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SOAH DOCKET NO. 304-21-0081.26
CPA HEARING NO. 116,654
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: September 1, 2014 THROUGH August 31, 2017
Sales And Use Tax/RDT
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
KAREN MATLOCK
Representing Respondent
**************
Representing Petitioner
COMPTROLLER’S DECISION
This decision is considered final on January 28, 2022, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1] The failure to timely file a motion for rehearing may result in adverse legal consequences.
Administrative Law Judge (ALJ) Matt Jones of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision on Remand (PFD on Remand) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on Remand on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ recommended that the Comptroller adopt the Corrected PFD on Remand as written.
After review and consideration, IT IS ORDERED that the Corrected PFD on Remand is adopted as changed.[2] .
The result from this Decision is Attachment A. The ALJ’s letter to the Comptroller is Attachment B. The Corrected PFD on Remand as changed is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachment A reflects a liability.
SIGNED on this 3rd day of January 2022.
GLENN HEGAR
Comptroller of Public Accounts
By: Lisa Craven
Deputy Comptroller
Attachment A, Texas Notification of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Corrected Proposal for Decision on Remand as changed
ATTACHMENT B
State Office of Administrative Hearings
Kristofer Monson
Chief Administrative Law Judge
May 6, 2021
The Honorable Glenn Hegar
Comptroller of Public Accounts
LBJ Building
111 E. 17th Street, 1st Floor
Austin, TX 78701
RE: SOAH Docket: 304-21-0081.26
TCPA Hearing No.: 116,654
Taxpayer No.: **************
************** v. Texas Comptroller of Public Accounts
Dear Comptroller Hegar:
On April 8, 2021, Staff filed its exceptions to the Corrected Proposal for Decision (CPFD) issued on March 30, 2021. On April 23, 2021, Petitioner filed its Reply. Based on my review of the pleadings filed by both parties, the ALJ finds that no arguments have been raised that would warrant changing the analysis, or the Findings of Fact, or Conclusions of Law.
Staff continues to argue Petitioner purchased market data. This is only partially correct. Petitioner purchased real-time market data, the benefit of which was derived by its Canada trading business segment. That separate identifiable segment’s entire business was conducted outside the State of Texas. Therefore, the Administrative Law Judge (ALJ) recommends that the CPFD be adopted as written.
Sincerely,
Matt Jones
Administrative Law Judge
ATTACHMENT C
SOAH DOCKET NO. 304-21-0081.26
TCPA DOCKET NO. 116,654
**************
Taxpayer No. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
CORRECTED PROPOSAL FOR DECISION ON REMAND
The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) audited ************** (Petitioner) for compliance with sales and use tax laws. The resulting assessment included use tax on purchases, penalty for a late-filed period, and interest. Petitioner requested redetermination, contending its COMPANY A market-data purchases were not taxable information services. In the alternative, it asserts the services were not used in Texas and the multi-state benefit rule applies. Staff maintains the market data is a taxable information service. Staff also argues Petitioner received a benefit in Texas; therefore, the services were used in Texas. The Comptroller holds that the services were used in Texas, the multi-state benefit exemption does not apply, and the assessment is upheld without change. In this Corrected Proposal for Decision on Remand, the Administrative Law Judge (ALJ) finds the multi-state benefit rule applies, and recommends removing the services from the assessment.
Source: See Conclusion of Law No. 32.
I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION
On September 9, 2020, Staff referred the case to the State Office of Administrative Hearings (SOAH) and a hearing was set. On September 21, 2020, ALJ Matt Jones issued Order No. 1, which set out the pre-hearing requirements. The hearing convened via Zoom on October 29, 2020, and the record closed November 6, 2020. Karen Matlock represented Staff, and **************, of COMPANY B, represented Petitioner.
A Proposal for Decision (PFD) was issued on December 9, 2020. On March 8, 2021, the Comptroller issued an Order to Correct returning the matter to SOAH for the sole purpose of amending or correcting the PFD by adding conclusions of law, findings of fact, and legal reasoning and analysis related to use in Texas and the application of 34 Texas Administrative Code § 3.342.
