Texas’ New State of Mind on the Taxability of Data Processing Services
Everything’s bigger in Texas – including the collection of data processing services subject to sales tax in the state. While several states already implement broader sales and use taxes on digital products, including data processing services (DPS), such as Washington State’s Digital Products Tax, Texas’s DPS tax stands out for explicitly targeting e-commerce through its proportional intrastate sourcing of sales provision for marketplace provider services.
What makes this state provision unique is not just that a digital product is subject to sales and use tax (SUT), but also the actual economic activity related to data processing services. Because this DPS tax applies to e-commerce, it is likely to affect remote sales income. Undoubtedly, this model will likely be adopted by other states, as digital services taxes in the U.S. have become increasingly unpopular. At the same time, state governors across the country are growing concerned about budget constraints, revenue shortfalls and the difficult decisions they face in balancing their states’ budgets in the near future.
Although hard to believe, the Longhorn State has a longstanding law (dating back to the late 1980s) that imposes a sales tax on data processing services. Texas was surely a forerunner in early digital taxation and taxing online markets. In March, after facing much controversy and challenges from online business and technology groups, the state issued an amended rule, generally effective on April 2, 2025, to help online marketplaces determine their tax obligation. The update is also intended to expand the scope of services subject to sales and use tax, according to a Grant Thornton report.
A statement at the Texas Comptroller’s web page defines data processing as a service performed with a computer using the customer’s data: “Entering, storing, manipulating or retrieving a customer’s data is taxable. But merely using the computer as a tool to help perform a professional service is not taxable.” Taxable services include:
- Payroll services, such as preparing W-2 forms, payroll tax returns and payroll checks
- Production of business accounting data, such as accounts payable and accounts receivable billing
- Internet services, such as creating web pages and providing server space
- Computer-aided drafting when the client provides specifications
- Transcription services and word processing services.
Examples of nontaxable services include:
- Auditing services, including inventory counting services
- Preparing financial statements
- Preparing federal income tax returns.
The changes regarding marketplace provider services are effective October 1, 2025. These services may be taxable if they involve processing data or information provided by the marketplace seller, according to Grant Thornton. For example, storing product photographs, maintaining transaction records and performing analytics are taxable services.
This update is another pioneering move by the Lone Star State, and one which other jurisdictions are certain to follow, again, given the budget constraints and state revenue decline in recent months. Though intended in part as a regulatory clarification, the new rule does little to reduce the overall level of complexity in the state’s data processing sales tax laws or minimize companies’ compliance burden for indirect tax.
