Data Processing Services are Taxable
Data processing is a service performed with a computer using the customer's data. Entering, storing, manipulating, or retrieving a customer's data is taxable. But merely using the computer as a tool to help perform a professional service is not taxable.
We've prepared a partial list of taxable data processing services. This will give you an idea of the type of service that is taxable when performed using a computer. If you provide a different service for a client, and are not sure if it's taxable, give us a call at the toll-free number listed on this bulletin.
Examples of taxable services are:
- Accounts payable
- Accounts receivable billing
- Check preparation
- Computer-aided drafting, when the client provides specifications
- Data conversion services
- Editing client's data
- Entering client's data
- Totalisator services
- Internet services: creating web (home) page and providing server space
- Formatting client's data
- Data storage
- Manipulating client's data
- Preparing W-2 forms, payroll tax returns, and payroll checks
- Producing reports from client's data
- Transcription services
- Word processing services
- Compiling and producing records
- Scanning documents
When you provide a professional service, such as engineering or bookkeeping, and use a computer as a tool to complete that service, your charges are not taxable. For example, when you use a computer to prepare a federal income tax return, the charge to your client is not taxable because you are using your knowledge of accounting principles and tax laws to prepare the return. Or when you use a computer to analyze faults in a structure, the service is not a data processing service. The computer is merely a tool you use to provide an engineering service.
Examples of nontaxable services are:
- Auditing services (including inventory counting services)
- Consulting services
- Developing specifications for designs
- Interpreting a client's data
- Preparing depositions and other court documents by a licensed court reporter or a notary public for a participant in a lawsuit
- Preparing financial statements
- Preparing federal income tax returns
- Preparing state sales, franchise, and income tax returns
- Processing geophysical/seismic data
- Transcribing medical dictation or records
If your business includes both taxable services and nontaxable services, collect tax only on taxable services. But the nontaxable service must be distinct and identifiable, and it must be a type of service that is commonly provided by itself without another service. You must bill your customer separately for the taxable service, and this charge must be reasonable.
If the taxable service represents 5 percent or less of the overall contract price and the charge for the taxable service is not separately identified, don't worry about collecting tax from your client.
If more than 5 percent of your fee represents taxable services, your total charge is taxable unless you separately show the charges for taxable and nontaxable services. If you do this, you should collect tax only on 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 unrelated services.
Collect the 6.25 percent state tax (plus any local taxes) from your customer on the charge for your taxable service. This amount includes all expenses connected with providing the service. For example, if you have to travel in connection with your taxable service, your airfare, meals, and hotel expenses that you pass on to your customer are part of your taxable sales price.
Customers with Locations Inside and Outside of Texas
Some of your customers may have locations inside and outside of Texas. Your service may be purchased for use at all those locations. Only the part of your service "used" in Texas is taxable. If your service is used to support a separate part of a customer's business - other than general administration or operation of the business - the service is used where that business is conducted.
If that part of the business is conducted at locations both within and outside of the state, the service is not taxable to the extent it is used outside of Texas.
Your customer may give you an exemption certificate, which relieves you from having to collect tax. Your customer must then accrue Texas tax on the portion of your service used in Texas.
A multi-state customer may use any reasonable method for allocation that is supported by business records.
If your service cannot be assigned to an identifiable segment of your client's business, then it supports the administration or operation of the business in general and is "used" at your client's principal place of business.
You may use a resale certificate instead of paying tax on goods you give to your customer as a part of your service. For example, you may give a resale certificate when you buy forms you use to print your customer's payroll. You also may use a resale certificate instead of paying tax on services essential to the provision of your service.
You may accept a resale certificate from your customer when your service is integral to the provision of another taxable service. For example, your customer may ask you to process data to be included in a newsletter he will sell.
Download a copy of the resale certificate. The certificate can be copied for your use. It must be completely filled out and kept as a part of the seller's records.
Contracts with Tax-Exempt Organizations
You don't need to charge tax when you provide data processing services for a governmental agency. Some nonprofit organizations also are exempt from tax. They must give you an exemption certificate. Other nonprofit organizations must pay sales tax. If you have a question about a customer's exempt status, give us a call.
Other Taxable Services
Before you decide not to collect tax, make sure your service is not one of the other taxable services.
A few examples of other taxable services are:
- Credit reporting
- Debt collection
- Security services
- Certain services provided in connection with an insurance policy