Ohio Sales / Use Tax: Financial authorization services found to be nontaxable; appealed to Supreme Court.
The Ohio Board of Tax Appeals held that certain financial authorization services, Debit Authorization as described below, are not taxable automatic data processing processing (“ADP) or electronic information services (“EIS”). CheckFree Services Corp. v. Harris, BTA No. 2019-43 (Oct. 10, 2024). These nontaxable authorization services did not involve the service provider, CheckFree Services Corp., processing or accessing any information from the consumer’s financial institution. Rather, CheckFree simply conveyed a transaction request from a vendor’s point-of-sale system or bank ATM to the consumer’s bank and relayed the “Yes” or “No” response from the consumer’s bank back to the requesting equipment to authorize or deny the transaction. As was held in Marc Glassman, Inc. v. Levin, providing a response to an authorization request is nontaxable as long as the service provider is not processing or accessing the customer’s data to formulate the response.
BACKGROUND:
CheckFree claimed a sales tax refund for tax collected and paid on certain financial payment services offered to its customers. Upon denial from the Tax Commissioner, CheckFree appealed to the Ohio Board of Tax Appeals (“BTA”) claiming that its services were nontaxable personal and professional services, rather than taxable automatic data, or computer services.
There were two services at issue on appeal:
- Debit Authorization– This service verifies whether a consumer’s account has sufficient funds to complete ATM or vendor transaction using a debit card. When a consumer attempts to withdraw cash or make a purchase, the vendor or ATM sends a digital transaction request to CheckFree, who relays that request to the consumer’s bank which responds with an approval or denial based upon the consumer’s balance. CheckFree then relays the response to the ATM or vendor to approve or deny the transaction.
- Disbursement Authorization – This service is a bill-payment service which allows a bank’s customers to pay their bills automatically using CheckFree’s proprietary service. Based on a consumer’s requests through CheckFree’s online portal, CheckFree advances the consumer’s bill payments to the applicable vendor, and reimburses itself from the customer’s account, creating a seamless way for customer’s to pay their bills on time.
The charges for these services consist of many different line-item charges that are necessary and integral to providing the services, such as charges for fraud detection, maintenance fees, enrollment fees, and other service fees.
BTA HOLDING:
The Board held that Debit Authorization charges are nontaxable based upon the holding in Marc Glassman, Inc. v. Levin, 2008-Ohio-3819, but that other related charges must be analyzed under the “true object” test to determine whether the true object of each was for nontaxable Debit Authorization Services or taxable ADP or EIS. The BTA further held Disbursement Authorization services did not constitute personal or professional services due to their automated nature, but that each pre-transaction charge must be separately analyzed to determine taxability.
CheckFree has appealed the BTA’s decision to the Ohio Supreme Court. If you have questions regarding this case or how it may impact your sales / use obligations for automated payment services, please contact us.
Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reached at [email protected] or 330.258.6460.
Richard B. Fry III is a partner and Buckingham’s Taxation Practice Group Chair. He focuses on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. Rich can be reached at [email protected] or 330.258.6423
Nathan M. Fulmer is an associate in Buckingham’s Taxation Practice Group. He represents clients on a broad range of tax planning and controversy matters. His joint degree in taxation allows him to provide unique solutions when assisting clients on business matters. Nate can be reached at [email protected] or 330.258.6464.