There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A. Evidence
Staff presented the testimony of Matthew Martin, the auditor, and submitted the following exhibits:
1. Sixty-Day Letter;
2. Texas Notification of Audit Results;
3. Penalty and Interest Waiver Worksheet;
4. Audit Plan;
5. Audit Report;
6. Independent Audit Review Report; and
7. Printouts from Petitioner’s Website and Article.
Petitioner presented the testimony of INDIVIDUAL A, its former chief executive officer; INDIVIDUAL B, its former chief financial officer; and INDIVIDUAL C, former director of business operations for COMPANY C. Petitioner also provided the following exhibits:
1. 2016 Financial Audit (excerpt);
2. Co-Location Services Agreement;
3. Acquisition Announcement;
4. Invoice No. 044;
5. Online Article, re: High Frequency Trading and Latency;
6. January 1, 2013 Financial Times Article;
7. January 1, 2018 Financial Times Article;
8. September 9, 2018 Letter from INDIVIDUAL C;
9. COMPANY C Distribution Agreement;
10. Exhibit A to COMPANY C Distribution Agreement;
11. February 8, 2018 Petitioner Correspondence with COMPANY C;
12. COMPANY C Service Request Form;
13. Master Network Connectivity Services Agreement;
14. Invoices Nos. SU1269072, SU1264810, SU1236321, SU1228197, SU1199895, SU1186978, SU1178630, and SU1166088;
15. Notification of Audit Results (excerpt);
16. Trading Desk Operation Detail;
17. December 2016 Board of Directors Meeting (excerpt);
18. Petition for Redetermination; and
19. Reply to Position Letter.
The exhibits were admitted into the record without objection.
B. Agreed Adjustments
Staff did not agree to adjust the audit assessment.
C. Facts Established by the Evidence
During the period at issue, Petitioner traded stocks and other financial instruments on exchanges throughout the world. Prior to being acquired by an unrelated entity in September 2017, it was headquartered in CITY A, Texas where 89 of its 94 employees worked. Petitioner’s business model was based on high-speed, real-time, high-frequency trading. To facilitate these trades, it leased server space in very close proximity to exchanges. For example, Petitioner leased server space in the same building as COMPANY A, CITY B but did not maintain any personnel in CITY B.[3]
Primarily from its CITY A office, Petitioner developed computer programs containing algorithms and trading methods. It loaded these programs onto its servers near the various exchanges. The programs allowed the servers to make market trades in real time in an automated manner. For example, if the server received information that a certain stock was selling for $10 and it was programmed to buy that stock at $10, the server executed a purchase order. The computer programs utilized real-time market information, made buy and sell decisions, and executed trades in a matter of milliseconds or microseconds. Because it would take too much time, humans were not involved; the computer programs made the decisions. Petitioner’s employees monitored the trading activity; however, the computer programs generally went unchanged for weeks to months.
In order to execute trades in the time required, Petitioner purchased real-time financial information. For its COMPANY A trades, Petitioner acquired the information from CITY B based COMPANY C. The price for real-time market data from COMPANY C was $9,750 per month; however, COMPANY C sold the same information delayed by 15 minutes (delayed data) for $1,250 per month. If Petitioner only wanted the data at the end of the day (historical data), it was available for free on the internet, from other sources for a small fee, and provided by COMPANY C for no additional charge. Because Petitioner needed the market data in real time, it paid COMPANY C $9,750 per month. Each trading day, COMPANY C sent the historical data to Petitioner’s CITY A headquarters approximately one hour after the market closed. The historical data was identical to the real-time data sent to Petitioner’s servers in CITY B and New Jersey. Petitioner used the daily historical data to evaluate its computer programs’ performance and make modifications if necessary. It also archived the historical data for regulatory purposes. Although Petitioner’s CITY A employees could access the real-time data provided to the servers in CITY B and New Jersey, there was a delay.
INDIVIDUAL A testified that Petitioner needed its servers in close proximity to the exchanges because by the time the data could be transmitted to Texas it was essentially worthless for trading purposes. For this reason, the delayed and historical data was of very little value to Petitioner. According to INDIVIDUAL A, the value to Petitioner went to how close to real time information could be obtained and used for decision making activity.
INDIVIDUAL B testified that Petitioner organized segmented its trading activities into business units based on trading locations and functions. For example, there were separate Japanese, Canadian, CITY C, etc. units. Petitioner maintained separate accounts in its general ledger which tracked revenues and expenses from business activities pertaining to specific business units. Each unit made its own decisions, was evaluated separately, had its own profit and loss calculations, and its own accounting.
