TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES

The Comptroller of Public Accounts adopts amendments to §3.330, concerning data processing services, with changes to the proposed text as published in the September 13, 2024, issue of the Texas Register (49 TexReg 7307). The rule will be republished. The comptroller amends this section to clarify existing definitions; to add new definitions; to list examples of services that are included in and excluded from taxable data processing services; to describe data processing that is not taxable; to explain the incidence of the tax; and to update provisions related to the collection of local sales and use taxes on data processing services. The amendments implement language in Senate Bill 153, 87th Legislature, 2021, regarding payment processing. Other revisions improve the clarity and readability of the section.

During the public comment period, the comptroller received comments regarding adoption of the amendment from the following:

Oscar Rodriguez, President, Texas Assn. of Broadcasters

Renzo Soto, Executive Director, Texas and Southwest, TechNet

Michael J. Behm, Executive Director, The Payments Coalition

Peter Chandler, Executive Director, Internet Works

Stephen Long, Partner, Baker McKenzie

Helen Brantley, Legal Analyst, Texas Taxpayers and Research Assn. (TTARA)

Patrick Reynolds, President and Executive Director, Council on State Taxation (COST)

On December 6, 2024, the comptroller held a public hearing at the request of Helen Brantley on behalf of TTARA and Patrick J. Reynolds on behalf of COST.

The comptroller received comments at the public hearing from the following:

Brian Pannell, Tax Director, Dell Technologies

Stephen Long, as an individual

Helen Brantley, TTARA

Jennifer Rabb, President, TTARA

Leonore Heavey, Senior Tax Counsel, COST

Ben Geslison, Partner, Baker Botts

Asha Kangralkar, Founder of Avacraft

Mohamad Sam, COO of Purifyou LLC

The individual comments will be addressed throughout the preamble.

Subsection (a) provides definitions. The comptroller amends the general definition of "data processing service" in paragraph (1) to list the operative words included as examples of "data processing service" in Tax Code, §151.0035(a)(1) ("Data Processing Service"). The comptroller amends and moves the examples to subsection (b). The comptroller deletes existing language regarding internet access services as they are no longer taxable.

The comptroller adds new subparagraph (A) listing services that are specifically included in data processing service under Tax Code, §151.0035.

The comptroller adds new subparagraph (B) listing services that are specifically excluded from data processing service under Tax Code, §151.0035, including services added by Senate Bill 153.

The comptroller received a comment from Michael Behm regarding the examples included for payment processing. Mr. Behm believes the intent of Senate Bill 153 is to broadly exclude fees for electronic payment transactions, including those between a merchant and a payment processor. The comptroller declines to add additional language that is not present in Senate Bill 153. If the merchant does not meet the definitions of one of the enumerated parties, their services are not excluded from data processing services based on Senate Bill 153.

The comptroller adds new subparagraph (C) to exclude some data processing that might otherwise be included in "data processing service" as described in Tax Code, §151.0035. The comptroller adds subparagraph (C) under its exclusive jurisdiction to interpret taxable services, as provided in Tax Code, §151.0101(b) ("Taxable Services").

Subparagraph (C) provides that a data processing service will not be taxable if it is sold for a single charge with another service, the data processing service does not have a separate value, and the data processing service is ancillary to the other service.

New clause (i) provides that 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.

New clause (ii) provides that if the data processing service has a separate value and is sold or purchased for a single charge with a nontaxable related service, subsection (e) applies.

New clause (iii) identifies factors that the comptroller may consider in determining whether the data processing service has a "separate value." The "separate value" requirement is drawn from Rylander v. San Antonio SMSA Ltd. P'ship., 11 S.W.3d 484, 488 (Tex. App.-Austin 2000, no pet.). The opinion uses the "separate value" concept in evaluating whether services could be segregated for taxation purposes.

The "separate value" requirement of clause (iii) is also consistent with the comptroller's longstanding rule, retained in subsection (e)(3), which provides for the segregation of nontaxable and taxable services sold or purchased for a single charge.

