They say nothing is certain in this life but death and taxes. We’ll need to revise that axiom a bit after a favorable outcome was announced last month for an Insights Association member company in its legal battle against the Texas state comptroller, who sought to collect sales tax on research services.
The Insights Association lent material support in this case, which ended when the Comptroller opted not to proceed to trial in district court.
Forty-five of our 50 states charge sales tax. In each jurisdiction, many factors determine whether tax applies to the sale of a specific good or service. Typically, levies are applied to the sale of tangible personal property. In some instances, they may be excised on certain services. In many states, sales tax applies to data processing and/or information services, but not when the processing or services are so personalized that they could not be shared with or sold to another customer. It is in the categories of data processing and information services that aggressive state tax authorities may attempt to ensnarl marketing research. The critical language is that custom goods and services in these categories are not taxed. Therefore, sales tax is not applied when marketing research is conducted for a single client and the finished product is customized such that it cannot be shared with other clients.
The question at the heart of the issue in the case mentioned above is whether the work product could be shared or re-sold. The timeframe for this legal action was the early 2000s when the CASRO Code was the document governing marketing research company behavior. Therefore, it is referenced below. We argued, along with our member, that custom research is produced exclusively for a single client and disclosure or resale of either the underlying data or intelligence derived from the data would be a violation of the CASRO Code.
The Code requires “Research organizations [to] hold confidential all information that they obtain about a client’s general business operations, and about matters connected with research projects that they conduct for a client.” This duty, to maintain confidentiality about matters connected with a research project conducted on behalf of a client, means that a research company cannot share or re-sell any information, including data, results or conclusions obtained through a project conducted for a client with third parties without violating the Code.
The examples of work provided in this case showed the member company developing custom proposals, collecting data specific to the projects through customized surveys, analyzing data using unique criteria requested by the client, and providing a consultative report that answers business questions and provides action items specific to the client’s objectives. These practices are consistent with providing proprietary market research to a single client. The sharing or re-selling of either the underlying data, or intelligence derived from the data provided to the client would be a clear violation of the CASRO Code. The member’s practices and final work product went far beyond compiling and manipulating generic data. Rather the findings delivered constituted custom intelligence to aid its client in making business decisions.
The CASRO Code – and the new Insights Association Code as well – prohibits members from sharing or re-selling custom research that was undertaken for a single client because it is confidential and proprietary. For the same reasons, sharing or re-selling the underlying data or the insights derived from the data is not tolerated in the industry. The state comptroller appeared to be persuaded by this argument and ultimately agreed to settle the case on terms desirable to the marketing research firm.
While state tax laws and their application by individual state tax authorities vary, the Insights Association is strongly committed to protecting the non-taxable status of custom research. If your company is facing a challenge in this area, please reach out to IA for assistance.
The Insights Association does not provide tax or legal advice. This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or legal advice. You should consult your own tax or legal advisor before acting.