“Information Processing Providers” And Gross sales And Use Tax

The characterization and taxability of “knowledge processing” is a fancy and hotly contested space. The definition of “knowledge processing” was carried out in 1987, and has not been considerably up to date. As all readers are conscious, in that very same time span the usage of computer systems has developed from being little greater than an afterthought to being a necessary a part of life, and are the first engine for each communications and enterprise.

The disconnect between (i) the ever-changing panorama of computer systems and (ii) the stagnant definition of “knowledge processing” providers can create a bunch of issues when figuring gross sales and use tax. Let’s use Texas tax regulation for example.

Definitions of “Information Processing Providers”

Texas Tax Code § 151.0035 defines “knowledge processing service” to incorporate the next:

-word processing, knowledge entry, knowledge retrieval, knowledge search, data compilation, payroll and enterprise accounting knowledge manufacturing, and different computerized knowledge and knowledge storage or manipulation;
-the efficiency of a totalisator service with the usage of computational gear required by Subtitle A-1, Title 13, Occupations Code (Texas Racing Act); and
-the use of a pc or pc time for knowledge processing whether or not the processing is carried out by the supplier of the pc or pc time or by the purchaser or different beneficiary of the service. [1]

This definition was initially carried out in 1987, however has not been considerably up to date since then. [2] Comptroller Rule 3.330 defines “knowledge processing providers” to imply “the processing of knowledge for the aim of compiling and producing data of transactions, sustaining data, and getting into and retrieving data.” [3] Additional, the Comptroller’s definition states that “knowledge processing providers” particularly embrace “phrase processing, payroll and enterprise accounting, and computerized knowledge and knowledge storage or manipulation.” [4]

Affect on Varied Industries

When the above definitions of “knowledge processing providers” had been first carried out, computer systems had been scarcely obtainable to the general public, and the overwhelming majority of providers had been nonetheless carried out with out the usage of computer systems. In flip, the taxability of these providers was decided based mostly on the service itself, moderately than the usage of a pc.

Quick ahead to 2023, almost 36 years later. Lots of those self same providers are being carried out with not less than some pc use, which has prompted the Comptroller to say that some or all of those providers are taxable as “knowledge processing providers”. That is even supposing, as a basic matter, the underlying providers themselves haven’t considerably modified.

The aggressive remedy of “knowledge processing providers” has had, and can possible proceed to have, an direct impression on {many professional} providers, together with the next:

Actual property and title-related providers [5];
On-line administration options [6]; and
Different “skilled” providers, equivalent to advertising and marketing and promoting, that more and more make use of computer systems to carry out these providers.

[1] Tex. Tax Code § 151.0035(a).

[2] Efficient October 1 2021, the definition was up to date through S.B. 153 to offer that knowledge processing doesn’t embrace sure providers associated to (i) medical dictation by a medical transcriptionist, (ii) providers to encrypt digital cost data onto a cost card community, and (iii) settling of specified digital cost transactions. See Tex. Tax Code § 151.0035(b), S.B. 153. Whereas unclear presently, this will have an effect on the remedy of providers which the Comptroller has beforehand tried to categorize as taxable, equivalent to on-line banking and invoice pay providers. See, e.g., Hegar v. CheckFree Providers Company, 2016 WL 1576414 (Tex. App.—Houston [14th] 2016, no pet.).

[3] 34 Tex. Admin. Code § 3.330(a)(1).

[4] Id.

[5] See, e.g., Hegar v. Black, Mann, and Graham, L.L.P., 2022 WL 567853 (Tex. App.—Austin 2022, no pet.).

[6] See, e.g., Instill Company v. Hegar, 2019 WL 2308592 (Tex. App.—Austin 2019, pet. denied).