The Texas Comptroller of Public Accounts recently issued a decision regarding the taxability of digitized services provided by a Taxpayer to oil and gas industry customers. The Taxpayer’s digitized service involves analysis of gas well log data received and the tailoring of that data in reports to the client to its specific needs. For example, the Taxpayer might take gas well data and analyze it against certain production goals as set by the client. The digital component of the service would therefore be taking the raw well data and measuring it against certain output or production goals as set by the client to determine an overall productivity result. That analysis and the results would be provided to the client as its final product.
Notably, the Comptroller upheld the auditor’s sales tax assessment on digitized services as data processing services.
Texas imposes sales tax on data processing services. Data processing services are defined as the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. The auditor issued the tax assessment based on taxpayer’s description of digitized services on its website. Taxpayer’s website described well log digitizing as the conversion of client-provided data. Taxpayer’s other digitized services included converting the data into a word document. Texas auditors focused on the word “conversion” to conclude taxpayer’s digitized services are taxable data processing services. The auditor argued that “conversion” of data does not equate to analyzing data, which is not specifically taxable under the data processing statute.
This ruling suggests that the auditor was willing to reach conclusions on the taxpayer’s services by simply referring to information available about the Taxpayer on a public domain. This ruling may also be a harbinger of when auditors are forced to determine the taxability of cutting-edge technology and services–they may opt to characterize a product or services in a manner most familiar to the auditor.