The comptroller explains the "ancillary" requirement in new clause (iv). The requirement is similar to the current provision that excludes data processing service if it "facilitates the performance" of another service. But clause (iv) identifies specific factors, which are not in the current rule. Clause (iv) also states that the test for determining whether a data processing service is "ancillary" to a nontaxable service is not an essence of the transaction test. The essence of the transaction test attempts to determine what the buyer ultimately wants. Combs v. Chevron, Inc., 319 S.W.3d 836, 843 (Tex. App.-Austin 2010, pet. denied) ("underlying goal"). Instead, the evaluation is based on what the service provider is doing.

The comptroller received comments from Michael Behm, Renzo Soto, Patrick Reynolds, Leonore Heavey, Helen Brantley, Jennifer Rabb, Brian Pannell, and Benjamin Geslison regarding the "ancillary" standard instead of the "essence of the transaction test." Mr. Reynolds and Ms. Heavey commented that the change was made without the involvement of the Texas Legislature. Both were concerned that there would be an expansion of the sales tax base to more services. They requested that the comptroller allow the Texas Legislature to make the change instead of adopting the proposed language.

Ms. Heavey also commented that the proposed amendments primarily target business purchases. She states that imposing sales tax on business-to-business transactions specifically violates the tax policy principles of neutrality, equity, simplicity, and transparency, and causes economic distortion. The comptroller declines to add an exception to taxable data processing services for business-to-business transactions as this type of change would require a legislative change.

Ms. Brantley commented that the comptroller lacks the authority to promulgate subsection (a)(1)(C) because the new test would conflict with the essence of the transaction text under Bullock v. Statistical Tabulating Corp., 549 S.W.2d 166 (1977) Additionally, she commented the agency does not have "exclusive jurisdiction to interpret taxable services," but shares that jurisdiction with the courts and states that a comptroller interpretation cannot conflict with judicial jurisprudence. She also states the comptroller may not interpret terms in a manner contrary to the Tax Code, citing to Hegar v. CheckFree Servs. Corp . She requests that subsection (a)(1)(C)(iii) be revised to clarify that the phrase "commonly provided" is to be applied in the context of the seller's industry.

Ms. Brantley also requested that subsection (a)(1)(C) be rephrased to clarify that the taxpayer's burden is only to rebut the comptroller's prima facie case that a service is a taxable data processing service. She commented that proposed subsection (a)(1)(C) creates an exclusion from the definition of data processing services and then purports to shift the burden to the taxpayer to prove that a service falls within the exclusion, which she commented improperly shifts the comptroller's burden to make a prima facie case that a service is taxable. She proposes that this paragraph be rephrased to state that "if the comptroller makes a prima facie showing that a service is a taxable data processing service because it is not ancillary to a nontaxable related service and has a separate value, then the taxpayer has the burden to prove that the data processing is ancillary and has no separate value."

Ms. Brantley also commented that focusing on the "ancillary" test rather than the "essence of the transaction" test may sometimes violate Internet Tax Freedom Act (ITFA), as it may ultimately tax services with non-digital analogs that are not taxed in Texas because it focuses on how the service is performed rather than the nature of the service itself.

The comptroller declines to make Ms. Brantley's suggested changes regarding burden of proof. While the rule explains the basis for determining whether a service is data processing, it does not change the burden of proof. The comptroller will still be required to show a service involves computerized data entry, data retrieval, data search, information compilation, or other computerized information storage or manipulation. Additionally, taxing data processing services does not violate ITFA because the basis for taxing these services is that they are computerized and not that they are provided over the internet.

Ms. Rabb commented that the "ancillary," "separate value," and "repetitive or routine manipulation of data" tests are not supported by any action of the legislature or Texas courts as it does not flow from the Black, Mann & Graham case. Mr. Geslison commented that in repudiating the common law "essence of the transaction" test, and instead imposing an "ancillary service" with no "separate value" test, the comptroller is giving the impression that only those taxpayers with the means to pursue extended litigation will be able to benefit from showing that data processing is not the essence of their customer transaction.

Mr. Pannell commented that the characterization in the preamble of the proposed rule that a buyer "would never want the manipulation of data for its own sake" was not reflective of current technology in such areas as artificial intelligence and data migration services. The comptroller is not using this sentence in the preamble to the adopted rule.

