Is a customized medical literature-search service taxable as an information service, even though each report is tailored to one client and can't literally be resold as-is?

Plain-English summary

A researcher provided customized medical literature-search services -- for example, compiling citations on retinal detachment and cataract extraction -- by interviewing each client and pulling results primarily from Medline, the world's largest medical bibliography database, then binding the citations into a client-specific report. The researcher argued the service couldn't be resold because the search strategy was customized to each client, and asked the Comptroller to reconsider an earlier informal conclusion that the service was taxable.

The Comptroller confirmed the service is a taxable information service. The key legal test is Rule 3.342(d)(1)'s exclusion for information "of a proprietary nature" to a client — meaning the client has an enforceable property right preventing the researcher from selling the same raw information to anyone else, even in a different form or report. Here, the raw information comes from a public-access database: if a second client asked about the same medical topic, they'd receive some of the same underlying documents as the first client. The publishers of the original articles — not the researcher's clients — hold the actual proprietary rights, merely licensed to the database provider for resale to subscribers. Because neither the researcher nor the clients hold an enforceable proprietary interest in the raw information, the service doesn't qualify for the exclusion — customizing the search strategy or binding a report specifically for one client doesn't change that. The Comptroller noted this holds true even if the researcher signed a written confidentiality agreement promising not to release the search results to third parties, because the exclusion turns on the client's lack of a proprietary interest in the underlying data, not on a resale promise.

The researcher must hold a Texas sales tax permit and collect tax on these information services, but may purchase the underlying database access and other pass-through items tax-free using a resale certificate.

What this means for you

Researchers, consultants, and information-service providers

Compiling and customizing information for a specific client doesn't make the underlying raw information "proprietary" for sales tax purposes if that same raw information (e.g., from a public database) is available to other clients too. The proprietary-information exclusion depends on whether the client has an enforceable right to prevent resale of the raw data -- not on how tailored the final deliverable looks.

Accountants and tax professionals

Watch for this distinction whenever a client argues their research/compilation service is nontaxable because it's "customized": the relevant question under Rule 3.342(d)(1) is who owns the underlying raw information, not whether the finished product happens to be unique to one customer.

Common questions

Q: Does customizing a report for one client make the underlying information tax-exempt?
A: No, per this letter -- if the underlying raw information (like citations from a public database) could be provided to another client too, it isn't "proprietary" to any one client, even if the finished report is customized.

Q: Would a confidentiality agreement with the client change the answer?
A: No, per this letter -- the exclusion depends on whether the client has an enforceable proprietary interest in the raw information, not on a promise not to resell it.

Q: Can the researcher buy the database subscription tax-free?
A: Yes, per this letter, using a resale certificate for items and services passed through to clients as part of the taxable information service.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.342(d)(1) (information services — exclusion for information of a proprietary nature to the client)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9806633L

Original ruling text

June 16, 1998

Dear **:

This is in response to your request for a ruling on the taxability of services
that you provide. I had previously corresponded with Ms. ** on
April 20, 1998 about the taxability of your service.

You enclosed a sample of a literature search on retinal detachment and cataract
extraction that you performed for one of your clients. The information is
bound into a special binder customized for each client. You state that you
cannot resell this because the search strategy is customized for each person.
You do an interview of each client before you do the search.

The citations are drawn from various databases based on information provided by
the customer. The database that you primarily use is Medline, the largest
database of medical bibliography in the world.

Answer: I have reviewed the report that you provided and still conclude that
your service is a taxable information service within the meaning of the statute
and the rule.

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 you gather from a public-access database is not "of a
proprietary nature" to your clients. If a second client asked you for
information on retinal detachment or cataract extraction, that client would get
some of the same documents that your first client received in his or her
report. Hence, you are not prohibited from reselling the same information to
both clients.

To meet the terms of the exclusion, your clients would have to have enforceable
property rights in the raw information you gather such that they could prevent
you from selling it to another client, even in another form or report. Your
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 you nor your client holds an enforceable proprietary
interest in this raw information.

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

You are required to hold a sales tax permit and to collect tax on sales of
information services. You may issue a resale certificate to purchase, tax free,
on-line database services and other items and services that you transfer to
your clients as part of your services.

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