CheckFree, which offers a variety of financial services in the state of Ohio, brought a refund case before the Board of Tax Appeals regarding services offered by CheckFree, primarily debit authorization, which allows CheckFree to act as an intermediary allowing consumers to access funds in their banks through vendor ATMs, and disbursement authorization, which allows transferring funds from a consumer’s bank account to a specified vendor through the bank or website. Though the level of interaction between consumer, bank, and CheckFree varies depending on whether the client is using debit authorization or disbursement authorization, in both cases, CheckFree performs an analysis to prevent fraud and necessary related services to complete transactions.
CheckFree made a refund application for over two million dollars based on sales and use tax paid between July 1, 2011, and June 30, 2015. The application was justified based on the fact that payment authorization and bill payment services are not specifically taxable services in Ohio and which CheckFree noted as consistent with guidance provided by an Ohio state auditor. Upon receiving this application, the Department of Taxation denied the refund application, which the Commissioner upheld because CheckFree failed to provide sufficient evidence the transactions were for personal or professional services and not a taxable service, such as Automatic Data Processing.
In the appeal, the Commissioner maintained that because transactions include separate components, the true object of each component must be analyzed and that most of the services provided under the CheckFree services are automatic and constitute Automatic Data Processing. Check Free claimed that though the components were billed separately, they were complimentary and essential, further noting the services were not available on their own.
Rejecting CheckFree’s request to consider the items as one and finding there was no “all or nothing” approach to determining taxability, especially when the services were expressed separately, the Board considered each of the service types separately. Since many of these services are automated, the Board rejected the contention they would be personal or professional services, which are performed by people. They found that the debit authorization service and the disbursement service did not allow parties to access other parties’ data, instead it received only a yes or no answer which CheckFree forwarded to the vendor ATM, which could then complete or deny the transaction. Since the additional services offered alongside the authorization services are offered charged separately, the true object of each item needs to be considered, leading to services like the fraud service being considered taxable.
The Board did vacate the final determination, instead remanding the appeal to the Commissioner to determine the true object of each item and assess whether any refund is due. (Case No. 2019-43, CheckFree Services Corporation (et al) vs. Patricia Harris, Tax Commissioner of Ohio (et al), Ohio Bd. of Tax App. 3-0 decision entered 10 October 2024, signed by Kathleen M Crowley, Board Secretary)