A taxpayer’s provision of website development, e-commerce technology, and fulfillment services was properly subject to Texas sales and use tax since the services qualified as taxable data processing services. The Tax Division had determined that the taxpayer was providing taxable data processing services without charging sales tax on its sales and issued an assessment for additional taxable sales. The taxpayer contended that the disputed transactions are not related to website development and maintenance and are therefore exempt. The taxpayer’s services included receiving its customers’ electronic data, processing the data into required formats for the purpose of compiling and providing records of transactions (data manipulation), and retrieving information.
In Texas, a taxable data processing service “includes 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 Administrative Law Judge (ALJ) found that the evidence was sufficient to establish that the taxpayer was performing taxable data processing services and that the Tax Division met its burden in establishing the taxability of the services. The ALJ found that the scope of the services the client received reflect the object of the transactions. The services at issue did not merely gather and furnish customer’s data. Clients purchased services that not only established the means of retrieval of the client’s data and orders, but processed the received information for the purpose of compiling and producing records of transactions, maintained information, and entered and retrieved information. The taxpayer used this information to fulfill orders per the client’s specifications. The taxpayer failed to prove by a preponderance of the evidence that the audit was erroneous or rebut the Tax Division’s determination regarding the taxability of the services. As such, the taxpayer’s protest was denied, and the services were properly determined to be subject to Texas sales and use tax. This decision demonstrates the importance of understanding state law as well as clearly defining the services provided in contracts and invoices and separately stating services that qualify as exempt. (Decision, Hearing No. 115,819, Texas Comptroller of Public Accounts, June 10, 2020)