|(a) Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
(1) Data processing services - the processing of information
for the purpose of compiling and producing records of transactions, maintaining
information, and entering and retrieving information. It specifically includes
word processing, payroll and business accounting, and computerized data and
information storage or manipulation. The charge for data processing services
is taxable regardless of the ownership of the computer. Examples of data processing
services include entering inventory control data for a company, maintaining
records of employee work time, filing payroll tax returns, preparing W-2 forms,
and computing and preparing payroll checks. Data processing does not include
the use of a computer by a provider of other services when the computer is
used to facilitate the performance of the service or the application of the
knowledge of the physical sciences, accounting principles, and tax laws, e.g.,
the use of a computer to provide interpretive or enhancement geophysical services
or the use of a computer by a CPA firm, enrolled agent, or bookkeeping firm
to produce a financial report, prepare federal income tax, state franchise
or sales tax returns, or charges for temporary secretarial personnel who as
part of their function use word processing equipment. Data processing services
does not include Internet access services or data processing services provided
in conjunction with and incidental to the provision of Internet access service
when billed as a single charge.
(2) Internet - collectively the myriad of computer and
telecommunications facilities, including equipment and operating software,
that comprise the interconnected worldwide network of networks that employ
the Transmission Control Protocol/Internet Protocol, or any predecessor or
successor protocols to the protocol, to communicate information of all kinds
by wire or radio.
(3) Internet access service - a service that enables users
to access content, information, electronic mail, or other services offered
over the Internet and may also include access to proprietary content, information,
and other services as part of a package of services offered to consumers.
Internet access service does not include any other taxable service, unless
the taxable service is provided in conjunction with and is merely incidental
to the provision of Internet access service. Individuals providing Internet
access should refer to §3.366 of this title (relating to Internet Access
(b) Hold permits. All providers of data processing services
must obtain Texas sales and use tax permits and collect 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). Effective October
1, 1999, 20% of the total amount charged for data processing services is exempted
from tax. The exemption applies to services performed on or after October
1, 1999. The exemption does not apply to services performed before the effective
date and billed or paid for after the effective date of the exemption.
(c) 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 magnetic tape to transfer the results
of data processing services to customers. The tape is transferred to the customer,
and the customer owns and uses the tape to review the results of the data
processing service. The service provider may purchase the tape tax free by
issuing a resale certificate. Tax is due on the total amount charged the customer,
including amounts for the tape 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.
(d) Unrelated services.
(1) A service will be considered as unrelated if:
(A) it is neither a data processing service, nor a service
taxed under other provisions of the Tax Code, Chapter 151;
(B) it is of a type which is commonly provided on a stand-alone
(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 unrelated 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 unrelated 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 if 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
(e) Service benefit location. If both the data processing service
provider and the customer are located in Texas, Texas tax is due.
(f) Service benefit location--multi-state customer.
(1) To the extent a data processing service is used to support
a separate, identifiable segment of a customer's business (other than general
administration or operation of the business) the service is presumed to be
used at the location where that part of the business is conducted.
(2) If that part of the business is conducted at locations
both within and outside the state, the service is not taxable to the extent
it is used outside Texas. A multi-state customer may use any reasonable method
for allocation which is supported by business records.
(3) A multi-state customer purchasing data processing
services for the benefit of both in-state and out-of-state locations is responsible
for issuing to the data processing service provider an exemption certificate
asserting a multi-state benefit, and for reporting and paying the tax on that
portion of the data processing charge which will benefit the Texas location.
A data processing service provider that accepts such a certificate in good
faith is relieved of responsibility for collecting and remitting tax on transactions
to which the certificate relates.
(4) The customer's books must support the assignment of
the service to an identifiable segment of the business, the determination
of the location or locations of the use of the service, and the allocation
of the taxable charge to Texas.
(5) To the extent the use of the service cannot be assigned
to an identifiable segment of a customer's business, the service is presumed
to be used to support the administration or operation of the customer's business
generally. The service is presumed to be used at the customer's principal
place of business. The principal place of business means the place from which
the trade or business is directed or managed.
(g) Local taxes.
(1) For local sales tax purposes, city, county, transit authority,
and/or special purpose district sales taxes are due if the data processing
service provider has only one place of business (the location where clients
request service) within the boundaries of a local taxing entity. Local sales
tax must be collected based upon the tax rate at that location, except that
no MTA or CTD sales tax is due on services provided at a location outside
the boundaries of the transit area. In the case of multiple locations, if
an order for service is placed at one location but the service is provided
at another location, the place of business from which the service is provided
will determine to which local taxing entity the tax is allocated.
(2) For the purposes of the local use tax, if a place
of business is outside the boundaries of a local taxing entity, the data processing
service provider will be required to collect local use tax if the client is
within the local taxing entity and the service provider has representation
in the local taxing entity as outlined in §3.286 of this title (relating
to Seller's and Purchaser's Responsibilities). Even if the service provider
is not required to collect local use tax, the client is still liable for the
tax if the service is performed or a benefit is derived from the service within
the boundaries of a local taxing entity.
(A) 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.
(B) A multi-state customer purchasing data processing services
for the benefit of both in-state and out-of-state locations is responsible
for issuing an exemption certificate and for reporting and paying local tax
as provided by subsection (f)(3) and (4) of this section.
(h) Use tax. If a provider of a data processing service is
not doing business in Texas or in a specific local taxing jurisdiction and
is not required to collect Texas tax, it is the Texas customer's responsibility
to report and pay the state and local use tax directly to this office.