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Texas SaaS: Text & Messaging are Taxable Data Processing Service

author photo of Carolynn Iafrate Kranz

Unlike Indiana’s recent ruling in which the Indiana Department of Revenue creatively held that cloud-based texting services are subject to Indiana sales and use tax as a telecommunications service (See “SaaS Characterized as Taxable Telecommunications Service”), Texas recently issued a ruling where it held that a similar SaaS model was not a telecommunications service, but rather a data processing service.

In Texas Private Letter Ruling No. 151250584 (5/30/2017), the Texas Comptroller of Public Accounts ruled that sales of cloud-based text and messaging services are subject to Texas sales and use tax as a taxable data processing service. The taxpayer’s cloud-based software platform allowed subscribing businesses to access the platform through a web-based application called the “dashboard”. Through the dashboard, the taxpayer receives and processes data for its customers, translates incoming messages into an accessible format, stores customers’ messages for subsequent retrieval, and creates analytic reports for the subscriber’s use. The text and messaging service did not require the download or installation of any software or tangible personal property. The Comptroller found that these SaaS services fit squarely within the definition of data processing services in Texas, 80% of the value of which is taxable. Data processing services are defined to include: word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation. 34 Tex. Tax Code 151.0035. Furthermore, the Comptroller found that such text and messaging services fell “squarely within the exclusion from telecommunications services for data processing.”

Thus, we continue to see extreme inconsistencies in the states treatment of similar services. In fact, in its ruling, the Indiana Department of Revenue noted that although “telecommunications service” do not include “data processing and information services,” the “taxpayer’s mobile messaging service would not qualify as data processing.” On the contrary, Texas has long held that SaaS is a taxable data processing service and expressly stated that these texting and messaging services were not telecommunications services, but rather a data processing service.

Ultimately, both states came to the same conclusion: cloud-based text and messaging services are taxable. However, their rationale in getting to this conclusion could not be more inconsistent.

Carolynn is the founder and Managing Member of Industry Sales Tax Solutions, LLC (“ISTS”), which offers a subscription database containing the sales and use taxability of software related transactions, digital content and cloud services; she is also the Managing Member of Kranz & Associates, PLLC, a boutique law firm specializing in state and local tax consulting. See Carolynn's AUTHOR page in order to send a message and/or consultation request.

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