Source: See Finding of Fact No. 17.
In September 2017, Staff initiated a sales and use tax compliance audit of Petitioner’s business for the period September 1, 2014, through August 31, 2017. Because Petitioner did not make any sales, the auditor only examined Petitioner’s purchases. After reviewing the invoices from COMPANY C, he assessed tax on those sent to Petitioner’s CITY A address as the purchase and Texas use of a taxable information service. Petitioner disagreed and requested an Independent Audit Review. Following that review, Petitioner’s contentions were denied and the assessment upheld.
On December 7, 2018, Staff issued Petitioner a Texas Notification of Audit Results assessing tax on, among other items, the service provided by COMPANY C. The assessment included a late penalty for one untimely filed period and interest accrued to the account. Petitioner timely requested redetermination, contending that the essence of the transaction is speed not an information service. In the alternative, it asserts the trading activity took place OUT-OF-STATE (OOS), not Texas. Finally, Petitioner argues the OOS trading desk constitutes an identifiable segment of business and, per the multi-state benefit rule, the benefit was all outside of Texas. Staff disagreed with each contention and referred the matter to SOAH.
D. Analysis and ALJ Recommendations
Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051. The term “taxable item” includes tangible personal property and taxable services. Id. § 151.010. Information services are among the listed taxable services. Id. § 151.0101(a)(10). Where the contested‑case issue in dispute involves the taxability of a service, Staff must demonstrate, prima facie, that the service is taxable. See, e.g., Comptroller’s Decision No. 111,530 (2015). A prima facie case is one that allows a fact finder to infer the fact at issue and rule in the party’s favor. See Black’s Law Dictionary (11th ed. 2019). If that burden is satisfied, Petitioner must demonstrate by a preponderance of the evidence that that tax was paid, accrued, or assessed on a service in error. See 34 Tex. Admin. Code § 1.26(e). A preponderance of the evidence is the greater weight of the evidence, or evidence that is sufficient to incline a fair and impartial mind to one side of any issue rather than the other. See Black’s Law Dictionary (11th ed. 2019).
Information services are defined, with exceptions not relevant here, as “furnishing general or specialized news or other current information, including financial information” and “electronic data retrieval or research.” Tex. Tax Code § 151.0038(a)(1), (2). The Texas Administrative Code further defines a taxable information service as information that is gathered, maintained, or compiled and made available by the provider of the information service to the public or to a specific segment of industry for consideration. 34 Tex. Admin. Code § 3.342(a)(6). Because information services include financial information, Staff met its prima facie burden to show Petitioner purchased a taxable information service from COMPANY C. Therefore, it is Petitioner’s burden to show by a preponderance of the evidence that the service is nontaxable. See id. § 1.26(e).
Petitioner points to the premium price it paid and argues that what it really purchased was speed, not an information service. Taxability determinations have applied the “essence of the transaction” test when determining the taxability of pure service transactions. See, e.g., Comptroller’s Decision Nos. 112,104 (2016), 109,109 (2015), 105,515 (2013), 104,317 (2012), 48,328 (2011); State Tax Automated Research Document No. 200112592L (2001). The 14th Court of Appeals also opined on this test in Hegar v. CheckFree Services Corp., No. 14-15-00027-CV, 2016 WL 1576414 (Tex. App.–Houston April 19, 2016, no. pet.) (mem. op.). In that case, the appellate court found the trial court properly focused on the “essence of the transaction at issue, rather than simply the involvement of a computer, to determine the nature of the services CheckFree provided.” CheckFree at 12. Likewise, in order to make a determination regarding Petitioner’s claim of error in the audit, the case at bar requires considering not only the technical content of the services but Petitioner’s objective in purchasing the services.
The ALJ finds the essence of Petitioner’s purchases is real-time market data. Market data constitutes a taxable information service and the speed with which the data is provided does not change that finding. Therefore, Petitioner’s first contention should be denied.
Use tax is imposed on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state. Tex. Tax Code § 151.101(a). In the case of a taxable service, Section 151.011(b) defines “use” as “the derivation in this state of direct or indirect benefit from the service.” See 34 Tex. Admin. Code § 3.346(a)(2). The person storing, using, or consuming a taxable item in this state is liable for the tax. Tex. Tax Code § 151.102(a).
