A recent
Texas Comptroller Decision (103099) has held that charges for document coding, eDiscovery, web hosting, and image services (e.g., file conversion, creating CDs, and electronic numbering)
are data processing services and subject to sales tax.
FACTS
The taxpayer in the case was headquartered in Arizona and operated a
litigation support and technology office in Texas. Among other things, the taxpayer provided customers such as law firms, corporations, and government agencies with secure repository hosting services. The web hosting services gave customers a convenient way to securely access, share, and manage documents and information online.
The taxpayer was to handle document management and discovery processes for the litigation. It was to create and manage a depository and online website to manage documents and e-mails submitted during the investigation and discovery process. The document depository established a uniform method of identifying and producing documents for use in all company related proceedings, which minimized duplication efforts and ensured the continued existence of the data and documents.The depository was physically located in Texas.
The taxpayer's pricing schedule detailed specific charges for services such as document preparation, scanning, production services, coding, eDiscovery, data integration, copying, and trial services. The rates for each service was either on a per page, per item, or per hour basis.
Litigation parties provided hard copy documents, and electronic documents stored on CDs and DVDs.
The taxpayer entered information about each document into a litigation support program that enabled parties to search documents by the Bates number, author, recipient, document title, date, etc. In addition to the coding, the taxpayer provided eDiscovery services in which it did file conversions, meta-data capture, and full text extraction. The taxpayer created indices that listed every document housed at the depository, and included information regarding documents being withheld for privileges.
Prior to the audit at issue, the taxpayer did not consider its sales transactions taxable unless a tangible item was transferred to its customer.
After allowing a 20% statutory exemption, the Comptroller’s auditor scheduled charges for document coding, eDiscovery, image servicing, web hosting, reprographics, web repository, and trial services
as taxable data processing services.
The taxpayer concedes that some elements of data processing are present in its services, and it does not contest some of the data processing assessments in the audit. For example, the taxpayer concedes charges for certain image and reprographics services are appropriately scheduled at 80% taxable (e.g., Bates labeling and document preparation).
LAW
TEX. TAX CODE Section 151.0101 defines taxable services to include data processing services, which are defined at TEX. TAX CODE Section 151.0035 to include: word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and computerized data and information storage or manipulation.
Data processing services include the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. See 34 TEX. ADMIN. CODE Section 3.330(a)(1).
A seller of data processing services is required to collect sales tax on the total charge for data processing services or accept a properly completed resale, exemption, or direct pay permit certificate. See 34 TEX. ADMIN. CODE Section 3.330(b)(1).
CONCLUSION
If your company is a litigation support firm or other firm that performs activities in Texas that may be considered "data processing services," then you will want to review how you are currently treating them and take corrective action if necessary. For assistance in conducting this review,
please contact me.
