Are Data Processing Services Taxable in Texas? What Businesses Need to Know
Most businesses in Texas depend, to some extent, on digital tools to help them perform more effectively. From accounting systems and payroll to customer relationship management software, cloud storage, and data analytics platforms, these digital services are now essential in modern business. What a lot of business owners do not realize, however, is that many of these services are subject to Texas sales tax. Failing to comply with these rules, either due to ignorance or apathy, can bring about unforeseen penalties, audits, and tax liabilities.
This blog is intended to help Texas businesses understand how data processing services are defined and taxed according to the Texas Comptroller of Public Accounts and Rule 3.330, and why being able to differentiate between nontaxable and taxable services is necessary for compliance and your financial protection. When it comes to information technology, figuring out what’s taxable can be, well… taxing. If you have any questions, please contact one of our skilled Texas tax attorneys.
What Are Texas Data Processing Services?
Texas law defines data processing services as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering or retrieving information.” In simpler terms, this includes any service that involves collecting, manipulating, or storing data through computer-based systems.
Data processing activities that are taxable under Texas law include:
- Hosting or storing data, including cloud storage
- Summarizing, analyzing, and sorting information
- Drafting reports from data
- Database management and data entry
Although these services are commonly performed digitally or completely automated, they are still taxed under Texas law. Currently, the law states 80% of the total for any data processing services is subject to Texas sales tax, even if some parts of the service are not.
Taxable and Nontaxable Services in Texas
Since data processing includes such a huge variety of digital services, many businesses struggle to differentiate between nontaxable and taxable services. Data processing services that are taxable in Texas include:
- Cloud storage and hosting services
- Payroll processing and automated bookkeeping systems
- Data conversion or reformatting
- Information retrieval and reporting services
- Database management and analytics platforms
Services that are not taxable in Texas include:
- Custom software development (when ownership is transferred)
- IT consulting or training not directly related to data processing
- Repair or maintenance of computer hardware
- Personal or professional services where data use is incidental (such as legal or accounting advice)
Contemporary business tools often combine multiple functions, like CRM systems that both analyze and store customer data. This means that determining what percentage of the total is taxable means taking a closer look at how the data processing service is invoiced and described.
What to Do If You’re Unsure About Compliance
If your Texas business buys or supplies digital services, it is important to determine whether you are paying and collecting the right amount of sales tax. Texas companies are routinely audited for sales tax compliance by the Texas Comptroller. Unsurprisingly, data processing is a commonly misunderstood category.
Taking steps to address your business’s compliance today can save you from a lot of future headaches, like costly penalties, in the future. A good place to begin is by reevaluating your invoices and service contracts and invoices to determine:
- Whether the services involve data collection, storage, or manipulation.
- How much of each service charge might fall under the taxable portion?
- Whether you’re properly registered to collect and remit sales tax in Texas.
If you aren’t sure, professional advice can help. Our Texas tax attorneys can investigate your company’s situation, determine whether your products or services are taxable, and assist you in implementing compliant reporting and billing systems. We will also gladly represent you if your business is undergoing a Comptroller audit and make sure that your rights and financial interests are protected.
Call Coleman Jackson, P.C.
The law surrounding sales tax on data processing services in Texas is a quagmire of technicalities and gray areas, one where even a teeny mistake can lead to costly repercussions. Whether your business operates across multiple states, uses digital vendors, or offers cloud-based services, you need to fully understand Texas sales tax laws in order to stay compliant.
If you need help determining whether your business’s digital services are taxable, contact the Texas tax law firm of Coleman Jackson, P.C., today. Our experienced Texas tax attorneys can walk you through compliance, audit defense, and tax planning strategies that are designed to protect your business from unplanned liabilities.
Call us at (214) 599-0431 or fill out the contact form on our website to schedule your private consultation. Whether you have questions or concerns with tax law, business law, or immigration law, you can trust our decades of experience and our commitment to putting our clients first.
This law blog is written by the attorneys at Coleman Jackson, P.C., located at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206, for educational purposes only. It does not create an attorney-client relationship between this law firm and the reader. You should consult with legal counsel in your geographic area regarding any legal issues affecting you, your family, or your business.
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