Effective April 2, 2025, the Texas Comptroller of Public Accounts (Comptroller) has adopted final amendments to 34 Tex. Admin. Code Section 3.330, on the sales and use tax treatment of data processing services.¹ The final amendments make some revisions to the proposed amendments released by the Comptroller in October 2024 (see Tax Alert 2024-1861). Notably, the Comptroller announced that amendments affecting marketplace providers will not go into effect until October 1, 2025, which allows the Texas Legislature an opportunity to adopt legislation² on the subject.³

The final amendments expand the definition of data processing, include examples of taxable and nontaxable data processing services, require data processing service providers to register for a Texas Sales and Use Tax Permit, update the rules dealing with the sourcing of data processing, and implement an "ancillary test" to determine if a service is considered data processing.

The proposed changes would have classified search engine optimization services, social media marketing and lead generation as taxable data processing. Based on public comments, the Comptroller agreed to remove those terms "as they did not provide sufficient guidance to taxpayers." The Comptroller noted, however, that it would review those services on a case-by-case basis to determine if the service meets the definition of taxable data processing services.

With the exception of the changes affecting marketplace providers, the Comptroller declined to adopt public comments that argued the amendments should only be applied prospectively. The Comptroller reasoned that the amendments to Section 3.330 adopt "current policy regarding services that meet and that do not meet the definition of data processing."

Implications

The implementation of an "ancillary test" to determine whether a service is considered data processing has the potential to significantly change what services will now be considered taxable data processing in Texas. Previously, the Comptroller has used the "essence of the transaction test" to determine if a service qualified as data processing, which it has now determined is not adequate. Under the "ancillary test," the Comptroller will focus its inquiry on what the seller is doing rather than what the buyer wants.