Is on-site computer network administration (backups, file cleanup, running reports, data manipulation) taxable as a data processing service in Texas?

Plain-English summary

A taxpayer who performed on-site system management and computer consulting support services for a client under a long-term agreement asked the Comptroller to confirm, in writing, a verbal answer they had previously received about which of these services were taxable. The services listed included: backing up information on the client's multi-user server computers; cleaning up old files and messages; installing software and software upgrades purchased by the client from a third-party retailer; using existing tools on the client's computers to produce reports or manipulate data; training and support on existing (third-party-written) database applications; and integrating PC software applications for use with Microsoft Windows.

The Comptroller explained that consultation services are not taxable if they are not related to the sale of a taxable item, and that installing software or software upgrades is not taxable if the person doing the installation did not sell the software, the upgrade, or the original program being upgraded.

However, citing Tax Code Section 151.0035's definition of "Data Processing Service" (which includes "word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation") and Rule 3.330's similar definition, the Comptroller concluded that four of the listed services are taxable data processing services: (1) backup of information on the client's multi-user server computers, (2) cleanup of old files and messages on the client's systems, (3) use of existing tools on the client's computer to produce reports, and (4) use of existing tools on the client's computer to manipulate data for the client.

The letter instructs the taxpayer to separately state and collect sales tax on charges for these taxable services. It also explains a bundling rule: if a single combined rate is charged for both taxable and non-taxable services, the entire charge is presumed taxable if the taxable services make up more than 5% of the total charge — but that presumption can be overcome by separately stating a reasonable charge for the taxable services at the time of the transaction.

What this means for you

IT consultants and network administrators

If you provide on-site system management or network administration services — such as data backups, file/message cleanup, running reports with existing tools, or manipulating data with existing tools — this letter indicates those specific tasks are taxable data processing services in Texas, and you should separately state and collect sales tax on them.

By contrast, general consulting not tied to selling a taxable item, and installing software or upgrades you didn't sell, were treated as non-taxable in this letter.

Businesses that bundle IT services into one invoice

If you charge a single combined rate covering both taxable data-processing-type tasks and non-taxable consulting/installation tasks, be aware of the 5% presumption described in this letter: if the taxable portion is more than 5% of the total charge, the whole charge is presumed taxable unless you separately state a reasonable charge for the taxable services at the time of the transaction.

Accountants and tax professionals

This letter is a useful, fact-specific illustration of how the Comptroller applied the Section 151.0035 "data processing service" definition and Rule 3.330 to common LAN/WAN administration tasks in 1994. When advising clients on similar services, confirm whether current guidance still draws the line the same way, since this is a decades-old letter addressed to a specific taxpayer.

Common questions

Q: Are all the network administration tasks listed in this letter taxable?
A: No. The Comptroller found only four of the eight listed tasks taxable as data processing services: backups of client server data, cleanup of old files/messages, using existing tools to produce reports, and using existing tools to manipulate data. General consultation not tied to a taxable item sale, and installing software or upgrades the provider didn't sell, were treated as non-taxable.

Q: What law did the Comptroller rely on?
A: The letter cites Tax Code Section 151.0035, which defines "Data Processing Service," and Rule 3.330 (Data Processing Services), which expands on that statutory definition.

Q: What happens if I bill my client one combined price for both taxable and non-taxable services?
A: According to this letter, if the taxable services make up more than 5% of the total charge, the entire charge is presumed taxable. You can overcome that presumption by separately stating a reasonable charge for the taxable services at the time of the transaction.

Q: Is training on existing database applications taxable under this letter?
A: The letter lists "training and usage support of existing database applications (written by third party)" among the services described, but does not include it in the list of services it identifies as taxable data processing services.

Q: Does this letter apply to my business specifically?
A: This is a taxpayer-specific letter ruling from 1994 based on the facts that taxpayer described. Under STAR's rules, it can only be relied upon by the taxpayer to whom it was issued, so you should confirm current guidance for your own facts.

Citations and references

• Tax Code Section 151.0035 (definition of "Data Processing Service," quoted in the letter)
• 34 Tex. Admin. Code Rule 3.330 (Data Processing Services), referenced in the letter as expanding on the Section 151.0035 definition

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9404L1307G11

Original ruling text

April 15, 1994

Dear Ms. **:

This is in response to your letter requesting a written verification of
a verbal response that you received from Mr. Orlando Guerrero, in our Tax
Administration Division.

As I understand it, you perform on-site system management and computer
consulting support services for a client under a long term agreement. The
System Management services that you perform for your client include:

1. backup of information on the client's multi-user serve computers

2. cleanup of old files and messages on the client's systems

3. installation of software purchased by the client from a third party
   retailer

4. installation of software upgrades from third party retailer

5. use of existing tools on the client's computer to produce reports

6. use of existing tools on the client's compute to manipulate data for
   the client

7. training and usage support of existing database applications (written
   by third party)

8. integration of PC software applications for use with Microsoft Windows

Consultation services are not taxable if they are not related to a sale
of a taxable item. Similarly, installation of software or software upgrades
in a client's computer system is not taxable if you did not sell the software
or upgrades or the original program being upgraded.

Section 151.0035 of the Tax Code defines" "Data Processing Service" to
include "word processing, data entry, data retrieval, data search, information
compilation, payroll and business accounting data production, and other
computerized data and information storage or manipulation."

Emphasis Added.

Subsection (a) of Rule 3.330 - Data Processing Services expands on the
definition found in Section 151.0035 as follows:

Services. Data processing services means 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.

Emphasis Adds

Based on these definitions, the following services that you provide to
your client would be taxable as data processing services:

1. backup of information on your client's multi-user server computers

2. cleanup of old files and messages on your client's systems

3. use of existing tools on your client's computer to produce reports

4. use of existing tools on your client's computer to manipulate data for
   the client

You should separately state and collect sales tax on the charges to your
client for these services. If you charge your client a single rate that
includes both taxable and non-taxable services, the total charge will be
presumed to be taxable if the taxable services comprise more than 5% of the
total charge. This presumption may be overcome if at the time the transaction
occurs you separately state to your client a reasonable charge for the taxable
services.

I apologize for any misinformation you may have received from this
office, but based on the specific facts in your letter and the language
contained in Section 151.0035 and Rule 3.330, the taxability of the services
mentioned above is he only conclusion that I can reach.

This letter is based on the facts recited above. Other facts though
similar may provide a different result. Should you have any further questions,
please do not hesitate to contact me toll-free at 1-800-531-5441, extension
3-4502.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9404461L