By Nick Kump and Todd Lard

The Texas Comptroller of Public Accounts has issued a private letter ruling finding that a Texas company’s revenue from sales of real-time payment risk and fraud prevention services should be sourced to the location of Taxpayer’s customers. In Texas, receipts from a service are sourced to the location where the service is performed, and in determining where a service is performed, the Ruling notes, “the focus is on the specific, end-product act for which the customer contracts and pays to receive, not on non-receipt producing, albeit essential, support activities” (citing previous Comptroller Decisions). Taxpayer’s customers access Taxpayer’s services by submitting certain information on Taxpayer’s website and then receiving a response within seconds of the submission after Taxpayer’s servers access the databases of third-party vendors. The Comptroller explained that “while the processing of information is essential to the performance of Taxpayer’s service, it is nonetheless a support activity and not the service for which the customers contract.” Instead, Taxpayer’s customers pay to receive Taxpayer’s response at the customers’ location. Therefore, for purposes of the Texas franchise tax, gross receipts from providing that response should be sourced based on the customers’ location. (Tex. Private Letter Ruling No. 201703005L (Mar. 15, 2017) (released May 2017).)