Staff has the burden of establishing, prima facie, a basis for imposing use tax. See Comptroller’s Decision No. 30,461 (1994). If Staff demonstrates, prima facie, that a transaction is subject to use tax, it becomes the taxpayer’s burden to prove either by a preponderance of the evidence that Staff is incorrect, or by clear and convincing evidence that the taxable service was exempt from taxation. See 34 Tex. Admin. Code § 1.26(c), (e). In this case, Petitioner’s headquarters were in Texas, 89 of its 94 employees worked in Texas, and the computer programs that received the data were created in Texas. The ALJ finds that Staff met its burden to show the services purchased from COMPANY C were used in Texas; therefore, it is Petitioner’s burden to show audit error. Id.
Petitioner argues the real-time data provided by COMPANY C was not used in Texas. It asserts the only data used in Texas was the historical data used to evaluate its computer programs’ performance, modify those programs if necessary, and archived for regulatory purposes. Furthermore, the evidence shows that although Petitioner’s Texas employees could access the real‑time data, there was a delay, making the data no longer real time.
Staff cites to Comptroller’s Decision No. 44,389 (2008). In that matter, the claimant, a nationwide insurance company doing business in Texas, purchased services that allowed for claims to be submitted electronically to its data center in Florida. The claims were then sent to claimant’s Connecticut office where they were translated, thereby allowing claimant’s other operating systems to read the data. The Comptroller held that:
It is not determinative that [the] services are performed in Florida or that Claimant receives the processed data in Connecticut. … Services that facilitate the efficient administration of Claimant’s Texas insurance plans merely strengthen Claimant’s relationships with Texas employers, Texas healthcare providers, and Texas insured. Claimant’s reputation in the state as a major insurance provider, in turn, leads to additional local business opportunities. Such is the ‘direct or indirect benefit’ derived by Claimant.
Staff argues Texas is Petitioner’s only business location and the computer programs are created in Texas. Additionally, Petitioner’s Texas employees had access to COMPANY C’s data, modified the computer programs based on that data, and the data was sent to CITY A at the end of each day. Finally, Staff asserts that Petitioner received a benefit in Texas because the data allowed Petitioner to make successful trades, creating profit for it and its Texas employees and owners. Given the broad definition of use found in the Tax Code, Petitioner used COMPANY C’s services in Texas. However, the inquiry does not end there.
To the extent an information service is used to support a separate, identifiable segment of a taxpayer’s business (other than general administration or operation of the business) the service is presumed to be used at the location where that part of the business is conducted. 34 Tex. Admin. Code § 3.342(g)(1). If that part of the business is conducted at locations both within and outside the state, the service is not taxable to the extent it is used outside Texas. Id. § 3.342(g)(2). A multistate customer may use any reasonable method for allocation which is supported by business records. Id. Establishing entitlement to the multi-state benefit exemption requires clear and convincing evidence that Petitioner operates in more than one state, and that the purchased service supports a separate, identifiable segment other than general administration or operation of the business. See Comptroller’s Decision Nos. 49,501 (2009), 46,844 (2007), 43,240 (2005).
As set out in Comptroller’s Decision No. 100,939 (2009):
When considering the multi-state exemption[,] the Comptroller has defined an “identifiable segment” as a part of a business that has its own identity apart from, and must perform a function that is separate from, the general administration or operation of the purchaser’s business. To the extent the use of the service cannot be assigned to a separate identifiable segment[,] it is presumed to be used to support the taxpayer’s business generally at the principal place of business, which is deemed to be the place from which trade or business is directed or managed. The existence of a separate, identifiable segment must be demonstrated by evidence of the organizational structure of the business, and any allocation of charges must be supported by taxpayer books and records. [Internal citations omitted.]