The comptroller declines to make any additional changes to subsection (a)(1)(C). The 3rd Court of Appeals in Austin, and now the 15th Court of Appeals, have not ruled on whether the essence of the transaction test is appropriate for distinguishing taxable data processing services from other nontaxable services. In the Instill opinion, and in Black, Mann & Graham opinion, the 3rd Court of Appeals stated that it would be "assuming, for the sale of argument," and that it would "assume without deciding" that the essence of the transaction test applied. Instill Corp. v. Hegar, No. 03-18-00374-CV at *13 (Tex. App. Austin May 31, 2019, pet. denied); Hegar v. Black, Mann, & Graham. L.L.P., No. 03-20-00391-CV (Tex. App.- Austin 2022) (mem. op.) at *27. Additionally, Statistical Tabulating Corp, supra, that is relied upon by the commentors applied the essence of the transaction test in a different context- to determine whether an indivisible transaction is a taxable sale or rental of tangible personal property or a nontaxable intangible. Statistical Tabulating Corp, supra, predates the taxation of services, and thus does not contain a robust analysis that addresses the sale of taxable services combined with the sale of nontaxable services.

The Check-Free case is the only decision holding that the essence of the transaction test is appropriate to determine whether an indivisible transaction was a taxable data processing service or a nontaxable service. Hegar v. CheckFree Servs. Corp., No. 14-15-00027-CV (Tex. App. Houston [14th Dist.] Apr. 19, 2016, no pet.) (mem. op.) But CheckFree was decided by the 14th Court of Appeals, and the 3rd Court of Appeals was not bound, and now the 15th Court of Appeals is not bound, by the decision of a sister court. See, Satterfield v. Crown Cork & Seal Co., Inc., 268 S.W.3d 190, 207 (Tex. App. Austin 2008, no pet.) ("we are not bound to follow the decision of another court of appeals").

Furthermore, the 3rd Court of Appeals, when it was the intermediate appellate court with primary appellate jurisdiction, indicated that the essence of the transaction test was inappropriate regarding taxable data processing services. The Court stated that the reference to purpose in the current rule "did not create an independent 'purpose' prong that must be satisfied in every case," and the imposition of such a requirement "could raise questions about its validity." Hegar v. Black, Mann, & Graham. L.L.P., No. 03-20-00391-CV (Tex. App.- Austin 2022) (mem. op.) at *10 and n. 11. Therefore, "basic purpose," "ultimate object," or "underlying goal" should not be used as a determining factor. The operative words of the statute focus on what the vendor is doing, and so does the adopted rule.

Therefore, in determining whether a data processing service is "ancillary" to a nontaxable service, the comptroller will focus on what the seller is doing, and not the buyer's purpose. The repetitive or routine manipulation of data by the seller is a factor suggesting that the activity is not ancillary and should be taxable as a data processing service, while the manipulation of data that depends on the external knowledge and discretionary judgment of the seller suggests that the activity is ancillary and should not be taxable as a data processing service.

For example, the insertion of data into form title or loan documents for a client would ordinarily be a taxable data processing service. The primary service is the compilation, retrieval, and accurate manipulation of the data into the forms, even though there may be an ancillary element of independent judgement in correctly entering the data. However, the preparation of a title opinion would not ordinarily be a taxable data processing service. The primary service is the application of legal knowledge and judgement to a set of facts, even though there may be ancillary elements of data processing. The "ultimate goal" of the preparation of loan documents and the preparation of title opinions may be the same - to close a real estate deal. But one service is a taxable data processing service because it requires the repeated application of the same process to different data, albeit with skill and expertise; and the other service is not a taxable data processing service because it produces a solitary result based on legal principles. These examples are illustrated in the recent opinion in Hegar v. Black, Mann, & Graham, L.L.P., No. 03-20-00391-CV, 2022 WL 567853 (Tex. App. Austin Feb. 25, 2022, no pet.).

The comptroller amends paragraph (2) to delete the definition of "internet" as that term is already defined in Tax Code, §151.00393 (Internet). The comptroller adds a new definition of "downstream payment processor" based on the language in Senate Bill 153 that incorporates the definition in 7 TAC §33.4(c) (Payment Processors) as that provision existed on January 1, 2021.

The comptroller amends paragraph (3) to delete the definition of "internet access services" as the statutory reference to that definition is now listed in subsection (a)(1)(B)(i) and a separate definition is no longer necessary. The comptroller adds a new definition of "point of sale payment processor" based on the language in Senate Bill 153 that incorporates the definition in 7 TAC §33.4(d) as that provision existed on January 1, 2021.

