Sales Tax Update - April 2025

Texas Comptroller Adopts Changes to Data Processing Services

Effective April 2, 2025, the Texas Comptroller effected changes to Texas Administrative Code Rule 3.330, addressing the definition and sales tax treatment of data processing services, most specifically (1) refining what constitutes and does not constitute data processing services, and (2) adopting an exclusion for data processing that is sold for a single charge with another service if the data processing service (a) does not have a separate value and (b) is ancillary to the other service.  Data processing is defined as “the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information.” [34 Tex Admin Code Sec. 3.330(a)(1)].

With respect to the definition of “data processing” many of the changes merely reflect recent decisions and rulings of the Comptroller.  Specific examples of taxable data processing include payroll services, production of business accounting data, data migration services and website creation, repair and maintenance involving the entry, compilation, manipulation, or storage of data or information.  Of course, taxable data processing is subject to a 20% exclusion from the basis of tax.

The second significant change is the Comptroller’s excludes data processing that is sold for a single charge with another service if the data processing service does not have a separate value and is ancillary to the other service. [34 Tex Admin Code Sec. 3.330(a)(1)(C)]  The addition of the “ancillary” test to the exclusion for data processing sold with another service is a marked departure from Comptroller’s use of “essence of the transaction” test in mixed transactions involving both taxable and nontaxable items.  The taxpayer has the burden of showing that the data processing service does not have a separate value and is ancillary to the other service.  What is difficult is that “ancillary” is not defined, and is quite subjective.  The rule sets forth criteria that the Comptroller may consider, primarily focused what the service provider is doing, not what the customer desires to receive.  The Comptroller will consider – among other things - the amount of expertise, knowledge and discretion used by the service provider and the extent of routine or repetitive data manipulation in determining whether one is ancillary to the other. 

We have also seen that sales tax software codes have been updated to reflect these changes. Taxpayers providing services that involve the entry, retrieval, search, compilation, manipulation, or storage of data or information, even as a component of the service, are advised to work with their sales tax advisors to ensure accurate imposition of these new tax rules. 

Illinois Law Clarifies that Sales Tax Should not be Subject to Credit Card Processing Fees

As more e-commerce retailing continues to demonstrate strong growth – 8.1% domestic increase from 2023 to 2024, according to U.S. Census Bureau data – states will continue to define and refine the tax base for sellers.  One such area involves the imposition of sales tax on credit card processing fees.  When a retailer accepts payment via a credit card, the retailer typically does not receive the full amount of payment due to the service charges or fees charged by the credit or debit card company. In General Information Letter ST 24-0042-GIL, we previously reported that the Department of Revenue clarifies that these charges or fees are part of the retailer’s cost of doing business and are not deductible from the gross receipts subject to tax. 86 Ill. Adm. Code 130.410.  [General Information Letter ST 24-0042-GIL, Illinois Department of Revenue, December 11, 2024, released February 2025].

However, pursuant to HB 4951, to take effect July 1, 2025, card networks are prohibited from charging fees on the portion of the charge relating to sales tax.   This is an example of a law forcing technology to adapt, as networks have expressed that their systems are not equipped to separate out the tax and tips from the transaction.  

Utah Drops the Transaction Count from its Economic Nexus Threshold

Utah is the most recent state to follow trend and drop its transaction count from the state’s sales tax economic nexus threshold.  [SB 47, signed 3/25/2025]. Effective July 1, 2025, remote sellers will establish sales tax nexus with Utah to the extent gross sales of tangible personal property, any products transferred electronically, or services exceed $100,000 in the current or previous calendar year.  Previously, Alaska, California, Colorado, Indiana, Iowa, Louisiana, Maine, Massachusetts, North Carolina, North Dakota, South Dakota, Washington, Wisconsin and Wyoming had removed the transaction count from their sales tax economic nexus threshold. 

Our handy Economic Nexus Matrix can be found here

New York High Court Affirms Taxability of Personal Information Incorporated into Reports Furnished to Others in the Provision of Advertising Services

Technology has empowered advertising service providers to furnish extremely curated reports detailing the impact and success of specific advertising expenditures for customers.  This information enables customers to make more targeted expenditures of their advertising dollars, by comparing their results to competitors in the market. 

In New York, information services are subject to sales tax.  However, sales tax does not apply to information that is personal or individual in nature and that is not or may not be substantially incorporated into reports furnished to other persons by the person who has collected, compiled or analyzed the information. [NY Code Sec. 1105(c)(1); NY Reg. Sec. 527.3(b)(2)] Therefore, while data processing and information services are taxable services in New York, to the extent the information in the database is personal or individual to the customer, and is not or may not be not furnished to others by the service provider, it is not subject to tax.

In Matter of Dynamic Logic, Inc. v Tax Appeals Trib. of the State of New York, the New York Court of Appeals affirmed a decision upholding the taxability of advertising related reports as information services. [2025 NY Slip Op 02262 (NY Ct App, April 17, 2025)] Dynamic Logic provides a services that enables customers to measure the effectiveness of their advertising campaigns. In providing the service, Dynamic Logic conducts surveys about the customer’s campaign, the results of which are compared against similar market data that Dynamic Logic maintains.  Dynamic Logic then provides the results in a report to the customer and the customer’s results are incorporated into the market database that will be utilized in providing services to other customers. 

At issue in the appeal was whether the information services qualified for the exclusion “personal or individual in nature and that is not or may not be substantially incorporated into reports furnished to other persons by the person who has collected, compiled or analyzed the information.”  While the parties all agree that the information was “personal or individual in nature”, the NY Court of Appeals determined that the information failed to meet the second criteria of the exclusion, because the reports and recommendations for the client include not only the customer information but market information.  Furthermore, the customer’s results are incorporated into the market database, which itself is available for sale to the public.

While the taxpayer argued that personal information was not “substantially” incorporated into reports furnished to others, the Court of Appeals determined that the Tax Tribunal’s interpretation of “substantially incorporated” was reasonable, noting “…[t]his reincorporation of data represents an appreciable portion of each subsequent report, without which there would be no ability to compare a client’s campaign to any baseline data.” As such, the Court of Appeals was convinced that – while quantitatively a nominal amount of data – the personal information was qualitatively important to the value of the market data and subsequent reports provided to other customers.

State Tech Taxes to Watch

Washington State SB 5814 seeks to impose sales tax on a whole host of new services, including services of advertising agencies,  software delopment, IT support services and additional digital services.  Similarly, the Maryland budget bill on the Governor's desk, includes a new 3% sales tax on myriad technology services, including software delopment and IT services.  While the Governor has indicated his support for this aspect of the budget, it currently remains unsigned.  As the economy shifts towards more and new services, we will continue to see states epxand their sales tax base to cover more services, including those historical viewed as nontaxable business inputs.

Learning From Other Taxpayers

When you cease nexus in a state, or change from one type of account to another (eg sales tax to vendors use), make sure to file a final return and close the account.  For a managed compliance client we recently added, we conducted a review of its sales tax accounts, only to realize that their former service provider (not a sales tax advisory firm) had set up a new vendors use tax account in a state 4 year ago, but had never closed the old sales tax account.  We gained access to the account only to discover 4 years of failure to file notices, proposed assessments and a levy against the CEO’s personal bank account for over $400,000 that was set to seize the funds within weeks.  Talk about good timing.  We quickly filed the zero returns to being the account current, and closed the account.  The very next day, the state called me to say they had instructed the CEO’s bank to release the levy.  The client was thrilled.  Simple mistake - drastic consequences - completely avoidable.

Moral of the story: have a trusted sales tax advisor watching your blind spots.