201107196H

SOAH DOCKET NO. 304-11-3540.26 CPA HEARING NO. 104,366 RE: ************* TAXPAYER NO.: ************* AUDIT OFFICE: ************* AUDIT PERIOD: October 1, 2004 THROUGH July 31, 2008 Limited Sales, Excise, And Use Tax/RDT BEFORE THE COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS SUSAN COMBS Texas Comptroller of Public Accounts ANGELA KOKE Representing Tax Division ************* Representing Petitioner COMPTROLLERS DECISION ************* (Petitioner) was examined for sales tax compliance by the Texas Comptroller of Public Accounts (Comptroller) and assessed tax, penalty, and interest on its sales of information services. Upon redetermination, the following issues were presented: (1) whether Petitioners services are more properly characterized as information services or as data processing services; and (2) if the services are information services, whether they qualify as nontaxable proprietary information services. In his Proposal for Decision, the Administrative Law Judge (ALJ) finds that Petitioners services were information services and that they qualify as proprietary information services. The ALJ recommends that the tax, penalty, and interest assessed on Petitioners sales of information services be dismissed. I. PROCEDURAL HISTORY, NOTICE & JURISDICTION On March 3, 2011, Comptroller Staff (Staff) referred the case to the State Office of Administrative Hearings. A hearing convened before ALJ Alvin Stoll on April 12, 2011. The Comptroller was represented by Assistant General Counsel Angela Koke. Petitioner was represented by ************* and INDIVIDUAL A of COMPANY. The ALJ closed the record at the conclusion of the hearing. There are no contested issues of notice or jurisdiction and those matters are set out in the Findings of Fact and Conclusions of Law without further

discussion here. II. REASONS FOR DECISION A. Evidence Submitted Staff submitted the following exhibits: (1) Certified 60-Day Letter; (2) Texas Notification of Exam Results; (3) Business Activity Research Team (BART) Documentation; (4) Texas Notification of Amended Exam Results and supporting documentation; (5) Independent Audit Review Report; and (6) Lead Generation Agreement. Staff called as a witness David Paniagua of BART. Petitioner submitted the Lead Generation Agreement, a List of Tiers, Selected Customer Communications, sample website pages, and a PowerPoint Presentation presented at the Independent Audit Review Hearing. Petitioner called as a witness its Chief Executive Officer, INDIVIDUAL B. All exhibits of both parties were admitted without objection. B. Background Petitioner is a Nevada Corporation with its principal place of business in CITY, Texas. Petitioner describes itself as a marketing firm that engaged in the business of online lead generation for clients who are dating services. [ENDNOTE:(1)] During the examination period of October 1, 2004, through July 31, 2008, Petitioner gathered information from potential customers or candidates for dating services. Petitioner then sold the information to the client for whom it was obtained. Petitioner had numerous clients and approximately eight of them were located in Texas during the examination period. The process of gathering information and data began when Petitioner placed advertisements on the internet, on Facebook pages, or on other media. Petitioner employed an advertising strategy whereby its advertisements were targeted towards potential candidates based on their age, income, or interests. Interested potential candidates who were drawn to Petitioners websites were asked to complete an online form. The candidates provided data such as name, address, zip code, telephone numbers, occupation, income, marital status, and e-mail addresses. They also provided information regarding their preferences as to potential partners, religion, marriage and children, and other personal information. The candidates were on notice from information on the websites that the information would be forwarded to a dating service and that the candidates might be contacted by a dating service. After the candidates completed the online forms, Petitioner evaluated the candidates based on their location, income, relationship interests, and other characteristics. Petitioner also screened the information to detect duplications, fictitious names or jokes, telephone numbers, or other data that could not be confirmed. The information obtained from the candidates was electronically entered, maintained, and stored on computer server space provided by Petitioner. However, the information was immediately sold to the particular client for whom it was gathered. Information regarding potential dating candidates is time sensitive and quickly loses its value if not sold. [ENDNOTE:(2)] Under the agreements between Petitioner and its clients, Petitioner received a fee for each qualified lead that it generated. The amount of the fees depended upon the tier of the qualified lead and ranged from $************* to