The comptroller adds new paragraph (4) to add a definition of "settling of an electronic payment transaction" based on the language in Senate Bill 153.

The comptroller moves the existing text of current subsection (b) to amended subsection (c)(2), with changes. Amended subsection (b) provides examples that apply the definition of "data processing service."

The comptroller adds new paragraphs (1)-(3) to restate text from current subsection (a)(1) that payroll services, business accounting, and the preparation of financial statements are data processing services. The comptroller includes revised example language from existing subsection (a)(1) in new paragraph (3).

The comptroller adds new paragraph (4) based on the holding in Hegar v. Black, Mann, & Graham, L.L.P., No. 03-20-00391-CV, 2022 WL 567853 (Tex. App. Austin Feb. 25, 2022, no pet.), which held the preparation of form title or loan documents is taxable data processing.

The comptroller adds new paragraph (5) to clarify that marketplace providers may provide data processing services to their customers if they enter, retrieve, search, manipulate, and store data or information in the course of their business. This paragraph will not become effective until October 1, 2025.

The comptroller received public comments or public testimony during the hearing on December 6, 2024, regarding this paragraph from Helen Brantley, Renzo Soto, Peter Chandler, Mohamad Sam, and Asha Kangralkar.

Mr. Soto, Mr. Chandler, Mr. Sam, and Ms. Kangralkar commented that taxing the data processing services of marketplace providers would have an adverse impact on marketplace sellers.

Mr. Soto commented that many online marketplace platforms are offered nationally, and the proposed changes might violate ITFA by specifically targeting electronic commerce as commissions earned by auctioneers of oil and gas leases, consignment stores, and real estate agents using computers remain untaxed. Mr. Soto also commented that many online marketplace providers are "already absorbing Texas sales taxes for taxable goods or services" and taxing marketplaces in the data processing definition would be double taxation. The comptroller declines to make any changes based on these comments. Taxing these services as data processing is not discriminatory and does not violate ITFA, as the basis for taxing the services is that they are computerized and not that they are provided over the internet. The sale of an item through a marketplace is separate from the sale of data processing services to a seller who makes sales on the marketplace and the collection of sales or use tax on those separate transactions is not "double taxation."

Ms. Brantley commented that classifying marketplace provider services as taxable data processing does not apply the "essence of the transaction" test and that it would wrongly convert many charges akin to a nontaxable auctioneer or broker service into a taxable data processing service. Ms. Brantley also proposed that the comptroller clarify that the exclusion of charges by marketplace providers from the "settling of an electronic payment transaction" does not mean the charges are taxable data processing.

The comptroller declines to make any changes to new paragraph (5) as the statutory language is clear that marketplace provider services are not included in the exclusion from data processing for the settling of an electronic payment transaction based on Senate Bill 153. Marketplaces provide taxable data processing as their services involve computerized data storage and manipulation for their customers. For example, their services may include storing product listings and photographs, maintaining records of transactions, processing product orders, and compiling analytics. All of these activities fall under the definition of taxable data processing services. The comptroller adopts a delayed implementation of this paragraph to October 1, 2025, to allow the Texas Legislature time to consider addressing this issue.

The comptroller adds new paragraph (6) to clarify that internet hosting as defined by Tax Code, §151.108 (Internet Hosting) is taxable data processing.

The comptroller adds new paragraph (7) to clarify that video streaming subscriptions are taxable cable television services under Tax Code, §151.0033 ("Cable Television Service"). See also §3.313 of this title (relating to Cable Television Service and Bundle Cable Service).

The comptroller adds new paragraph (8) to clarify that streaming video gaming subscriptions are taxable amusement services as set forth in Tax Code, §151.0028 ("Amusement Services") and in STAR Accession No. 201405957L (May 28, 2014). These services are not taxable data processing services.

The comptroller adds new paragraph (9) to provide that the compilation of nontaxable opinion polls and survey information as described by §3.342 of this title (relating to Information Services), is not taxable data processing if the data processing is ancillary to the acquisition of the information and the service provider's expertise is not managing data, such as in an inventory management service.