Petitioner’s evidence indicates that the information services are “used” outside of Texas in only the most literal sense. Such literal use cannot supplant the definition of “use” of a taxable service set out in Tex. Tax Code § 151.011(b), which only requires the derivation in Texas of a direct or indirect benefit from the service. The services at issue support Petitioner’s stock and financial instrument trading, which it manages and directs from Texas, and thus benefit Petitioner in Texas. See, e.g., Comptroller’s Decision No. 44,389 (2008); Findings of Fact Nos. 2, 5, 6, 10, and 14; Conclusions of Law Nos. 22, 23. The evidence does not show that the COMPANY A trading group or servers perform a function that is separate from the general administration or operation of Petitioner’s business, i.e., trading stocks and other financial instruments. See Finding of Fact No. 1. Further, finding that tangible personal property alone, such as Petitioner’s rented out-of-state server space, creates a separate, identifiable segment of a business is not supported by law or precedent.
Because the COMPANY A trading group does not perform a separate function from the general operation of Petitioner’s business, it is not considered a “separate, identifiable segment” of Petitioner’s business for purposes of the multi-state benefit exemption set out in 34 Tex. Admin. Code § 3.342(g). Thus, because the information services at issue cannot be assigned to a separate, identifiable segment of Petitioner’s business, they are presumed to support Petitioner’s business generally at Petitioner’s principal place of business, which is deemed to be the place from which trade or business is directed or managed. See 34 Tex. Admin. Code § 3.342(g); see also, e.g., Comptroller’s Decision No. 100,939 (2009). Petitioner’s principal place of business, where it manages and directs the stock and financial instrument trading, is in Texas. See Findings of Fact Nos. 2, 5, 6, 10, 13, and 14. Because the information services at issue are deemed to support Petitioner’s business generally, at its Texas location, use tax was properly assessed and the audit is upheld without change. See Tex. Tax Code §§ 151.011(b); 151.101.
Petitioner’s evidence shows it segmented its trading activities into business units based on trading locations and functions. Each segment tracked revenues and expenses independently from the other segments, made its own decisions, was evaluated separately, had its own profit and loss calculations, and had its own accounting. The ALJ finds Petitioner’s COMPANY A trading group was a separate, identifiable segment of its business and the real-time data purchased from COMPANY C supported this segment. In addition, this segment’s business was trading on the COMPANY A via servers located outside Texas. The ALJ also finds this part of Petitioner’s business was conducted outside of Texas and the multi-state benefit exemption applies. Furthermore, Petitioner’s evidence supports allocating the real-time financial data purchases outside of Texas. Therefore, the COMPANY C invoices should be removed from the audit.
III. FINDINGS OF FACT
1. During the period at issue, ************** (Petitioner) traded stocks and other financial instruments on exchanges throughout the world.
2. Prior to being acquired by an unrelated entity in September 2017, Petitioner was headquartered in CITY A, Texas where 89 of its 94 employees worked.
3. Petitioner’s business model was based on high-speed, real-time, high-frequency trading. To facilitate these trades, it leased server space in very close proximity to trading exchanges.
4. In order to trade on COMPANY A, Petitioner leased server space in the same building as COMPANY A and in New Jersey.
5. Petitioner did not maintain any personnel in CITY B.
6. Primarily from its CITY A office, Petitioner developed computer programs containing algorithms and trading methods. It loaded these programs onto its servers near the various exchanges.
7. Petitioner’s computer programs allowed its servers to make market trades in real time in an automated manner. For example, if the server received information that a certain stock was selling for $10 and it was programmed to buy that stock at $10, the server executed a purchase order.
8. The Petitioner’s computer programs utilized real-time market information, made buy and sell decisions, and executed trades in a matter of milliseconds or microseconds.
9. Humans were not involved directly in trading decisions on a daily basis, the computer programs made the decisions.
Source: See Findings of Fact Nos. 10, 14.
10. Petitioner’s employees monitored the trading activity; however, the computer programs generally went unchanged for weeks to months.
11. Petitioner purchased real-time financial information. For its COMPANY A trades, Petitioner acquired the information from CITY B based COMPANY C.
12. The price for real‑time market data from COMPANY C was $9,750 per month; however, COMPANY C sold the same information delayed by 15 minutes (delayed data) for $1,250 per month. If Petitioner only wanted the data at the end of the day (historical data), it was available for free on the internet, from other sources for a small fee, and provided by COMPANY C at no additional charge as part of its service.
13. Each trading day, COMPANY C sent the historical data to Petitioner’s CITY A headquarters approximately one hour after the market closed. The historical data was identical to the real-time data sent to Petitioner’s servers in CITY B and New Jersey.