$************* or more per lead. Petitioner electronically transferred the information regarding each qualified lead to the client for whom it was gathered. Once Petitioner sold the information regarding a particular lead, it could not resell the same information to another client. The Lead Generation Agreement that was submitted contained the following provision: Exclusivity of Leads. [Petitioner] guarantees that it will not resell leads generated on behalf of [Client A] to another company and that [Client A] will have exclusive rights to said leads. Notwithstanding, [Client A] understands that [Petitioner] may generate leads for another company and cannot control a person that fills out a lead for both firms. [ENDNOTE:(3)] All of Petitioners agreements with its clients contained identical or similar terms. [ENDNOTE:(4)] BART reviewed Petitioners activities and determined that Petitioner performed taxable information services in Texas and that sales tax was due on the receipts that Petitioner received as fees from its clients. By Texas Notification of Amended Exam Results dated August 19, 2010, tax of $*************, a 10% penalty, and accrued interest was assessed. C. Analysis and Recommendation 1. Information Services or Data Processing Services Tax was initially assessed based on the premise that Petitioner performed information services that are taxable under TEX. TAX CODE ANN. Section 151.0101(a)(10) and 151.0038. That was the stated basis for taxability during the examination period, at the Independent Audit Review Conference, and in Staffs Position Letter. In its Response of December 17, 2010, Staff for the first time stated the alternative position the Petitioner performed data processing services that are taxable under TEX. TAX CODE Section 151.0101(a)(12) and 151.0035. At the hearing, Staff took the position that Petitioners services are primarily taxable as data processing services and only secondarily taxable as information services. Both information services and data processing services are taxable services that are taxable at 80% of the value of the services performed. TEX. TAX CODE Section 151.351. The only tax consequence that flows from the distinction between the two types of taxable services is the availability of an exclusion from tax for certain proprietary information services. The sale of information that is gathered or compiled on behalf of a particular client is not subject to tax if the information is of a proprietary nature to that client and may not be sold to others by the person who gathered or compiled the information. 34 TEX. ADMIN. CODE Section 3.342(a)(5)(A). There is no corresponding exclusion for data processing services. Therefore, since Petitioner claims the exclusion for proprietary services, it is first necessary to determine whether Petitioner performed information services, or data processing services, or some combination of the two, or both at the same time. Information services are defined, with exceptions not relevant here, as furnishing general or specialized news or other current information, including financial information. TEX. TAX CODE Section 151.0038(a). Information services are also defined as electronic data retrieval or research. TEX. TAX

CODE ANN Section 151.0038(a)(2). Petitioner obtained packets of data and information regarding candidates for dating services, screened and evaluated the information, and then sold the data and information to dating services. This activity can be accurately characterized in the statutory terms as providing specialized or current information. Indeed, the Comptroller has considered similar activities as constituting information services. SEE, E.G., State Tax Automated Research System (STAR) Document No. 9104L1099C01 (April 8, 1991) (sale of market leads to insurance agents and home remodelers is a sale of information services) STAR Document No. 9307L1247G10 (July 7, 1993) (providing market leads prepared for a particular client was an information service). The statutory definition and the prior Comptroller letter rulings indicate that Petitioners services are properly classified as information services. Staff nevertheless contends that Petitioners services are more accurately characterized as data processing services because Petitioner utilized electronic means to obtain, store, and transmit the information. Data processing services 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. TEX. TAX CODE Section 151.0035. Staff contends that Petitioner performed data processing by retrieving, compiling, and manipulating the data obtained from potential candidates on its website, and by storing that data on its electronic servers. Staff correctly points out that an activity may be data processing even though the data that is processed is not obtained from the client for whom the service is performed but, as is the case here, from third parties. SEE, E.G., COMPTROLLERS DECISION NO. 29,110 (1992). However, a service is not transformed into data processing simply because electronic or computerized applications are involved. Data processing does not include the use of a computer by a provider of other services when the computer is used to facilitate the performance of the service. 34 TEX. ADMIN. CODE Section 3.330(a)(1). In the context of data processing utilized in connection with nontaxable services, a taxpayer who provided student loan origination services for lenders performed nontaxable account billing, collection and management services, even though electronic or computerized applications were used to approve loan applications, respond to inquiries from loan applicants, disburse loan proceeds, update accounts, and to provide reports to lenders. STAR Document No. 200109442L (September 6, 2001). The same analysis applies to Petitioners use of electronic and computerized applications to facilitate the performance of taxable information services. Petitioners clients wished to obtain current marketing leads for prospective customers of dating services. The clients agreed to pay Petitioner fees based upon the number of leads provided. Petitioner utilized electronic and computerized applications to obtain the marketing leads, to evaluate and verify them, and to transmit them to the clients. But that was only the means by which the information services were performed. The clients did not bargain for the performance of data processing services and there were no separately stated fees for data processing. For those reasons, the ALJ concludes that the fees Petitioner received were for providing information services.

