us-tx/regs
34 Tex. Admin. Code § 3.330 — Data Processing Services
(a)
Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.
(1) Data processing service--the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information.
(A) Data processing service includes:
(i) word processing;
(ii) payroll and business accounting data production;
(iii) 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
(iv) 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.
(B) Data processing services do not include:
(i) Internet access service as defined by Tax Code, §151.00394 (Internet access service);
(ii) the transcription of medical dictation by a medical transcriptionist;
(iii) the display of a classified advertisement, banner advertisement, vertical advertisement, or link on an Internet website owned by another person;
(iv) 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
(v) settling of an electronic payment transaction by:
(I) a downstream payment processor or point of sale payment processor or point of sale payment processor that routes electronic payment information to an entity described in subclause (II) or (III) of this clause;
(II) a federally insured financial institution, as defined by Finance Code, §201.101 (Definitions), that is organized under the laws of Texas, another state, or the United States, or an affiliate of the institution;
(III) 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;
(IV) a person who has entered into a sponsorship agreement with an entity described in subclause (II) of this clause for the purpose of processing that entity's electronic payment transactions through a payment card network; or
(V) a person who is engaged in the business of money transmission and required to obtain a license under Finance Code, §152.101 (Money Transmission License Required).
(C) Under its exclusive jurisdiction to interpret taxable services, the comptroller excludes from the definition of "data processing service," 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. The burden is on the taxpayer to demonstrate that the data processing service does not have a separate value and is ancillary to the other service.
(i) If the data processing service is sold for a single charge with another service that does not have a separate value, and the other service is ancillary to the data processing service, the entire charge will be taxable as a data processing service.
(ii) If the data processing service is sold for a single charge with another service that has a separate value, subsection (e) of this section applies.
(iii) In determining whether the data processing service and the other service have separate values, the comptroller will consider whether the services are distinct and identifiable and whether each service is of a type that is commonly provided on a stand-alone basis or commonly provided as an additional service for a greater single charge.
(iv) In determining whether the data processing service is ancillary to another service, or conversely, whether the other service is ancillary to the data processing 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. Other factors may be considered, and the weight of the factors may vary from case to case. The evaluation is based on what the service provider is doing, not on what the customer wants.
(2) Downstream payment processor--A payment processor that acts as an intermediary between a consumer-facing entity that has incurred an outstanding money transmission obligation to a consumer, and the consumer's designated recipient.
(3) Point of sale payment processor--A payment processor that receives funds from a consumer on behalf of a consumer-facing entity that either sells goods or services other than money services or accepts charitable donations.
(4) Settling of an electronic payment transaction--The authorization, clearing, or funding of a payment made by credit card, debit card, gift card, stored value card, electronic check, virtual currency, loyalty program currency such as points or miles, or a similar method. The term does not include charges by a marketplace provider, as that term is defined by Tax Code, §151.0242 (Marketplace Providers and Marketplace Sellers).
(b)
Examples of services that are and are not taxable data processing services.
(1) 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. The service provider's skill, experience, or expertise with payroll documents is not determinative.
(2) 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. The service provider's skill, experience, or expertise with business reports is not determinative.
(3) 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. For example, the use of a computer by a certified accounting firm, enrolled agent, or bookkeeping firm to produce a financial report or to prepare federal income tax or state franchise or sales tax returns is not taxable data processing services.
(4) 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. The service provider's skill or experience with title or loan documents is not determinative. 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.
(5) 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.
(6) Internet hosting, as defined by Tax Code, §151.108 (Internet Hosting), 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. An example is 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.
(7) Streaming video subscriptions are taxable as a cable television service but not as data processing services. See also §3.313 of this title (relating to Cable Television Service and Bundle Cable Service).
(8) Streaming video game subscriptions are taxable as an amusement service but not as data processing services. See also §3.298 of this title (relating to Amusement Services).
(9) The compilation of information that the service provider acquires from unrelated third parties through nontaxable opinion polls and surveys as described by §3.342 of this title (relating to Information Services) 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.
(10) 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 §3.342 of this title (relating to Information Services) 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.
(11) Data migration services that transfer data from one storage device to another storage device is taxable data processing.
(12) 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.
(c)
Imposition of tax, permits.
(1) State sales and use tax and any applicable local sales and use tax are imposed on each sale or use of a data processing service in Texas.
(2) Except for small remote sellers described in §3.286(b)(2)(B) of this title (relating to Seller's and Purchaser's Responsibilities), a seller of data processing services must obtain a Texas sales and use tax permit and collect and remit tax on charges for data processing services, or accept properly completed resale, exemption, or direct pay permit certificates in lieu of collecting tax. See §3.285 of this title (relating to Resale Certificate; Sales for Resale); §3.287 of this title (relating to Exemption Certificates); §3.288 of this title (relating to Direct Payment Procedures and Qualifications).
(3) A charge for data processing services is taxable regardless of the ownership of the computer or whether the data is provided by the customer or the customer's authorized designee.
(4) Twenty percent of the total amount charged for data processing services is exempted from tax. If the data processing service is also taxable as another type of taxable service other than an information service, the twenty percent exemption does not apply.
(d)
Resale certificates.
(1) Providers of data processing services may issue a resale certificate in lieu of tax to suppliers of tangible personal property only if care, custody, and control of the property is transferred to the client. For example, a service provider purchases a Universal Serial Bus (USB) drive to transfer the results of data processing services to customers. The USB drive is transferred to the customer, and the customer owns and uses the USB drive to review the results of the data processing service. The service provider may purchase the USB drive tax free by issuing a resale certificate. Tax is due on the total amount charged the customer, including amounts for the USB drive and for the services.
