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Texas on taxing data processing services

  • Jul 20, 2017 | Gail Cole

 Best not to mess with taxes in Texas.

Data processing services are, for the most part, subject to sales and use tax in Texas. However, given the ever-evolving nature of technology, it’s sometimes unclear whether a specific service qualifies as a taxable data processing service, a telecommunications service, or something new and different. Businesses wishing to comply with Texas law have several options, including seeking advice from the state, and winging it.

Seek advice from the state

Seeking advice from the state tax authority is a good option. However, it can also be a lengthy one. In April 2015, for example, a California business (Taxpayer) requested guidance from the Texas Comptroller on the taxability of certain cloud-based services and printer usage fees. The answer was issued May 30, 2017.

As explained by the comptroller in a private letter ruling, Taxpayer’s specialized printers are a form of tangible personal property, the rental of which is subject to tax.

The comptroller devotes more attention to the taxability of the cloud-based software texting service provided by Taxpayer. It finds it to be a type of software as a service (SaaS): Customers don’t own the software but instead pay Taxpayer to use it. SaaS is a taxable data processing service in Texas — mostly.

There’s a fun quirk. Although Texas law (Sec. 151.0035) imposes sales tax on the transfer of data processing services and information services, it also exempts 20 percent of the value of those charges from sales tax (Sec. 151.351).

Wing it (and hope for the best)

This is never advisable. In the above example, winging it and choosing not to collect sales tax on the sale of the cloud-based software texting services could lead to negative audit findings, penalties, and interest.

On the other hand, winging it and collecting tax on the charges could lead to the over-collection of tax, disgruntled customers, and a refund nightmare. The Texas Comptroller publication Data Processing Services Are Taxable makes no mention of the 20 percent exclusion.

Automate tax compliance

Of course, there is another option: Using an end-to-end compliance solution that can scale with a growing business.

This is a win-win. It allows businesses to devote less time to sales tax and more time to more profitable business activities, like keeping customers happy. At the same time, automated solutions reduce errors and audit risk. Learn more.

photo credit: TSLAC Represents Texas at the National Book Festival (Washington DC) 9.21.13 via photopin (license)

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
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.