2. Proprietary Information The next question is whether Petitioner sold nontaxable proprietary information as provided for in 34 TEX. ADMIN. CODE Section 3.342(a)(5)(A). To qualify under this provision, the information: (1) must be gathered or compiled on behalf of a particular client; (2) must be of a proprietary nature to that client; and (3) and may not be sold to others by the person who gathered or compiled the information. The first requirement, that Petitioner obtained marketing leads for particular clients, is supported by the evidence and does not appear to be directly disputed. [ENDNOTE:(5)] With regard to the second requirement, Comptroller decisions and taxability rulings have held that information cannot be considered proprietary when it is gathered from public sources or public records. COMPTROLLERS DECISION No. 28,018 (1991); STAR Document No. 200709611L (September 28, 2007). Staff contends that much of the information that Petitioner gathered, such as names, addresses, and telephone numbers, are generally available. While such information may be publicly available to varying degrees, it is not valuable in and of itself. The information constitutes a marketing lead only when it is coupled with the dating preferences of a candidate who wishes to obtain dating services. That information by its very nature is private and was submitted in confidence by the candidates. Petitioner did not gather the information in the marketing leads from public sources or records. For the information to be of a proprietary nature, the client must also have an enforceable property right in the information such that the client could prevent the service provider from selling it to another party. COMPTROLLERS DECISION No. 28,018. That requirement is met in this case. Under Petitioners agreements with its clients, the clients paid a fee for each marketing lead, they obtained exclusive rights to the marketing leads in return, and Petitioner guaranteed that it would not resell the leads to other persons. The third and last requirement, that the information may not be resold to others, overlaps to some extent with the second requirement. Staff emphasizes prior Comptroller letter rulings that state information services may be taxable even when the sale is limited to a particular client. SEE, E.G., STAR Document No. 9307L1247G10. This of course is correct since all of the requirements must be met before the information is considered proprietary. Staff further contends that Petitioner could resell the same information if a particular candidate submitted the information during a succeeding marketing campaign for another client. The exclusivity clause in Petitioners agreements recognized that a potential candidate may fill out successive forms. Petitioner responds that its clients wish to purchase new and unique marketing leads. For that reason, Petitioner screens each lead to ensure that it is not a duplicate and that it was not previously sold to that client. Petitioner cannot guarantee that a candidate will not in the future submit information as a marketing lead for a different client. Petitioner contends, however, that a future lead would be a new and different packet of information, since the particular facts regarding a candidate, such as location, eligibility, and dating preferences, change over time. The ALJ concludes that Petitioners position is supported by a preponderance of the evidence. Once Petitioner sold a marketing lead, its agreements with the clients prohibited it from using the same information to prepare a marketing lead for another client. Petitioners facts are distinguishable from prior

policy letters in which exemption was denied. SEE, E.G., STAR Document No. 9109L1130D05 (September 12, 1991) (seller of information service may not use the same information to compile a report for another client). The marketing leads were current information that lost their value over time and the collection of similar information from the same candidate in the future constituted a new lead. The information that Petitioner sold met all the requirements for nontaxable proprietary information in 34 TEX. ADMIN. CODE Section 3.342(a)(5)(A) and the tax assessed on the sales of nontaxable information services should be deleted from the audit. III. FINDINGS OF FACT 1. ************* (Petitioner) was examined for sales and use tax compliance by the Texas Comptroller of Public Accounts (Comptroller) for the period October 1, 2004, through July 31, 2008, and assessed a tax deficiency. Petitioner timely requested redetermination. 2. Comptroller Staff referred the case to the State Office of Administrative Hearings and issued a Notice of Hearing that contained a statement of the nature of the hearing; the date, time, and place of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the matters asserted. 3. Petitioner is a marketing firm engaged in the business of online lead generation for clients who are dating services. During the examination period, Petitioner gathered information from potential customers or candidates for dating services. Petitioner then sold the information to the client for whom it was obtained. 4. Petitioner had numerous clients and approximately eight of them were located in Texas during the examination period. 5. The process of gathering information began when Petitioner placed advertisements on the internet, on Facebook pages, or on other media. Petitioner employed an advertising strategy whereby its advertisements were targeted towards potential candidates based on their age, income, or interests. Interested potential candidates who were drawn to Petitioners websites were asked to complete an online form. The candidates provided data such as name, address, zip code, telephone numbers, occupation, income, marital status, and e-mail addresses. They also provided information regarding their preferences as to potential partners, religion, marriage and children, and other personal information. 6. After the candidates completed the online forms, Petitioner evaluated the candidates based on their location, income, relationship interests, and other characteristics. Petitioner also screened the information obtained from each customer to detect duplications, fictitious names or jokes, telephone numbers, or other data that could not be confirmed. 7. The data obtained from the candidates was electronically entered, maintained, and stored on computer server space provided by Petitioner. The data was immediately sold to the particular client for whom the information was

