On March 28, 2025, the Texas Comptroller of Public Account (the “Comptroller”) finalized amendments to Rule 3.330, Data Processing Services, for purposes of the Texas sales and use tax.
What Does the Texas Tax Code Say?
The Texas Tax Code (the “Tax Code”) defines data processing as:
- word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation;
- the performance of a totalisator service with the use of computational equipment required by Subtitle A-1, Title 13, Occupations Code (Texas Racing Act); and
- the use of a computer or computer time for data processing whether the processing is performed by the provider of the computer or computer time or by the purchaser or other beneficiary of the service.[1]
However, the Tax Code provides that data processing does not include:
- the transcription of medical dictation by a medical transcriptionist;
- services exclusively to encrypt electronic payment information for acceptance onto a payment card network, described to comply with standards set by the Payment Card Industry Security Standards Council; or
- the settling of certain electronic payment transactions.[2]
In addition, the Tax Code explains that data storage, which is taxable under the general definition of data processing, does not include “a classified advertisement, banner advertisement, vertical advertisement, or link when the item is displayed on an Internet website owned by another person.”[3]
What Does Amended Rule 3.330 Say?
The amended rule generally defines a “data processing service” as the “computerized entry, retrieval, search, compilation, manipulation, or storage of data or information.”[4] The amended rule then goes on to track the definition of “data processing services” found in the Tax Code. Thus, “data processing services” include:
- word processing;
- payroll and business accounting data production;
- the performance of a totalizator service with the use of computational equipment required by Occupations Code, Subtitle A-1, Title 13, (Texas Racing Act); and
- the use of a computer or computer time for data processing whether the processing is performed by the provider of the computer or computer time or by the purchaser or other beneficiary of the service.[5]
“Data processing services” do not include:
- Internet access service as defined by Tax Code, §151.00394 (Internet access service);
- the transcription of medical dictation by a medical transcriptionist;
- the display of a classified advertisement, banner advertisement, vertical advertisement, or link on an Internet website owned by another person;
- services exclusively to encrypt electronic payment information for acceptance onto a payment card network that allows a person to accept a specific brand of debit or credit card by routing information and data to settle an electronic payment transaction, to comply with standards set by the Payment Card Industry Security Standards Council; or
- the settling of electronic payment transactions by certain persons.[6]
Where things get more interesting is in the amended rule’s discussion of ancillary services. The previous version of the rule provided that:
[d]ata processing does not include the use of a computer by a provider of other services when the computer is used to facilitate the performance of the service or the application of the knowledge of the physical sciences, accounting principles, and tax laws, e.g., the use of a computer to provide interpretive or enhancement geophysical services or the use of a computer by a CPA firm, enrolled agent, or bookkeeping firm to produce a financial report, prepare federal income tax, state franchise or sales tax returns, or charges for temporary secretarial personnel who as part of their function use word processing equipment.[7]
The amended rule expands on the reasoning behind this exclusion by providing that a “data processing service” does not include “data processing that is sold for a single charge with another service if the data processing service does not have a separate value, and the data processing service is ancillary to the other service.”[8] In determining whether a data processing service is ancillary to another service, the Comptroller may consider:
The extent to which the service provider exercises discretion or judgment in individual applications of the processed data based on knowledge of the physical sciences, accounting principles, law, or other fields of study. The routine or repetitive manipulation of data by the seller is a factor suggesting that the data processing activity is not ancillary to another service and should be taxable as a data processing service. The manipulation of data that depends on the external knowledge and discretionary judgment of the service provider in individual applications suggests that the data processing activity is ancillary to another service and should not be taxable as a data processing service. The provider’s skill, experience, or expertise, in processing data or information, is not a factor. . . . The evaluation is based on what the service provider is doing, not on what the customer wants.”[9]
