The Texas Comptroller of Public Accounts has adopted significant amendments to 34 Texas Administrative Code Section 3.330, which governs the taxation of data processing services. These changes aim to expand upon existing definitions, update what constitutes taxable and nontaxable services, improve the overall clarity of the rule, and provide that marketplace providers can offer both taxable and nontaxable data processing services.
Background
Under the previous version of §3.330, data processing services were defined broadly to include the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information. Examples of taxable data processing services included word processing, payroll and business accounting, and computerized data and information storage or manipulation. The updated rule, effective April 2, 2025, introduces several key changes.
Updated Definitions
The revised definition of “data processing service” clarifies the existing one and adds new illustrative examples of those items that may or may not meet it. A data processing service is defined as the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information. However, the new rule goes one step further in providing specific examples of what does and does not constitute data processing services.
Nontaxable Data Processing
The rule describes scenarios where data processing services are not taxable, particularly when bundled with another service, the data processing service does not have a separate value, and the data processing service is ancillary (or supports) the other service.
The rule elaborates on factors that will be considered when deciding if the data processing service has a “separate value” and is “ancillary” to the primary service it is bundled with. However, the Comptroller does not define either term, and the burden of proof is on the taxpayer to show that the data processing is ancillary to another service and does not have a separate value. The introduction of these new standards may make it difficult for the taxpayer to prove it is entitled to the exemption from tax.
Businesses may need to review their current practices and possibly adjust their billing and tax collection processes to align with the updated definitions and provisions.
How Forvis Mazars Can Help
Navigating the complexities of the newly amended Tex. Admin. Code §3.330 can be daunting, but Forvis Mazars is here to help. As a leading professional services firm, Forvis Mazars offers extensive experience in tax compliance and consulting. Our dedicated team of tax professionals can assist you in understanding how these changes impact your business, helping you stay compliant and potentially uncovering opportunities for tax savings. Forvis Mazars can help provide the clarity and guidance you need to confidently manage your tax obligations under the new regulations.
While the amendments are an improvement, proving exemptions to be valid may still be challenging, involving significant back-and-forth communication with the Comptroller. As a result, the audit process can be unnecessarily extended. Forvis Mazars can help guide you through these new amendments and the impact to your business while at the same time effectively and efficiently managing communications with the state.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.