14. Petitioner used the daily historical data to evaluate its computer programs’ performance and make modifications if necessary. It also archived the historical data for regulatory purposes.
15. Although Petitioner’s CITY A employees could access the real-time data provided to the servers in CITY B and New Jersey, there was a delay.
16. Petitioner needed its servers in close proximity to the exchanges because by the time the data could be transmitted to Texas it was essentially worthless for trading purposes. For this reason, the delayed and historical data was very little value to Petitioner.
Source: Language deleted because the historical data did have value to Petitioner. See Finding of Fact No. 14 (“Petitioner used the daily historical data to evaluate its computer programs’ performance and make modifications if necessary.”).
17. Petitioner organized segmented its trading activities into business units based on trading locations and functions. For example, there were separate Japanese, Canadian, CITY C, etc. units.
Source: Language is substituted to avoid confusion because “segment” and “separate, identifiable segment” are terms of art with respect to the multi-state benefit exemption set out in 34 Tex. Admin. Code § 3.342.
18. Petitioner maintained separate accounts in its general ledger which tracked revenues and expenses from business activities pertaining to specific business units. Each unit made its own decisions, was evaluated separately, had its own profit and loss calculations, and its own accounting.
19. In September 2017, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated a sales and use tax compliance audit of Petitioner’s business for the period September 1, 2014, through August 31, 2017.
20. After reviewing the invoices from COMPANY C, the auditor assessed tax on those sent to Petitioner’s CITY A address as the purchase and Texas use of a taxable information service.
21. Petitioner disagreed with the assessment on the COMPANY C invoices and requested an Independent Audit Review. Following that review, Petitioner’s contentions were denied and the assessment upheld.
22. On December 7, 2018, Staff issued Petitioner a Texas Notification of Audit Results assessing tax on, among other items, the service provided by COMPANY C. The assessment included a late penalty for one untimely filed period and interest accrued to the account.
23. Petitioner timely requested redetermination, and Staff referred the matter to the State Office of Administrative Hearings (SOAH).
24. On September 18, 2020, Staff issued a Notice of Hearing to Petitioner. The notice contained the location, date, and time of the hearing; a statement of the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters asserted, or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.
25. On September 21, 2020, the Administrative Law Judge issued Order No. 1, setting out the pre‑hearing requirements.
26. The hearing convened via Zoom on October 29, 2020.
27. The record closed November 6, 2020.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter pursuant to Texas Tax Code ch. 111.
2. SOAH has jurisdiction over matters related to this hearing, including the authority to issue a proposal for decision with findings of fact and conclusions of law pursuant to Texas Government Code ch. 2003.
3. Staff provided proper and timely notice of the hearing pursuant to Texas Government Code ch. 2001 and Texas Tax Code § 111.009.
4. Texas imposes a tax on each sale of a taxable item in this state. Tex. Tax Code § 151.051.
5. The term “taxable item” includes tangible personal property and taxable services. Tex. Tax Code § 151.010.
6. Information services are taxable. Tex. Tax Code § 151.0101(a)(10).
7. Where the contested‑case issue in dispute involves the taxability of a service, Staff must demonstrate, prima facie, that the service is taxable. See, e.g. Comptroller’s Decision No. 111,530 (2015).
8. A prima facie case is one that allows a fact finder to infer the fact at issue and rule in the party’s favor. See Black’s Law Dictionary (11th ed. 2019).
9. If Staff meets its burden, Petitioner must demonstrate by a preponderance of the evidence that tax was assessed in error. See 34 Tex. Admin. Code § 1.26(e).
10. A preponderance of the evidence is the greater weight of the evidence, or evidence that is sufficient to incline a fair and impartial mind to one side of any issue rather than the other. See Black’s Law Dictionary (11th ed. 2019).
11. Information services are defined, with exceptions not relevant here, as “furnishing general or specialized news or other current information, including financial information” and “electronic data retrieval or research.” Tex. Tax Code § 151.0038(a)(1), (2).
12. The Texas Administrative Code further defines a taxable information service as information that is gathered, maintained, or compiled and made available by the provider of the information service to the public or to a specific segment of industry for consideration. 34 Tex. Admin. Code § 3.342(a)(6).
