Texas Discusses Taxability of Software Advertising Plug-In Transactions

The owner of a software product was liable for Texas sales tax on payments received from companies for a variety of items that the taxpayer claimed were nontaxable advertising services. The taxpayer charged customers for creating or modifying plug-in advertisements contained in the software product. The taxpayer’s software program had a dialogue box that monitored the available storage space on a subscriber’s network. The taxpayer named this function after an advertising sponsor that provided storage serverswhich allowed the advertiser to promote its servers. This was determined to be nontaxable advertising. However, when the sponsor subsequently paid the taxpayer to add a print feature that allowed subscribers to print out the company’s report of available storage, the service then constituted taxable data processingas the advertising intent was complete without the print function. The print function allowed the taxpayer to retrieve and print the information for its subscribers which is data processing. A web-hosting company’s purchase of a plug-in advertisement on the software that allowed subscribers to view their e-mail accounts (on the web-hosting company’s network) while logged into the taxpayer’s software program was held not to be taxable data processing because there was no indication that the taxpayer created or maintained a website or webpage for the web-hosting company or stored data for the web-hosting company on either the taxpayer’s or the company’s website. The taxpayer was simply linking subscribers to data stored on the web-hosting company’s network. However, later charges for monthly fees to maintain the integration to the Cloud Services were deemed taxable data processing services. The taxpayer’s creation of banner ads sponsored by a company did not constitute taxable data processing. The same company’s sponsorship of the taxpayer’s monthly e-mail newsletter would also be nontaxable advertising if the charge was only for the naming rights. However, the taxpayer was sending the newsletter via e-mail, which constituted a taxable e-mail transmissionat the 80% base for taxable data processing. Because the charges for the banner ads and newsletter sponsorship were not separately stated, the entire lump sum was taxable. The taxpayer was determined to be engaged in taxable data processing when it modified its software program to create a security plug-in sponsorship for a company. Monthly fees charged by the taxpayer for notifying a company when a review of one of the company’s products was posted on a public chat room were determined to be charges for taxable information services. The information did not qualify as exempt information of a proprietary nature because the information was not collected from a private source and the taxpayer did not establish that the company had an ownership right to control the use of the information. (Decision, Hearing No. 109,109, Texas Comptroller of Public Accounts, February 6, 2015, released April 2015)

Posted on April 27, 2015