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Texas: Taxable Data Processing Services


 Data processing services are subject to sales tax in Texas.

The Texas Comptroller of Public Accounts has determined that numerous data processing services are subject to sales tax, at least with respect to a particular taxpayer. The State Office of Administrative Hearings concurred.

Digital services v. unrelated services

The taxpayer (or Petitioner) described the services provided as exempt “unrelated services.” Unrelated services are defined under Texas law as “neither a data processing service, nor a service taxed under other provisions of the Tax Code, Chapter 151. These services are “commonly provided on a stand-alone basis,” and are “distinct and identifiable.”

The Petitioner described the services rendered. The company “identifies the intake and storage of client-provided data, and the analysis, manipulation, and interpretation of that data….” This enables the company to produce a finished product. The Petitioner contends that “even though a computer is used in the process, the mere use of a computer to perform the ‘digitizing’ services assessed does not necessarily make the services taxable data processing.”

The Office of the Texas Comptroller disagrees and notes that the services described on the Petitioner’s website are “taxable data processing services pursuant to 34 Texas Admin. Code Section 3.330(b).” These services include the following:

  • Web site design;
  • HTML edit;
  • Web integration;
  • Web site updates;
  • Edit web site;
  • Web site enhancement; and
  • Digitizing, scanning, log reproduction, log scanning, scanning/log copies, scanning digitizing, and scanning archive.

Prove it

Once the comptroller initially establishes, PRIMA FACIE, that a service is taxable, the burden to prove that tax should not be imposed falls upon the taxpayer.

34 Tex. Admin. Code Section 3.330(a)(1) defines data processing services as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. It specifically includes word processing, payroll and business accounting, and computerized data and information storage or manipulation.”

Given the description of services on the Petitioner’s website and descriptions on federal income tax returns, the Comptroller concluded the Petitioner provided taxable data processing services. The Petitioner could not prove otherwise.

Do you sell data processing services into Texas or other states? How well do you know state laws?

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.