The rule lists examples of taxable and nontaxable data processing services and the rationale behind their categorization:
- Payroll services, such as maintaining records of employee work time, computing and preparing payroll checks, filing payroll tax returns, and completing pre-printed employee-related forms such as W-2s, are taxable data processing services because they involve the routine and repeated simultaneous application of the same process to different data.[10]
- The production of business accounting data, such as inventory reports, is a taxable data processing service because it involves the routine and repeated simultaneous application of the same process to different data.[11]
- The preparation of financial statements kept in accordance with generally accepted accounting principles is not a taxable data processing service, even though it has elements of data processing, because the categorization and characterization of the data is variable and depends upon the discretion and certified opinion of an accounting professional.[12]
- The insertion of data into form title or loan documents for a client is taxable data processing because it involves the repeated application of the same process to different data.[13]
- The preparation of a title opinion is not included in taxable data processing, even though it has elements of data processing, because the result is solitary and depends upon the opinion or skills of a legal professional.[14]
- Effective October 1, 2025, marketplace provider services may be included in taxable data processing services when they involve the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information provided by the purchaser or the purchaser’s designee (for example, services provided by a marketplace provider to its marketplace seller that store product listings and photographs, maintain records of transactions, and compile analytics are taxable data processing services).[15]
- Internet hosting under Section 151.108 of the Tax Code is a taxable data processing service when the user stores data on the service provider’s hardware, or processes data on software that is owned, licensed, or leased by the user or provider (for example, the provision of servers and operating systems that are used by a customer to store software applications and content that can be accessed by the customer’s customers).[16]
- Streaming video subscriptions are taxable as a cable television service, but not as data processing services.[17]
- Streaming video game subscriptions are taxable as an amusement service but not as data processing services.[18]
- The compilation of information that the service provider acquires from unrelated third parties through nontaxable opinion polls and surveys, as described by Comptroller Rule 3.342, is not a taxable data processing service if the data processing is ancillary to the main service of data acquisition and the data processing does not have a separate value. However, if the service provider acquires and compiles data from the customer or the customer’s designees, and the service provider’s expertise is in managing the data, such as in inventory management, the main service is data processing, and the service is taxable.[19]
- The compilation of nontaxable information primarily derived from the service provider’s laboratory, medical, or exploratory testing or experimentation or any similar method of direct scientific observation of physical phenomena as described by Comptroller Rule 3.342 is not a taxable data processing service if the data processing is ancillary to the main service and the data processing does not have a separate value. Examples may be geophysical surveys, polygraph tests, and the recording and tracking of vital signs in medical treatment.[20]
- Data migration services that transfer data from one storage device to another storage device are taxable data processing.[21]
- Website creation, repair, and maintenance are taxable data processing services when they involve the storage, manipulation, compilation, and entry of data. However, simply developing a blueprint or plan for a website is not data processing services.[22]
Closing Thoughts
If you have any questions about how these amendments may impact your business, don’t hesitate to contact us for a consultation.
[2] Id. § 151.0035(a)(2).
[3] Id. § 151.0035(b).
[5] Rule 3.330(a)(1)(A).
[6] Rule 3.330(a)(1)(B).
[8] Rule 3.330(a)(1)(C).
[9] Rule 3.330(a)(1)(C)(iv).
[10] Rule 3.330(b)(1).
[11] Rule 3.330(b)(2).
[12] Rule 3.330(b)(3).
[13] Rule 3.330(b)(4); see also 50 Tex. Reg. 2228.
[14] Id.
[15] Rule 3.330(b)(5).
[16] Rule 3.330(b)(6).
[17] Rule 3.330(b)(7). For the definition and taxability of cable television services, see Tex. Tax Code § 151.0033 and 34 Tex. Admin. Code § 3.313.
[18] Rule 3.330(b)(8). For the definition and taxability of amusement services, see Tex. Tax Code § 151.0028 and 34 Tex. Admin. Code § 3.298.
[19] Rule 3.330(b)(9).
[20] Rule 3.330(b)(10).
[21] Rule 3.330(b)(11).
[22] Rule 3.330(b)(12); see also STAR Accession No. 202402020L (Feb 20, 2024).