(2) A resale certificate may be issued for a service if the buyer intends to transfer the service as an integral part of taxable services. A service will be considered an integral part of a taxable service if the service purchased is essential to the performance of the taxable service and without which the taxable service could not be rendered.
(3) A resale certificate may be issued for a taxable service if the buyer intends to incorporate the service into tangible personal property which will be resold. If the entire service is not incorporated into the tangible personal property, it will be presumed the service is subject to tax and the service will only be exempt to the extent the buyer can establish the portion of the service actually incorporated into the tangible personal property. If the buyer does not intend to incorporate the entire service into the tangible personal property, no resale certificate may be issued, but credit may be claimed at the time of sale of the tangible personal property to the extent the service was actually incorporated into the tangible personal property.
(e)
Nontaxable related services.
(1) A service will be considered as a nontaxable related service if:
(A) it is neither a data processing service, nor a service taxed under other provisions of the Tax Code, Chapter 151;
(B) each of the services provided are of a type which are commonly provided on a stand-alone basis; and
(C) the performance of the service is distinct and identifiable. Examples of such a service would be consultation, development of and preparation of feasibility studies, design and development, or training.
(2) Where nontaxable related services and taxable services are sold or purchased for a single charge and the portion relating to taxable services represents more than 5.0% of the total charge, the total charge is presumed to be taxable. The presumption may be overcome by the data processing service provider at the time the transaction occurs by separately stating to the customer a reasonable charge for the taxable services. However, if the charge for the taxable portion of the services is not separately stated at the time of the transaction, the service provider or the purchaser may later establish for the comptroller, through documentary evidence, the percentage of the total charge that relates to nontaxable related services. The service provider's books must support the apportionment between exempt and nonexempt activities based on the cost of providing the service or on a comparison to the normal charge for each service when provided alone. If the charge for exempt services is unreasonable when the overall transaction is reviewed considering the cost of providing the service or a comparable charge made in the industry for each service, the comptroller will adjust the charges and assess additional tax, penalty, and interest on the taxable services.
(3) Charges for services or expenses directly related to and incurred while providing the taxable service are taxable and may not be separated for the purpose of excluding these charges from the tax base. Examples would be charges for meals, telephone calls, hotel rooms, or airplane tickets.
(f)
If both the data processing service provider and the customer are located in Texas, Texas tax is due.
(g)
Determining the incidence of the tax.
(1) With respect to a taxable service, "use" means the derivation in Texas of direct or indirect benefit from the service.
(2) The sale of a data processing service that is delivered in Texas is presumed to be a sale for storage, use, or consumption in Texas until the contrary is established.
(3) A data processing service performed in Texas is subject to Texas sales tax unless an exemption applies.
(A) A data processing service performed in Texas for use entirely outside of Texas is exempt from sales tax.
(B) A data processing service performed in Texas for use both within and outside of Texas is exempt to the extent that the service is used outside Texas.
(4) A data processing service performed outside of Texas is subject to Texas use tax to the extent that the service is for use in Texas, unless an exemption applies.
(5) A purchaser of a data processing service performed outside of Texas for use in Texas may claim a credit for a similar tax paid in another state if that state provides a similar credit for a taxpayer in Texas.
(6) A purchaser asserting the use of a data processing service at its business locations in multiple states may issue to the service provider a form promulgated by the comptroller, or a substantially similar document that asserts the purchaser's concurrent multistate business use and represents that the purchaser will report and pay the state and local tax on the portion that is taxable and is not exempt.
(A) The multistate purchaser may use a reasonable and consistent method supported by its business records to allocate the service between its business locations.
(B) A service provider that accepts a multistate use certificate in good faith is relieved of responsibility for collecting and remitting Texas state and local sales and use taxes on transactions subject to the certificate.
(h)
Local taxes.
(1) Local sales tax is due in a local jurisdiction where the sale is consummated. The sale may be consummated at a place of business of the seller where the order is received, a place of business of the seller where the order is fulfilled, or at the location to which the service is delivered. See §3.334 of this title (relating to Local Sales and Use Taxes).
(2) Local use tax may also be due in a local jurisdiction where a direct or indirect benefit from the service is derived if the 2.0% local tax cap has not been exceeded. See also §3.334 of this title.
(3) An in-state customer purchasing data processing services for the benefit of locations in more than one local taxing entity is responsible for issuing to the data processing service provider an exemption certificate claiming a multi-city benefit and for determining the extent of benefit for each entity. The local use tax for each entity must be reported, allocated, and paid by the customer. A data processing service provider that accepts in good faith an exemption certificate claiming a multi-city benefit is relieved of responsibility for collecting and remitting local tax on transactions to which the certificate relates.
(i)
Use tax. The customer is responsible to report and pay use tax if the service provider:
(1) is not required to collect and remit the sales or use tax; or
(2) does not collect the correct amount of sales or use tax.
Source Note: The provisions of this §3.330 adopted
to be effective June 16, 1988, 13 TexReg 2753; amended to be effective
November 13, 1989, 14 TexReg 5786; amended to be effective February
28, 1991, 16 TexReg 987; amended to be effective March 23, 1995, 20
TexReg 1749; amended to be effective August 24, 2000, 25 TexReg 8048;
amended to be effective April 2, 2025, 50 TexReg 2226.
Source: official text