The comptroller adds new paragraph (10) to provide that the compilation of nontaxable information derived from laboratory, medical, or exploratory testing or experimentation as described by §3.342 of this title is not taxable data processing if the data processing is ancillary to the provision of the information.

The comptroller adds new paragraph (11) to add an example from Comptroller's Decision No. 118,253 (2024) regarding the taxability of data migration services. This example is different from the example in the proposed rule published in the September 13, 2024 issue of the Texas Register (49 TexReg 7307) concerning computerized three-dimensional rendering. The comptroller deletes the earlier example as it did not provide adequate guidance for taxpayers, as some three-dimensional rendering may instead be graphic art, described in §3.312 of this title, (relating to Graphic Art or Related Occupations; Miscellaneous Activities).

The comptroller adds new paragraph (12) to include website creation, repair, and maintenance as examples of data processing when they involve the storage, manipulation, compilation, and entry of data. These examples are based on Comptroller's Decision Nos. 115,774 (2021) and 44,736 (2005), as well as STAR Accession Nos. 200009755L (September 27, 2000), 202010013L (October 22, 2020) and 202402020L (February 20, 2024).

Mr. Rodriguez commented that subsection (b)(12) states search engine optimization, social media marketing and lead generation are taxable data processing, but that we do not define these services or offer any rationale that justifies categorizing them as taxable data processing. He believes that the language clarifying that they are taxable only "when they involve the storage, manipulation, compilation, and entry of data" is too broad to distinguish taxable services from nontaxable ones. Mr. Rodriguez requests we either delete these services from paragraph (b)(12) or define them in subsection (a) and add language in subsection (b) that states they are only taxable data processing services if the services are performed by computers and compromise edits to the purchaser's website, the services are not proprietary information services, and the services are not advertising. Mr. Rodriguez also commented that subsection (b)(12) regarding social media marketing is a violation of ITFA and Texas law as it may contain nontaxable advertising.

Ms. Brantley also requested that we define the terms "search engine optimization," "social media marketing," and "lead generation" in subsection (a).

The comptroller agrees to remove the terms "social media marketing," "lead generation," and "search engine optimization" from subsection (b)(12) as they did not provide sufficient guidance to taxpayers. However, the comptroller will review these on a case-by-case basis to determine whether a taxpayer's services meet the definition of data processing. Additionally, subsection (b)(12) does not violate ITFA, as the basis for taxing the services is that they are computerized and not that they are provided over the internet.

The comptroller moves current subsection (c) to amended subsection (d), with changes, and titles new subsection (c) "Imposition of tax, permits."

The comptroller adds new paragraph (1) to provide that the use of data processing service is subject to state sales and use tax and that local sales and use tax may also be imposed.

The comptroller adds new paragraph (2) that contains language moved from current subsection (b) and restates that providers of data processing services must obtain a Texas sales and use tax permit. The paragraph includes the permitting safe harbor for small remote sellers as set forth in §3.286(b)(2) of this title (relating to Seller's and Purchaser's Responsibilities).

The comptroller adds new paragraph (3) that contains language moved from current subsection (a)(1) stating that a data processing service is taxable regardless of the ownership of the computer or whether that data is provided by the customer or the customer's authorized designee.

The comptroller adds new paragraph (4) to restate the language from current subsection (b) which exempts 20% of the amount charged for data processing services from sales and use tax based on Tax Code, §151.351 (Information Services and Data Processing Services).

The comptroller amends relettered subsection (d), formerly subsection (c), to update the storage medium used in the example from a magnetic tape to a Universal Serial Bus (USB) drive.

The comptroller amends relettered subsection (e), formerly subsection (d). The substantive effect of subsection (e) is the same as former subsection (d). However, the comptroller replaces the term "unrelated service" with the term "nontaxable related service" to conform to the ordinary usage of the terms. Subsection (e) applies when multiple services are sold or purchased for a single charge. Because the services are sold or purchased for a single charge, the services are in some manner going to be "related," as that term is ordinarily used, even if they are also distinct. When services are related by a common charge, and the services are each also commonly provided on a stand-alone basis, and the performances are distinct and identifiable, then the single charge may be segregated under the conditions described in subsection (e).

Ms. Brantley commented that the language in subsection (e) using "unrelated services" should not be changed to "nontaxable related services" as it takes it out of alignment with other rules. The comptroller declines to adopt Ms. Brantley's suggestion to continue using the existing language, as the other administrative rules will be updated in the future to reflect the changes in amended subsection (e).

