Ohio Ruling: Data Authorization Services Exempt from Sales Tax

The Ohio Board of Appeals decided in a case involving the USD 2 million sales and use tax refund request submitted by CheckFree, a subsidiary of Fiserv Inc., a company offering various financial service products. After the Ohio Department of Taxation (ODOT) denied the request, CheckFree appealed, and the Commissioner rejected the appeal. 

As a final resort, CheckFree submitted the appeal to the Board of Appeal, which reviewed all the case facts, and clarified sales and use tax rules and regulations related to the case.

Fact of the Case and Main Issues

Both the ODOT and the Commissioner rejected the CheckFree appeal mainly because they claimed there was not enough evidence to support CheckFree's claim that transactions were not taxable. The services in question were the debit authorization and bill payment services. CheckFree claimed they were not taxable as they were not automatic data processing (ADP), electronic information services (EIS), or computer services.

The Board of Appeal clarified that all retail sales are subject to sales tax, whereas the storage, use, or consumption in this state of tangible personal property and taxable services is subject to use tax unless they are strictly defined as exempt.

Based on the legislation's analysis, the Board of Appeals determined that the true object of CheckFree's services must be determined to decide whether or not they are taxable. The decision states that the service or transaction is not taxable if the true object is data authorization.

Nevertheless, when the buyer and seller agree on a bundle of services, which was the case here, and when records show that they were separately charged, the true object of each item must be evaluated individually and not as a whole.

Since the evidence showed that several services were offered, including data authorization, the Board of Appeals returned the case to the Commissioner to determine the true object and taxability of each service separately. 

Conclusion

Although the Commissioner still needs to evaluate each item and make a new decision on the request for a refund, the Board of Appeals decision provided vital clarification on Ohio's taxability rules for data authorization services.

In addition, this case represents a great example of how sales and use tax rules apply to services offered in bundles and the importance of invoicing those services correctly.

Source: Deloitte, Ohio Board of Tax Appeals