Texas Comptroller Overhauls Administrative Rule on Data Processing Services

Effective April 2, 2025, the Texas Comptroller overhauled 34 Tex. Admin. Code § 3.330 (Data Processing Services). The Comptroller stated last September that changes to the Rule were needed to implement 2021 legislation regarding payment processing and to improve clarity and readability. However, several of the changes adopted are unrelated to new legislation and represent potentially the most significant base expansion for data processing services since the Rule’s initial adoption in 1988.

First, the Rule redefines what constitutes a data processing service. The prior Rule explicitly stated that data processing does not include the use of a computer by a provider of other services, when the computer merely facilitates the performance of the service. In its place, the Comptroller has implemented a new test based on whether data processing is “ancillary” to another service.

The Comptroller has invoked “exclusive jurisdiction” to determine if a data processing service is ancillary. The Comptroller will no longer use the “essence of the transaction” test in making such determinations. The Comptroller will focus on the activities of the seller, instead of what the buyer wants from the transaction. The repetitive or routine manipulation of data by the seller suggests the service is not ancillary and should be taxable. On the other hand, the manipulation of data that depends on external knowledge and discretionary judgment suggests the activity is ancillary and should not be taxable. Other unspecified factors may also be considered, and the weight of those factors may vary at the Comptroller’s discretion.

Several new examples of data processing services were also added. A notable provision relates to marketplace providers. 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. Marketplace services, such as storing product listings and maintaining transaction records, will be considered data processing services when this provision takes effect. In the preamble that accompanied the adoption, the Comptroller noted that many online marketplaces are already collecting tax on purported data processing services. The Comptroller also advised that the delayed effective date of this provision is related to pending legislation that would specifically exclude marketplace providers’ payment processing services from the definition of “data processing.” See S.B. 265 and H.B. 1681 (89^th R.S.).

Another major change introduced with the revisions to Rule 3.330 is how taxpayers determine the incidence of tax. Under the old multistate service benefit test, taxpayers purchasing data processing services used by separate, identifiable business segments located both inside and outside Texas could issue an exemption certificate and accrue tax on the portion of the service allocable to Texas. The new Rule removes the reference to separate, identifiable business segments and references derivation of direct or indirect benefit, which is presumed to occur in Texas unless otherwise proven by the taxpayer.

While some of the changes introduced with the new Rule 3.330 are intended to modernize and simplify the requirements for data processing services, the Comptroller has retained a high level of subjectivity on numerous fronts. The updated Rule clarifies a taxpayer’s right to issue a certificate and self-report use tax for the portion of services occurring in Texas and not used in an exempt manner (such as for resale).

Ryan offers expertise and specific strategies that can help develop a sound and consistent approach to document such use. Based on the comments submitted when the Rule was proposed, and the Comptroller’s responses, we anticipate ongoing challenges with the administration of the tax on data processing services. Please contact the individuals listed below for assistance with your evaluation.

TECHNICAL INFORMATION CONTACTS:

Winston Post
Principal
Ryan
972.934.0022
winston.post@ryan.com

John Christian
Director
Ryan
512.476.0022
john.christian@ryan.com

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