The Texas Comptroller of Public Accounts (Comptroller) took a “members only” approach to determine how revenue derived from website access fees should be sourced to Texas for Texas Franchise Tax apportionment purposes. In Letter No. 201102989L (Feb. 2, 2011), the Comptroller considered the sourcing of revenues derived from a company’s social networking website. The social networking website allowed registered users to pay a flat fee to access the website’s database, publish information, communicate with other users, and utilize and interact with the website’s programs. The Comptroller concluded that such fees were akin to membership fees because customers were charged a flat rate for certain benefits and thus should be sourced to the location of the payor.

Franchise Tax Rule 3.591(e)(17) provides that “membership or enrollment fees paid for access to benefits should be considered gross receipts from the sale of an intangible asset and are apportioned to the legal domicile of the payor.” Thus, such fees would only be included in the company’s sales factor numerator if the legal domicile of the payor is in Texas. This conclusion is similar to that reached by Illinois in General Information Letter No. IT 08-0025 (Aug. 8, 2008), which held that revenues derived from fees collected for membership in an online discount program were properly classified as “intangibles” and should be sourced to the address of the member.

The Comptroller also considered the sourcing of the company’s click-through revenue derived from advertisers. The Comptroller classified this revenue as “service income.” Service income is sourced pursuant to Franchise Tax Rule 3.591(e)(26) to the location where the service is performed. In determining the “location” for click-through revenue, the Comptroller relied on prior guidance—Letter No. 20305904L (May 16, 2003), which held that “gross receipts from click-through advertising are apportioned to . . . the location of the server that provides the link to the customer to purchase the item from the seller.” Accordingly, the sourcing of click-through adverting revenue for Texas apportionment purposes will be based on the location of the online advertiser’s server.

We expect that other states will also begin to issue guidance on the sourcing of various types of e-commerce revenue that may not necessarily fit neatly within traditional sourcing rules and guidelines. So check your Sutherland SALT RSS feeds regularly!