Effective April 2, 2025, the Texas Comptroller of Public Accounts (Comptroller) has adopted amendments to Section 3.330 of Title 34 of the Texas Administrative Code. These amendments aim to clarify the tax implications of data processing services and are designed to align with statutory changes from Senate Bill 153. The changes focus on critical areas such as expanding and updating definitions, clarification on taxable and non-taxable services, new rules for bundled services, and refinement of multi-state allocation rules.
The Comptroller is expanding and clarifying what counts as data processing services. In other words, data processing includes activities like entering, retrieving, or storing information using computers. Specific examples now listed as taxable services include word processing, payroll and business accounting data production, use of computer equipment, and use of computers for data processing. At the same time, outdated examples like “internet access services” were removed as they are no longer taxable under Texas law. Lastly, the update also added new terms like “downstream payment processor” which explains how electronic payment transactions fit into the picture.
The new rules also clarify which services are taxable and which are not. Services that involve routine data handling, such as preparing loan forms, or managing product listings for marketplaces are taxable. Services that focus on professional judgment, such as compiling survey results or lab tests are not taxable. In other words, if the services mostly involve data organizing/handling, then they are taxable. However, if the services involve applying special knowledge, like a doctor interpreting medical tests, then they are often not taxable.
A big change is how the state will treat situations where data processing is bundled with another service. The Comptroller proposed that if the data processing is a small part of another main service and has no separate price, it might be exempt, but if the data processing has its own price or is the main part of the services, then the full services can be taxed. This approach focuses on what the service provider is doing, rather than what the customer wants, and it gives guidance to businesses on how to bill their customers when billing for bundled transactions. Additionally, if the data processing services are sold for one charge with another service that does not have a separate value, and the other service is supplemental to the data processing service, the entire transaction will be taxable. The Comptroller will consider whether the services are distinct and identifiable and whether the individual services are either commonly provided on a stand-alone basis or as an additional service when determining if the data processing services and the other service have separate values.
Lastly, the amendments also explain how businesses that operate in multiple states can handle tax when a data processing service is used both inside and outside of Texas. The rules update how local taxes apply depending on where the service is delivered and used, and businesses can issue certificates to allocate charges fairly, and service providers can rely on those certificates if accepted in good faith.
According to the Comptroller, these changes do not create new taxes or major economic impacts. Instead, the changes make it easier for businesses and tax professionals to follow the rules and apply them fairly and consistently. For businesses that sell or purchase data processing services, understanding these updates is important and such businesses should review these changes to ensure proper tax treatment and compliance.
(Propose Amendments to 34 TAC § 3.330, Data Processing Services, Texas Comptroller of Public Accounts, March 13, 2025)