gathered. 8. Under the agreements between Petitioner and its clients, Petitioner received a fee for each qualified lead that it generated. The amount of the fees depended upon the tier of the qualified lead and ranged from $************* to $************* or more per lead. Petitioner transferred the data and information regarding each qualified lead electronically to the client for whom it was gathered. Once Petitioner sold the information regarding a particular lead, it could not resell the same information to another client. 9. Under the agreements between Petitioner and its clients, Petitioner guaranteed that it would not resell the leads generated on behalf of one client to another client, subject to the understanding that Petitioner could not prevent a candidate from filling out another form with a different client in the future. 10. Any future marketing lead provided by a candidate for a different marketing campaign constituted a new packet of information. IV. CONCLUSIONS OF LAW 1. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE ANN. ch. 111. 2. The State Office of Administrative Hearings has jurisdiction over matters related to the hearing in this matter, including the authority to issue a proposal for decision with findings of fact and conclusions of law pursuant to TEX. GOVT CODE ANN. ch. 2003. 3. The Comptroller provided proper and timely notice of the hearing pursuant to TEX. GOVT CODE ch. 2001 and TEX. TAX CODE Section 111.009. 4. Petitioner sold information services as defined in TEX. TAX CODE Section 151.0038(a). 5. Petitioner used electronic and computerized applications to facilitate the performance of information services. Petitioner was not a seller of taxable data processing services as defined in TEX. TAX CODE Section 151.0035. 6. Petitioners sales of marketing leads were sales of information gathered or compiled on behalf of a particular client, were of a proprietary nature to that client, and could not be sold to others by as provided for in 34 TEX. ADMIN. CODE Section 3.342(a)(5)(A). 7. Petitioner met its burden of proof under 34 TEX. ADMIN. CODE Section 1.40(2)(B) to establish by a preponderance of the evidence that its sales of information services were not taxable. 8. Based on the foregoing Findings of Fact and Conclusions of Law, the tax, penalty, and interest assessed on Petitioners sales of marketing leads should be deleted from the audit.

Hearing No. 104,366 ORDER OF THE COMPTROLLER On April 19, 2011, the State Office of Administrative Hearings (SOAH) Administrative Law Judge (ALJ), Alvin Stoll, issued a Proposal for Decision in the above referenced matter. The parties were given fifteen days from the date of the Decision to file exceptions with SOAH. No exceptions were filed, and the Comptroller has determined that the ALJs Proposal for Decision, except for minor changes to correct typographical or clerical errors, should be adopted as written. The above Decision resulting in a credit to Taxpayer as set out in Attachment A, which is incorporated by reference, is approved and adopted in all respects. This Decision becomes final twenty days after the date Petitioner receives notice of this Decision. If either party desires a rehearing, that party must file a motion for rehearing, which must state the grounds for rehearing, no later than twenty days after the date Petitioner receives notice of this Decision. Notice of this Decision is presumed to occur on the third day after the date of this Decision. Signed on this 21st day of July 2011. SUSAN COMBS Texas Comptroller of Public Accounts by: Martin A. Hubert Deputy Comptroller ENDNOTE(S) (1) Lead Generation Agreement, Recitals. (2) Testimony of INDIVIDUAL B. (3) Lead Generation Agreement, Paragraph 9. (4) Testimony of INDIVIDUAL B. (5) Lead Generation Agreement; Testimony of INDIVIDUAL B.

ACCESSION NUMBER: 201107196H SUPERSEDED: N DOCUMENT TYPE: H DATE: 07/21/2011 TAX TYPE: SALES