Is a computer-using accountant's preparation of financial reports, payroll tax filings, and income tax returns for clients subject to Texas sales tax as data processing?

Plain-English summary

An accountant who prepares financial reports for clients using a computer asked the Comptroller whether several of those computer-assisted services trigger Texas sales tax as taxable "data processing." The accountant's services included a check register, payroll register, general ledger, and financial statements, plus manually prepared payroll tax returns -- except for the T.E.C. (Texas Employment Commission) wage list, which the computer generates automatically.

The Comptroller drew a line between the services. Preparing the financial reports (check register, payroll register, general ledger, financial statements) using a computer is not taxable -- the computer is just a tool used to produce a nontaxable accounting service. But generating the T.E.C. wage list with the computer for the payroll tax return is taxable data processing, even though the underlying data was already entered to produce the (nontaxable) financial report and the wage list itself took no additional time to generate.

Because the taxable wage-list function and the nontaxable financial-report function were both produced from a single data entry and could be billed together, the letter applies Texas's bundled-charge rule: if taxable services are sold for a single, undifferentiated charge along with nontaxable services, the whole charge is presumed taxable only when the taxable portion exceeds 5% of the total charge; if it's 5% or less, none of the combined charge is taxable. However, if the accountant separately states a charge for the taxable wage-list service, tax must be collected and remitted on that stated amount regardless of what percentage it represents.

The letter also addresses a second question: the accountant charges clients a "data processing fee" to pass along computer costs incurred while preparing (nontaxable) income tax returns. The Comptroller ruled that fee is not taxable because it is really just an overhead cost tied to a nontaxable service, not a separately taxable data processing charge. But the letter flags a practical risk: labeling it a "data processing fee" invites an auditor to assume a taxable service was billed, and the burden would then fall on the client to prove the charge was actually just overhead for a nontaxable service.

What this means for you

Accountants and bookkeepers using computers for client work

Not every computer-assisted task is taxable data processing, and not every one is exempt -- Texas looks at what the computer output actually is. Preparing financial statements, ledgers, and payroll registers by computer is treated as part of a nontaxable accounting service. But generating certain government-required outputs, like the T.E.C. wage list here, can independently qualify as taxable data processing, even when it flows from the same data entry as a nontaxable report.

Businesses billing bundled services

If you bundle a taxable component (like data processing) into a single fee with nontaxable accounting or tax-prep services, track what percentage of the total charge the taxable component represents. Under the 5% rule described in this letter, staying at or under 5% keeps the whole bundled charge nontaxable; exceeding it makes the Comptroller presume the entire charge is taxable. Separately stating the taxable portion avoids that presumption but requires collecting tax on that stated amount no matter how small it is.

Naming and invoicing choices

Be careful with fee labels. This letter shows that calling overhead costs passed through to a client a "data processing fee" can create an audit problem even where the underlying charge is legitimately nontaxable, because the label itself suggests a taxable service was rendered. Clients (or their preparers) would then have to affirmatively show the fee was overhead for a nontaxable service, not data processing.

Common questions

Q: Is using a computer to prepare a client's financial statements and payroll register taxable in Texas?
A: No. The letter treats computer-prepared financial reports (check register, payroll register, general ledger, financial statements) as a nontaxable accounting service, not taxable data processing.

Q: Why is the T.E.C. wage list taxable if it's generated from the same data as the nontaxable financial report?
A: Because the wage list itself is treated as a distinct taxable data processing output for purposes of the payroll tax return, even though no additional time or separate data entry was required to produce it.

Q: If I bundle the taxable wage-list charge with nontaxable accounting fees into one price, is the whole thing taxable?
A: Only if the taxable portion is more than 5% of the total combined charge. At 5% or less, the whole charge is treated as nontaxable. If you separately state the taxable charge, you must collect tax on it regardless of the percentage.

Q: Is a "data processing fee" passed through for computer costs on income tax return preparation taxable?
A: No, the letter treats it as a nontaxable overhead cost tied to the nontaxable service of preparing income tax returns -- but the label creates audit risk because it implies a taxable service was billed.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1192G12

Original ruling text

May 22, 1992

Dear **:

Thank you for your letter concerning the use of a computer in the accounting
services provided to your clients.

According to your letter, you prepare financial reports using a computer.
These reports include a check register, a payroll register, a general ledger
and financial statements. You do not prepare any payroll or accounts payable
checks, keep track of any inventory records, or do any accounts receivable
billings. You do prepare payroll tax returns, but these are done manually,
except for the T.E.C. wage list, which is generated by the computer. The
information needed to generate the wage list must be entered into the computer
in order to produce the financial report and takes no additional time. You do
not believe any of the services are taxable.

The preparation of the financial reports for your client using a computer is
not taxable. However, the use of the computer to prepare the T.E.C. wage list
for the payroll tax return is taxable data processing. When 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. If the
portion relating to taxable services is 5.0% or less, the total charge is not
taxable. If you separately state charges to the client for taxable services,
you must collect and remit tax from the client for the taxable services,
regardless of the percentage they represent.

You also stated you use a computer to help in preparing income tax returns for
your clients. You pass the cost of the computer to your clients in the form of
a "data processing fee". You do not believe the fee is taxable.

The fee is an overhead cost that is related to a nontaxable service (the
preparation of income tax returns). The fee is not taxable when related to a
nontaxable service. However, your clients could be at a disadvantage if they
are audited because the term "data processing fee" implies a taxable service
was billed to them. The clients would have to show that it was an overhead
cost for nontaxable service and not actually data processing.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-252-5555, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Administration Division