The comptroller reletters subsection (f), formerly subsection (e).

The comptroller amends relettered subsection (g), formerly subsection (f) and retitles it "Determining the incidence of the tax." The comptroller moves current text in subsection (g) regarding local taxes to relettered subsection (h). Relettered subsection (g) also includes additional nonsubstantive changes to further clarify how a purchaser may substantiate a multistate benefit.

The comptroller amends paragraph (1) to restate the statutory definition of "use" in Tax Code, §151.011 ("Use" and "Storage"). The comptroller deletes the current presumption language in paragraph (1) regarding a separate, identifiable segment of a customer's business. The comptroller replaces current presumption language by the presumption in paragraph (2) that more closely follows the statutory presumption in Tax Code, §151.104(a) (Sale for Storage, Use, or Consumption Presumed).

The comptroller amends paragraph (2) to restate statutory language in Tax Code, §151.104(a) regarding presumption of use in Texas. The comptroller moves language in current paragraph (2) regarding business conducted both inside and outside the state to amended paragraph (3) and moves language regarding multistate customers' method of allocation to new paragraph (6).

The comptroller amends paragraph (3) and adds new subparagraphs (A) and (B) to restate statutory language in Tax Code, §151.104 and §151.330 (Interstate Shipments, Common Carriers, and Services Across State Lines). The comptroller moves language in current paragraph (3) regarding a multistate customer providing an exemption certificate to new paragraph (6).

The comptroller amends paragraph (4) to restate statutory language in Tax Code, §151.101 (Imposition of Use Tax) and to be consistent with the interpretation of statute in Comptroller's Decision No. 116,293 (2022). The comptroller deletes language in current paragraph (4) regarding identifiable segments of a business as the revised subsection follows the statutory guidelines more closely.

The comptroller amends paragraph (5) to restate statutory language in Tax Code, §151.303(c) (Previously Taxed Items: Use Tax Exemption or Credit) and §3.338 of this title (relating to Multistate Tax Credit and Allowance of Credit for Tax Paid to Suppliers). The comptroller deletes language in current paragraph (5) regarding services that cannot be assigned to an identifiable segment of a business, as the revised subsection follows the statutory guidelines more closely.

The comptroller adds new paragraph (6) to restate language moved from current paragraph (3) regarding multistate customers issuing exemption certificates, with non-substantive changes to improve readability.

The comptroller adds new subparagraph (A) to restate language moved from current paragraph (2) regarding the method used for business records to allocate a data processing service used both within and outside Texas.

The comptroller adds new subparagraph (B) to add language regarding the good faith acceptance of an exemption certificate as set forth in §3.287 of this title (relating to Exemption Certificates).

Mr. Pannell commented that the deletion of "separate and identifiable segment of business" from the multistate benefit section of the section will greatly streamline taxpayer compliance and audit processes.

Ms. Brantley commented that the language in subsection (g) is not clear and does not follow the language in Tax Code, §151.330. She additionally comments that inconsistent sourcing rules across jurisdictions will lead to double taxation and increase costs for businesses. Mr. Soto also expressed that the sourcing provisions in subsection (g) and subsection (h) are unclear and requested the comptroller provide sourcing guidance specific to marketplace providers for both state and local taxes. Mr. Long commented that the sourcing of data processing services in real property marketplaces in subsections (g) and (h) can lead to different results for similar real property rentals depending on where the sale "is consummated" or the data processing service is "used." Mr. Long proposes adding presumption language to subsections (g) and (h) that would source the data processing services to the location of the property. The comptroller declines to make any changes based on these comments, as the language in subsection (g) simply adopts the provisions of Tax Code, §§151.011 (Use and Storage), 151.104 (Sale for Storage, Use, or Consumption Presumed), and 151.330 (Interstate Shipments, Common Carriers, and Services Across State Lines) within the context of data processing services. Any inconsistent sourcing language is a result of multiple statutes with conflicting language.

