April 29, 2022
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RE: Private Letter Ruling No. PLR20200303153929
Dear **************:
We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Feb. 25, 2020 and additional information received on April 12, 2020 and Sep. 24, 2021. In accordance with Rule 3.10, Taxpayer Bill of Rights, the Comptroller will provide detrimental reliance relief to ************** (Taxpayer).
You requested guidance on the taxability of Taxpayer’s payment card management program.
Facts Presented
Taxpayer offers a payment card management program (PCM Program) among its services. The PCM Program offers customers, such as food delivery services, the ability to manage and customize debit and prepaid cards used in their business.
The PCM Program allows customers to establish their own business rules to deny or authorize transactions initiated through payment cards used by customers’ employees. It allows customers to customize cards with spend controls that limit users by restricting spending amounts, locations, and frequencies.
Taxpayer does not have the authority to issue payment cards. Taxpayer contracts with issuing banks that have regulatory approval to issue payment cards to Taxpayer’s customers in the PCM Program.
Taxpayer also works with the issuing banks and payment card networks to authorize, process, and settle its customers’ card transactions. Issuing banks sponsor Taxpayer’s access to card networks.
Taxpayer is subject to the same regulatory authority governing the issuing banks and the payment card networks. This includes being subject to audit examination and regulatory enforcement actions initiated against Taxpayer.
Taxpayer is subject to standards set by several card associations, including the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a data security benchmark obligating companies that process, store, or transmit payment card information to maintain security measures designed to protect cardholder data. Taxpayer could be subject to fines or penalties if applicable card association rules are not followed.
When a card under the PCM Program is presented at a retailer to make a purchase, the card network sends a request to the Taxpayer for transaction authorization. Taxpayer reviews the limitations set by their customers and either approves or declines transactions based on the limitations. For authorized transactions, Taxpayer transmits settlement information to release the appropriate funds.
Taxpayer’s tiered fee schedule is based on transaction volume. Customers with a low volume of transactions are charged a monthly lump sum management fee. As transaction volume increases, the fixed monthly fee is phased out, and Taxpayer solely earns its revenue from interchange fees. The interchange fees are a percentage of the value of each transaction that Taxpayer earns through its agreements with the issuing banks. As transaction volume further increases, Taxpayer shares some of the interchange fee revenue with customers.
Question, Ruling, and Analysis
A restatement of your question is shown below followed by our ruling and analysis.
Question: Is the PCM Program a taxable data processing service?
Ruling: Taxpayer’s PCM Program is a nontaxable payment processing service.
Analysis: Sales or use tax is imposed on the sale or use of each taxable item in this state. Sections 151.051 (Sales Tax Imposed) and 151.101 (Use Tax Imposed). A taxable item is comprised of both tangible personal property and taxable services. Section 151.010 (Taxable Item). The term “taxable services” only applies to services listed in Section 151.0101 (“Taxable Services”). Data processing services are enumerated as taxable services under Section 151.0101(a)(12).
Data processing includes word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation. Section 151.0035 (Data Processing Services). Rule 3.330(a)(1) (Data Processing Services), states data processing includes, “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.”
Senate Bill 153, 87th legislature (2021) clarified that the processing of an electronic payment transaction is not data processing. Under Section 151.0035(c)(3), the settling of an electronic payment transaction includes the authorization, clearing, or funding of a payment made by credit card or debit card. Section 151.0035(b)(3)(D) states that data processing does not include settling of an electronic payment transaction by a person who has entered into a sponsorship agreement with a federally insured financial institution for the purpose of settling that entity’s electronic payment transactions through a payment card network.
Taxpayer maintains sponsorship agreements with issuing banks and card networks to facilitate its PCM Program. Taxpayer does not have regulatory authority to issue payment cards and must maintain these agreements with the banks who issue the cards to Taxpayer’s customers. These agreements allow Taxpayer to access the card networks to receive and transmit authorization and settlement information for transactions.
Because Taxpayer is sponsored by issuing banks to settle electronic transactions pursuant to Section 151.0035(b)(3)(D) and authorizes payment card transactions per Section 151.0035(c)(3), its PCM Program is a nontaxable payment processing service.
Sincerely,
Tax Policy Division – Indirect Taxes
Texas Comptroller of Public Accounts
ENDNOTE
[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.