Is a company's business of standardizing and structuring MRO (maintenance, repair, and operating) materials descriptions for clients a taxable data processing service in Texas, even for the parts of the work not actually done on a computer?

Plain-English summary

A materials cataloging company ("ABC, Inc.") that provides standardized part and equipment descriptions for Maintenance, Repair, and Operating (MRO) inventory to process industries worldwide asked the Comptroller how its revenue streams were taxed. The company's revenue was 85% services (62% standardizing/structuring MRO material description databases using proprietary methodology, 18% additional descriptive data gathered from manufacturers or on-site inspection, 5% consulting and training) and 15% products (a material description format dictionary, a duplicate-item report, and software at 2% of total revenue). Notably, computers were used to facilitate the work but were not strictly necessary to complete the underlying tasks.

The Comptroller ruled that the customized materials cataloging service is a taxable data processing service. Tax Code § 151.0035 defines "data processing service" broadly to include word processing, data entry, retrieval, search, information compilation, and other computerized data/information storage or manipulation -- and that definition covers use of a computer or computer time for processing regardless of who performs it. Rule 3.330(a) amplifies this definition, and Rule 3.330(d)(3) requires the provider to charge tax on services or expenses directly related to and incurred while providing the data processing service, including activities that are part of completing the cataloging even when NOT performed by computer. Finally, Rule 3.330(d)(2) requires tax on the entire single charge for a bundle of taxable and unrelated nontaxable services whenever the taxable portion exceeds 5% of the total cost.

What this means for you

Materials cataloging, data standardization, and similar information-compilation businesses

Don't assume that manual (non-computer) work steps escape tax just because they're not literally computerized -- Texas's data processing definition and Rule 3.330(d)(3) reach the full scope of activities directly related to providing the service, computerized or not.

Businesses that bundle taxable data-processing work with other services

If your taxable data processing charges make up more than 5% of a bundled invoice's total cost, expect the ENTIRE charge -- not just the data-processing slice -- to be taxable under Rule 3.330(d)(2), unless you separately itemize and can show the nontaxable portion is a genuinely unrelated service under Rule 3.330(d)(1).

Accountants and tax professionals

This letter is a useful example of how broadly "data processing service" sweeps under § 151.0035 -- information compilation and re-formatting of descriptive data, even when done by human experts reviewing and re-formatting entries rather than by automated computer processing, still falls within the definition.

Common questions

Q: Is a data-related service taxable even if a computer isn't strictly required to do the work?
A: Yes, per this letter -- Texas's data processing service definition and Rule 3.330(d)(3) reach the full scope of related activities, not just the computerized portion.

Q: What happens if only part of a bundled charge is for taxable data processing?
A: Per Rule 3.330(d)(2), if the taxable data processing portion is over 5% of total cost, tax applies to the entire bundled charge.

Q: Does information compilation count as "data processing" even without automated computer work?
A: Yes -- per this letter, § 151.0035's definition of data processing service specifically includes "information compilation" among the covered activities.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0035 (definition of data processing service)
• 34 Tex. Admin. Code Rule 3.330(a) (data processing services)
• 34 Tex. Admin. Code Rule 3.330(d)(1) (unrelated nontaxable services)
• 34 Tex. Admin. Code Rule 3.330(d)(2) (5% threshold for taxing an entire bundled charge)
• 34 Tex. Admin. Code Rule 3.330(d)(3) (charges directly related to and incurred while providing data processing services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9708681L

Original ruling text

August 15, 1997

Dear***:

Thank you for your letter of August 1, 1997, asking about your firm's Texas
sales and use tax responsibilities.

You provided a breakdown of your company's sources of revenue and described
what types of products and services your company provides. In providing these
services, the company uses computers to facilitate the handling of the data,
but it is not necessary to use a computer to complete the tasks.

ABC , Inc. (ABC ) is a materials cataloging company providing products and
services to process industries worldwide. Your primary business focus is
providing standardized part and equipment descriptions for Maintenance, Repair
and Operating (MRO) inventory.

ABC contacts with clients to provide a customized materials cataloging solution
utilizing its proprietary materials cataloging methodology and classification.

ABC 's revenue is derived from a combination of products and services.
Services account for 85% of the revenue.

Approximately 62% of the revenue is earned from standardizing and structuring
databases of MRO material descriptions using a confidential and proprietary
methodology developed by ABC . This process involves the review, analysis and
re-formatting of each material description by a materials expert. About 18% of
the revenue is earned from providing clients with additional descriptive data.
This data is gathered either through direct contact with manufacturers or the
physical inspection of the materials at the client's site. Consulting and
training account for the remaining 5% of the services revenue.

ABC provides three proprietary products including a collection of material
description formats (Standard Modifier Dictionary), a report identifying
potential duplicate items in a client's database, and software. The software
accounts for 2% of the revenue.

Response: The service of providing customized materials cataloging is a taxable
data processing service. Texas Tax Code Section 151.0035 defines a "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. "Data processing service" also includes the use of a computer or
computer time for data processing whether the processing is performed by the
provider of the computer or computer time or by the purchaser or other
beneficiary of the service.

This definition is amplified in the enclose Rule 3.330(a) concerning data
processing services.

Rule 3.330(d)(3) requires data processing services providers to charge sales
tax on services or expenses directly related to and incurred while providing
data processing services. This would include the activities involved in
completing the cataloging, including those not performed by computer.

Rule 3.330(d)(2) requires a data processing services provider to charge tax on
the entire single charge for taxable and nontaxable unrelated services when the
amount attributable to taxable services is over 5% of the total costs. An
unrelated nontaxable service is defined in Rule 3.330(d)(1).

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 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division