Is a remote computer data backup service, where a client's data is copied over phone lines by modem and temporarily stored (not manipulated), subject to Texas sales tax?

Plain-English summary

A taxpayer operating a remote backup service asked the Comptroller whether its service was taxable. The business backed up its clients' computer data on a daily basis over phone lines by modem: a copy of each client's data was transferred from the client's computer to the taxpayer's computer for security purposes, and would be transferred back to the client if the client experienced a catastrophe. The taxpayer charged clients a monthly fee based on the amount of data involved, and the data was not manipulated or processed at the taxpayer's location — it was only temporarily stored.

The Comptroller responded that this service is taxable, and that the provider should collect sales tax from clients on the total amount of the monthly fee. The letter explains that data processing services include computerized data storage, so the service is taxable even though the taxpayer does not manipulate the client's data. The letter points to the definition of data processing services in Rule 3.330(a) (enclosed with the original letter) as the basis for this conclusion. The Comptroller also notes that this opinion is based on the facts submitted, and that other facts, though similar, may yield different results.

What this means for you

Businesses offering remote data backup or storage services

If your business copies or stores clients' computer data — even just temporarily and even without manipulating or processing it — the Comptroller treats that as a taxable data processing service. Charging a flat monthly fee based on data volume does not change that outcome; sales tax applies to the full fee.

Accountants and tax professionals advising storage/backup providers

This letter confirms that "data processing services" under Rule 3.330(a) reaches pure computerized data storage, not just services that manipulate or transform data. When evaluating whether a client's backup, hosting, or storage offering is taxable, the presence or absence of data manipulation is not determinative — storage alone is enough to trigger taxability under this letter's reasoning.

Common questions

Q: Is a backup service taxable even if the provider never touches or processes the client's data?
A: Yes. The letter states the service is taxable "even if you do not manipulate the client's data," because data processing services include computerized data storage.

Q: What portion of the monthly fee is subject to sales tax?
A: The letter directs the provider to collect sales tax on the total amount of the monthly fee, which was charged based on the amount of data involved.

Q: Can another business rely on this exact answer for a similar-looking service?
A: The letter itself cautions that "this opinion is based on the facts you submitted" and that "other facts, though similar, may yield different results," so businesses should confirm their own facts against Rule 3.330(a) or seek their own ruling.

Citations and references

• 34 Tex. Admin. Code Rule 3.330(a) (definition of data processing services), referenced in the letter as "enclosed Rule 3.330(a)"

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9503L1338G13

Original ruling text

March 14, 1995

Dear **:

Thank you for your letter concerning the taxability of remote backup services.

Situation: The business is referred to as a remote backup service. You backup
your client's computer data on a daily basis over the phone lines by modem. A
copy of the client's computer data is transferred from their computer to yours
for a security purposes. This data would be transferred back to the client if
the client experiences a catastrophe. The client is charged a monthly fee on
the amount of data involved. The data is not manipulated or processed at your
location. The data is temporarily stored only.

Response: The service you provide is taxable. You should collect sales tax
from your clients on the total amount of the monthly fee. Data processing
services include computerized data storage. Your service is taxable even if
you do not manipulate the client's data. See the definition of data processing
services found in enclosed Rule 3.330(a).

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, 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

NOTE: Previous Accession Number 9503976L