For example, Tax Code, §151.104(a) establishes a presumption that the agency must follow for state sales tax. This section states "A sale of a taxable item by a person for delivery in this state is presumed to be a sale for storage, use, or consumption in this state unless a resale or exemption certificate is accepted by the seller." The agency must also follow the local tax consummation principles of Tax Code, Chapter 321.203 (Consummation of Sale), which do not allow for Mr. Long's proposed presumption. Under that section, local sales taxes are sourced based on the seller's set of facts which may result in sales sourced to where an order is received, to where an order is fulfilled, or to where an order is delivered.

The comptroller amends relettered subsection (h), formerly (g) regarding local taxes.

The comptroller amends paragraph (1) to provide general guidance on the consummation of sale for local sales tax and directs taxpayers to §3.334 of this title (relating to Local Sales and Use Taxes) and deletes the existing language.

The comptroller amends paragraph (2) to provide general guidance on determining local use tax and directs taxpayers to §3.334 of this title and to delete language that is now located in §3.334 of this title.

Language in former subparagraph (A) remains as new paragraph (3). The comptroller deletes subparagraph (B) as that language is now located in new subsection (g)(6).

The comptroller adds subsection (i) to restate former subsection (h) and to make minor changes for readability.

The comptroller adds new paragraphs (1) and (2) to clarify when a customer is responsible to report use tax due on the purchase of taxable data processing services under Tax Code, §151.101.

In addition to the specific comments addressed throughout the preamble, the following general comments were made: Mr. Chandler commented that there is no legislative or judicial action that supports the amendments, and the proposed changes should instead be addressed by the legislature. He stated that if the comptroller goes forward with the amendment to the rule it should only be applied prospectively. Ms. Heavey also commented that policy changes should be prospective only as "administrative changes imposing new or increased tax liabilities attributable to prior periods is fundamentally unfair...."

Mr. Reynolds and Mr. Soto also commented that the changes in administrative policy should only be applied prospectively. The comptroller declines to make any changes based on these comments, as §3.330 formally adopts current policy regarding services that meet and that do not meet the definition of data processing. The policy related to these services has been communicated through agency letters and upheld in Comptroller's Decisions.

The comptroller adopts the amendments under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provide the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of provisions of Tax Code, Title 2 (State Taxation), and taxes, fees, or other charges or refunds which the comptroller administers under other law.

The amendments implement Tax Code, §§151.0035 ("Data Processing Services"), 151.0101 (Taxable Services), 151.105 (Importation for Storage, Use, or Consumption Presumed), 151.330 (Interstate Shipments, Common Carriers, and Services Across State Lines), 151.351 (Information Services and Data Processing Services), 321.203 (Consummation of Sale), and 321.205 (Use Tax).

§ 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.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on March 13, 2025.

TRD-202500892

Jenny Burleson

Director, Tax Policy

Comptroller of Public Accounts

Effective date: April 2, 2025

Proposal publication date: September 13, 2024

For further information, please call: (512) 475-2220

CHAPTER 7. PREPAID HIGHER EDUCATION TUITION PROGRAM

SUBCHAPTER N. TEXAS ACHIEVING A BETTER LIFE EXPERIENCE (ABLE) PROGRAM

The Comptroller of Public Accounts adopts amendments to §7.198, concerning ABLE program advisory committee, without changes to the proposed text as published in the December 27, 2024, issue of the Texas Register (49 TexReg 10490). The rule will not be republished.

The amendments to subsections (a) and (b) expand the categories of individuals eligible to serve on the committee to include representatives of the business, legal, or veteran community.

The amendment to subsection (e) allows the comptroller the flexibility of not appointing a replacement member to the committee provided the requirements of subsection (b) have been met.

The amendment to subsection (f) allows the presiding officer or comptroller flexibility in determining how frequently the committee meets.

The amendment to subsection (g) reduces the number of members required to be present to constitute a quorum.

The comptroller did not receive any comments regarding adoption of the amendment.

The amendments are adopted under Education Code, §54.6181, which authorizes the Texas Prepaid Higher Education Tuition Board by rule to establish advisory committees to make recommendations on programs, rules, and policies administered by the board.

The amendments implement Education Code, §54.6181.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on March 13, 2025.

TRD-202500894

Victoria North

General Counsel for Fiscal and Agency Affairs

Comptroller of Public Accounts

Effective date: April 2, 2025

Proposal publication date: December 27, 2024

For further information, please call: (512) 475-2220