From the Desk of Glenn Hegar:Rule update would bring clarity to taxing online marketplaces in Texas
September 2024
The text that follows originally appeared in the Austin American-Statesman.
Technology has undergone a sea change in the past few decades, and Texas tax law has had to adapt to the innovations — including online marketplaces that process data to help people sell goods and services. When the Legislature imposed the sales tax on data processing services in 1987, the internet as we know it didn’t even exist. Current tax law applies to online marketplaces just as it does to the traditional businesses within our communities, and my job is to collect taxes fairly.
To help online marketplaces understand their responsibilities under the law, my office is proposing to update Comptroller Rule 3.330 regarding taxable data processing services. The proposed update has been published in the Texas Register for public comment, and we may revise it based on feedback we receive.
Starting with the basics, the proposed rule defines a taxable data processing service as the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information. It also lists items that are taxed and excluded from taxation.
For example, the proposed rule excludes some data processing from taxation if it is ancillary to a nontaxable, related service and does not have a separate value. It identifies specific factors to consider when looking at whether a service is taxed as a data processing service, and it provides examples of services that are and are not taxable.
I hope the detail in the proposed rule will resolve any confusion about the taxability of fees paid to online marketplaces by people using them to sell goods and services. Many online marketplaces have already come into compliance and are appropriately collecting tax on their data processing fees. But other online marketplaces have expressed surprise when they’re audited by my office and discover the fees they charge the sellers are taxable, since sales tax is separately collected on the price of the item sold.
The reality is there are two purchasers, two sales contracts and two taxable transactions. The purchaser of goods or services through a marketplace pays sales tax on the goods or services purchased. And the marketplace seller, who is purchasing data processing services from the marketplace provider, pays sales tax on those services.
My auditors have worked with online marketplaces, as they do with all taxpayers, to address concerns within the framework of the law. I understand why online marketplaces want their fees to be exempt from the sales tax and in the 2023 legislative session, my office helped to draft a workable bill when online marketplaces wanted the Legislature to exempt these fees from tax. The Legislature, however, didn’t approve the exemption.
This is the crux of the matter. Legislators have the ability to change the law, and so far, they haven’t changed this one. Unless and until the law is revised, I must carry out my responsibility, just as I do in collecting every other state tax created by the Legislature.
My office’s proposed rule is an effort to help online marketplaces navigate the realities of the tax statutes. I welcome input from them and all members of the public as we work toward finalizing the rule. The job of being Texas’ tax collector is rarely popular, yet the bottom line, as always, is we must follow the law and implement it fairly for all.
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