13. Staff met its prima facie burden to show Petitioner purchased a taxable information service from COMPANY C.
14. Taxability determinations have applied the “essence of the transaction” test when determining the taxability of pure service transactions. See, e.g., Comptroller’s Decision Nos. 112,104 (2016), 109,109 (2015), 105,515 (2013), 104,317 (2012), 48,328 (2011); State Tax Automated Research Document No. 200112592L (2001); Hegar v. CheckFree Services Corp., No. 14-15-00027-CV, 2016 WL 1576414 (Tex. App.–Houston April 19, 2016, no. pet.) (mem. op.).
15. The essence of Petitioner’s purchases is real-time market data.
16. Petitioner did not meet its burden to show the services were nontaxable.
17. Use tax is imposed on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state. Tex. Tax Code § 151.101(a).
18. In the case of a taxable service, “use” is “the derivation in this state of direct or indirect benefit from the service.” See Tex. Tax Code § 151.011(b); 34 Tex. Admin. Code § 3.346(a)(2).
19. The person storing, using, or consuming a taxable item in this state is liable for the tax. Tex. Tax Code § 151.102(a).
20. Staff has the burden of establishing, prima facie, a basis for imposing use tax. See Comptroller’s Decision No. 30,461 (1994).
21. If Staff demonstrates, prima facie, that a transaction is subject to use tax, it becomes the taxpayer’s burden to prove either by a preponderance of the evidence that Staff is incorrect, or by clear and convincing evidence that the taxable service was exempt from taxation. See 34 Tex. Admin. Code § 1.26(c), (e).
22. Staff met its prima facie burden to show the services purchased from COMPANY C were used in Texas.
23. Petitioner did not meet its burden to show the services provided by COMPANY C were not used in Texas.
24. To the extent an information service is used to support a separate, identifiable segment of a taxpayer’s business (other than general administration or operation of the business) the service is presumed to be used at the location where that part of the business is conducted. 34 Tex. Admin. Code § 3.342(g)(1).
25. If that part of the business is conducted at locations both within and outside the state, the service is not taxable to the extent it is used outside Texas. A multistate customer may use any reasonable method for allocation which is supported by business records. 34 Tex. Admin. Code § 3.342(g)(2).
26. Establishing entitlement to the multi-state benefit exemption requires clear and convincing evidence that Petitioner operates in more than one state, and that the purchased service supports a separate, identifiable segment other than general administration or operation of the business. See Comptroller’s Decision Nos. 49,501 (2009), 46,844 (2007), 43,240 (2005).
27. When considering the multi-state benefit exemption, the Comptroller has defined an “identifiable segment” as a part of a business that has its own identity apart from, and must perform a function that is separate from, the general administration or operation of the purchaser’s business. To the extent the use of the service cannot be assigned to a separate, identifiable segment it is presumed to be used to support the taxpayer’s business generally at the principal place of business, which is deemed to be the place from which trade or business is directed or managed. See, e.g., Comptroller’s Decision No. 100,939 (2009).
27.28. Petitioner’s evidence does not demonstrate that confirms the COMPANY A trading group performed a function separate from Petitioner’s general administration or operation and, therefore, was a separate, identifiable segment of its business.
Source: See Conclusions of Law Nos. 27, 29.
28.29. The real-time market data purchased from COMPANY C supported Petitioner’s general business operations of trading stocks and other financial instruments. COMPANY A trading group.
Source: See Findings of Fact Nos. 1, 2, 5, 6, 10, 13, 14, and 15.
29.30. Petitioner did not demonstrate that it operated a separate, identifiable segment of its business near or related to theThe COMPANY A trading segment conducted business outside of Texas.
Source: See Conclusions of Law Nos. 26-29.
30.31. Petitioner’s evidence does not support supports allocating the real-time financial data purchases outside of Texas.
Source: See Conclusions of Law Nos. 27, 29, and 30.
31.32. The invoices from COMPANY C should remain in be removed from the audit.
Source: See Conclusion of Law No. 31.
SIGNED March 30, 2021.
MATT JONES
ADMINISTRATIVE LAW JUDGE
STATE OFFICE OF ADMINISTRATIVE HEARINGS
ENDNOTES:
[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg. For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf
[2] See Tex. Gov’t Code § 2003.101(e) and (f).
[3] Petitioner also used a server in leased space in New Jersey for its COMPANY A trades.