sold to only one client and is not available for resale.

You are requesting an informational ruling as to the following questions:

(a) Is the service she provides exempt from state sales tax?

(b) If exempt, what if anything, should she do now with respect to sales tax in
the future conduct of her business, i.e. does she need to notify the
comptroller's office that the service is exempt or simply note that fact on
sales tax reports when they are due)?

Response: Your client is providing a taxable information service. The service
does not fit within the exclusion described in Rule 3.342 (d)(1), which
provides that the sale of information gathered or complied 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.

The information that your client gathers from a public-access database is not
"of a proprietary nature" to her clients. To meet the terms of the exclusion,
her clients would have to have enforceable property rights in the raw
information gathered such that they could prevent her from selling it to
another client, even in another form or report. Her clients do not have such a
proprietary interest in the information. Rather, the publishers of the articles
in question retain the proprietary rights in the articles, which are simply
licensed to the database provider for resale to any subscriber. Neither your
client, or the client's that she gathers the information for, holds an
enforceable proprietary interest in this raw information.

For the same reason, your client's service would be taxable even if she signed
a written agreement with her clients that prohibited her from releasing or
reselling the search results to any third party. Her clients still have no
proprietary interest in the raw information that she gathers.

With regard to the marketing research service that your client plans to conduct
using data bases and interviews, her charges for sales of information derived
in this manner will also be considered non-proprietary and taxable as
information services.

You will need to provide me with additional information regarding your client's
sales of information derived from interviews she conducts for market research.

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

I hope this information answers your questions. If you need additional
information, please 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. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division